-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DFotLpzsHhimf19O4egyfNTeNjrlsPTz8urpEB5tmIBUD7j1tfNIhVjWkqUKumnW 9DLKwz/4OvUh24MV0I2X9Q== 0000950144-00-004321.txt : 20000403 0000950144-00-004321.hdr.sgml : 20000403 ACCESSION NUMBER: 0000950144-00-004321 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDUTREK INT INC CENTRAL INDEX KEY: 0001041075 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 582255472 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23021 FILM NUMBER: 589216 BUSINESS ADDRESS: STREET 1: 6600 PEACHTREE DUNWOODY ROAD STREET 2: 500 EMBASSY ROW CITY: ATLANTA STATE: GA ZIP: 30328 BUSINESS PHONE: 4048128200 MAIL ADDRESS: STREET 1: 6600 PEACHTREE DUNWOODY ROAD STREET 2: 500 EMBASSY ROW CITY: ATLANTA STATE: GA ZIP: 30328 10-K 1 EDUTREK INTERNATIONAL, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER: 0-23021 EDUTREK INTERNATIONAL, INC. A GEORGIA CORPORATION 500 EMBASSY ROW 58-2255472 6600 PEACHTREE DUNWOODY ROAD (IRS Employer Identification No.) ATLANTA, GEORGIA 30328 404-965-8000 Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934: NONE Securities Registered Pursuant to Section 12(g) of the Securities Exchange Act of 1934: CLASS A COMMON STOCK, WITHOUT PAR VALUE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the Class A Common Stock of the registrant held by nonaffiliates of the registrant (4,530,125 shares) on March 3, 2000 was $4,530,125. For the purposes of this response, officers, directors, and holders of 5% or more of the registrant's Class A Common Stock are considered the affiliates of the registrant at that date. The number of shares outstanding of the registrant's Common Stock as of March 3, 2000: 4,530,125 Class A and 7,359,667 Class B. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be held in 2000 are incorporated by reference into Part III of this Report, with the exception of information regarding executive officers required under Item 10 of Part III, which information is included in Part I, Item 1. 2 EDUTREK INTERNATIONAL, INC. FORM 10-K INDEX
PAGE ---- PART I Item 1. Business 1 Item 2. Properties 25 Item 3. Legal Proceedings 25 Item 4. Submission of Matters to a Vote of Security Holders 25 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 25 Item 6. Selected Consolidated Financial Data 26 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 27 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 39 Item 8. Financial Statements and Supplementary Data 39 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 58 PART III Item 10. Directors and Executive Officers of the Registrant 58 Item 11. Executive Compensation 58 Item 12. Security Ownership of Certain Beneficial Owners and Management 58 Item 13. Certain Relationships and Related Transactions 59 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 59 SIGNATURES EXHIBIT INDEX
3 This Annual Report on Form 10-K contains forward-looking statements. Additional written or oral forward-looking statements may be made by the Company from time to time in filings with the Securities and Exchange Commission or otherwise. The words "believe," "plan," expect," "anticipate," "project," and similar expressions identify forward-looking statements, which speak only as of the date the statement was made. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may include, but are not limited to, projections of revenues, income or loss, expenses, capital expenditures, plans for future operations, financing needs or plans, the impact of inflation, and plans relating to products or services of the Company, as well as assumptions relating to the foregoing. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Forward looking statements contained in this Annual Report regarding the Company's plans for its future business activities depend upon the Company's ability to first address and alleviate the financial difficulties described under "Recent Developments." In addition, statements in this Annual Report, including Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," describe factors, among others, that could contribute to or cause such differences. Additional factors that could cause actual results to differ materially from those expressed in such forward-looking statements include, without limitation, new or revised interpretations of other applicable laws, rules and regulations, failure to maintain or renew required regulatory approvals, accreditation or state authorizations, failure to obtain the Southern Association of Colleges and Schools' ("SACS") approval to operate in new locations, failure to comply with Department of Education or state financial responsibility standards, changes in student enrollment, and other factors set forth in this Annual Report on Form 10-K and other reports or materials filed or to be filed with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company or its management). PART I ITEM 1. BUSINESS RECENT DEVELOPMENTS EduTrek International, Inc ("the Company") has reported net losses of $18.2 million for the year ended December 31, 1999 and $5.5 million for the seven-month transition period ended December 31, 1998 (the seven month transition period in 1998 resulted from the Company changing its fiscal year-end from May 31 to December 31 during 1998). For the year ended December 31, 1999, the Company's loss from campus operations was $13.9 million versus $8.0 million for the seven-month transition period ended December 31, 1998. The results for the year ended December 31, 1999 include restructuring accruals of $4.8 million, primarily in the following areas, in order to reduce overall expenditures and to restore positive cash flow: - Reduction of Corporate operations overhead through elimination and consolidation of positions and reductions of space occupied by Corporate operations; - Teaching out current classes in the Washington D.C. campus and the closure of that operation; and - Termination of the lease for a new Northern Virginia campus site. The loss from operations reported for the quarter ended December 31, 1997 was $7.1 million. This included restructuring accruals of $4.8 million and amortization of goodwill of $0.3 million. Excluding the restructuring accruals the loss from operations was $2.3 million for the quarter ended December 31, 1999. The Company is significantly leveraged and recent developments have had a material adverse effect on the Company's short-term liquidity and ability to service its debts. The Company has a $10 million revolving line of credit (Line A) and a $4,350,000 revolving line of credit (Line B) with a bank (the two lines of credit, as amended, are referred to collectively as the "Credit Agreement"). As of March 30, 2000, the Company had $8.1 million outstanding under Line A, and an additional $1.9 million of letters of credit issued against line A. Line A matures on April 30, 2001. As of March 30, 1 4 2000, the Company had $4.3 million outstanding under Line B ($2.3 million as of December 31, 1999). The indebtedness under Line B is required to be reduced to $3.5 million as of July 1, 2000, with the outstanding balance due in full on September 30, 2000. Substantially all of the Company's assets are pledged as collateral under the Credit Agreement. The Credit Agreement requires interest only payments until maturity, except for the required principal reductions described above. While the Company believes it will be able to make the regular interest payments, its ability to make the required payments of principal on a timely basis is uncertain, based upon management's current projected earnings and cash flow of the Company, without proceeds from some form of capital infusion, or refinancing or restructuring of the Credit Agreement. If the Company does not make either the July 1, 2000, September 30, 2000, or April 30, 2001 required debt payments, it may be unable to continue its normal operations, except to the extent permitted by its lender. For the year ended December 31, 1999, the Company failed to meet financial responsibility standards of the United States Department of Education. As a result, the Company may be required to post an irrevocable letter of credit in an amount equal to 10% to 50% of the Title IV funds received by AIU students during the year ended December 31, 1999. At 50% of the Title IV funds received by AIU students during the year ended December 31, 1999, an irrevocable letter of credit of approximately $15.0 million would need to be posted in favor of the Department of Education after June 30, 2000. The Company is evaluating various strategic alternatives, including, but not limited to, a business combination, strategic investment in the Company, or a refinancing of the Company's debt. Proceeds from such strategic alternatives would be used to insure that the Company is meeting the financial responsibility standards, and also to post any letters of credit required by the Department of Education. There is no assurance that the Company can successfully complete any of these transactions. Failure to post a letter of credit in the amount required, would result in the termination of the Company as an institution eligible for Title IV student financial aid, which would negatively affect cash flows of the Company. Certain states in which the Company operates have regulatory agencies which perform their own financial capability reviews. The Company is not currently in compliance with some of these state requirements. Management believes that, by successfully addressing the financial responsibility standards of the Department of Education, it will meet the financial requirements of all the states in which it operates, although there can be no assurance of such. MANAGEMENT'S PLANS Management is committed to obtaining adequate liquidity as well as expanding its business through affiliation with strategic business partners. Management will continue to emphasize the continuing commercial success and positive cash contribution of its Traditional programs in business, media communications and fashion and interior design ("Traditional Campuses"). At the same time Management is committed to build on the successful introduction of its "Power Campuses." At its four Power Campuses, AIU offers four business and information technology (IT) programs designed to equip students with skills that are in strong demand by employers: Master of Information Technology ("MIT"), Bachelor of Information Technology ("BIT"), Master of Business Administration ("MBA") in International Business, and Bachelor of Business Administration ("BBA") in International Business. 2 5 Management believes that the liquidity requirements described above in "--Recent Developments" are due to the following factors: (1) the investment in, and opening of, four Power Campuses over the last two fiscal years, (2) the move to a new and updated facility for the Los Angeles campus, (3) the cumulative effects of weak international economies on the enrollments of international students at Traditional Campuses, and (4) the development and implementation of an enterprise-wide campus information management system to integrate marketing, operations, and financial data. Throughout this period, the Traditional Campuses have made a positive income and cash flow contribution. However, due to the start-up of Power Campuses, the Company has been required to incur a significant amount of debt financing. In response to the recent developments described above, the Company has retained The Robinson-Humphrey Company LLC as its financial advisor. The Robinson-Humphrey Company will advise the Board of Directors of EduTrek on various strategic alternatives, which may include, but are not limited to, business combinations, a strategic investment in the Company by third parties and current shareholders, or a refinancing of the Company's debt, or a combination thereof. There are currently no arrangements or agreements in place with respect to any such alternative. In addition, management has restructured certain areas of the Company and implemented cost management controls to reduce expenses. Management estimates that corporate staff and space reductions will save approximately $2.5 million annually when fully implemented in the twelve-month period ended December 31, 2000. The accrual for severance and employment contracts included 16 employees. Management has further announced the teach-out and eventual closure of its Washington, D.C. Power Campus, which has failed to meet its enrollment goals. The Washington, D.C. Campus recorded a $2.1 million deficit in "campus contribution" (as defined and detailed in the "-- Business Strategy" section of this report) in the twelve-month period ended December 31, 1999. The Company has plans to open a new campus in northern Virginia, in the Washington D.C. metro area, once a suitable site and sufficient capital are secured. The components of the restructure accrual consist of the following: - - Lease termination and other related costs $4,137,135 - - Severance, employment expense, and other related costs $ 666,340 3 6 Despite the cumulative effects of weak international economies on the enrollments of international students at Traditional Campuses, the Company has been able to maintain its enrollment (total student count, or "census"). Total student census at the Traditional Campuses was 2,821 for the January 2000 term, 2,831 for the January 1999 term, and 2,823 for the January 1998 term. In mid 1999 the Company refocused its traditional Campus Marketing to emphasize local market recruiting. Traditional Campus new starts were 24% higher for the January 2000 term at 645 students, as compared to the January 1999 term at 522 students. Management estimates that once the fixed cost base of a Traditional Campus is established, each incremental tuition dollar returns approximately 80% to campus contribution. In the year ended December 31, 1999, the Dunwoody Power Campus recorded positive campus contribution. The Company believes that this indicates a market validation of the Power Campus business model. The Company further believes that the Los Angeles and Miami Power Campuses have the potential to also provide positive campus contribution within approximately 18-24 months from the initial campus opening, as demonstrated at the Dunwoody campus. However, there can be no assurance that positive campus contribution will be achieved for the Los Angeles and Miami campuses. Management is encouraged by the rapid pace of enrollment growth at the Dunwoody, Los Angeles and Miami Power campuses. Total Student census at the Power Campuses was 1,952 for the January 2000 term, 1,008 for the January 1999 term and 861 for the January 1998 term. Management estimates that once the fixed cost base of a Power Campus is established, each incremental tuition dollar returns approximately 60% to campus contribution. The Company believes that its Power Campus model represents a significant contribution to technology education from accredited institutions of higher education. The Company plans to obtain the financial resources to build on the successful introduction of this product to the education marketplace, although there can be no assurance that the company can obtain such resources on acceptable terms. BUSINESS OVERVIEW EduTrek International, Inc. ("EduTrek" or the "Company"), through its subsidiary American InterContinental University, Inc. ("AIU"), is a leading provider of global, career-oriented higher education programs. AIU currently offers accredited associate's, bachelor's, and master's degree programs in information technology ("IT"), international business, digital media communications, art, fashion and interior design to 4,773 students from over 100 countries. AIU currently maintains seven campuses located in Atlanta (Buckhead and Dunwoody), Los Angeles, Miami, Washington, D.C., London, and Dubai, United Arab Emirates. In 1987, AIU became the first for-profit four-year university to be accredited by the Commission on Colleges of the Southern Association of Colleges and Schools ("SACS"), one of the six regional accrediting agencies recognized by the U.S. Department of Education. The Company's education programs are designed to help graduates prepare for careers. AIU offers an authentic international education environment with approximately 1,700 students from outside the United States. In 1999 through its Study Abroad Program, AIU enrolled over 800 students from U.S. universities to study at AIU's London and Dubai campuses, while earning academic credit toward a degree from their home university. AIU intends to become the high-quality, lower-cost leader in the for-profit education industry by offering market-driven programs in state-of-the-art facilities. Established as a two-year institution in 1970, AIU has grown significantly, establishing four new campuses in 1998. The number of students attending AIU has increased 24% to 4,773 students enrolled for the January 2000 term from 3,839 students for the January 1999 term. If the Company is able to obtain sufficient financing, or affiliate with strategic business partners, the Company intends to continue expanding by opening new Power Campuses and by recruiting new students to existing campuses. Each existing campus is, and any new Power Campus will be, a fully wired university, utilizing state-of-the-art educational technology specifically designed to accommodate the collaborative, team-based learning model. AIU's Traditional Campuses are located in Atlanta (Buckhead), Los Angeles, London and Dubai. These Campuses are dedicated to delivering career education in business administration, interior design, fashion marketing, visual communication, and media production. In addition, students have the opportunity to obtain an international education through transfers between campuses. Enrollment at AIU's Traditional Campuses for the January 2000 term was approximately 2,821 students, as compared to 2,831 students for the January 1999 term. The average annual tuition revenue per student for the Traditional Campus programs is approximately $12,096. 4 7 In addition to its Traditional programs in business media, communications and fashion and interior design, AIU offers degreed information technology education through its newer Power Campuses. These Power Campuses are located in Atlanta (Dunwoody), Los Angeles (in a newly occupied shared site with a Traditional Campus), Miami, and Washington, D.C. At these four Power Campuses, AIU offers four business and information technology (IT) programs designed to equip students with skills that are in strong demand by employers: Master of Information Technology ("MIT"), Bachelor of Information Technology ("BIT"), Master of Business Administration ("MBA") in International Business, and Bachelor of Business Administration ("BBA") in International Business. Each Power Campus program is offered during the day for full-time students and in the evenings for working adults in order to provide flexibility for students and to maximize capacity utilization. Enrollment at AIU's Power Campuses for the January 2000 term was approximately 1,952 students, as compared to 1,008 students for January 1999 term. The average annual tuition revenue per student for the Power Campus programs is approximately $16,700, and the retention rate for these students is in excess of 90%. In 1999, AIU transitioned from a centrally controlled operation to a campus-centered environment. In striving to provide the student a seamless university experience, responsibilities were reorganized within key operational areas. Specifically, the areas of admissions and academic partnerships/community outreach were transferred from the Company's Atlanta headquarters to campus control. A campus president, supported by a team of human resources, academic, marketing, and administrative staff members, manages the local campus operations thus supporting the entire life cycle of a student -- from the time a prospective student inquires about AIU until the student graduates. AIU is completing its implementation of a new enterprise-wide campus management information system to integrate its operations and financial data including admissions, financial aid, student services, placement services, and default management. AIU is also implementing a total quality management program aimed at assessing and improving the quality of academic and administrative services for AIU's students. The United States education market may be divided into distinct segments: kindergarten through twelfth grade schools ("K-12"), vocational and technical training schools, workplace and consumer training, and degree-granting colleges and universities ("higher education"). The Company operates in the higher education segment. The Company expects that the international demand for postsecondary education will continue to increase over the next several years based on certain projected demographic, economic, and social trends. The Company believes that it is well positioned to take advantage of the increasing demand for postsecondary education programs for the following reasons: Better Quality Educational Programs. AIU's primary goal is to deliver better quality educational programs at a fast pace, resulting in a greater return on students' investment. Quality educational programs provide students with the learning skills to compete successfully for high potential employment opportunities. AIU provides a foundation for lifelong learning through adaptation of the Enterprise Learning Model (ELM). In this proprietary program, at the conceptual level, students enter a results-driven, systems-oriented learning environment that emphasizes updated curriculum, as well as the cultivation of cognitive foundations, collaborative learning and project management skills. At the experiential level, students participate in real-world problem solving through realistic, authentic course experiences. As a result, students are brought from novice to expert, understand the expanded concept of enterprise functioning, and develop the ability to adapt and modify their knowledge construction skills throughout their professional and personal lives. AIU's Traditional Campuses offer flexible, dynamic courses of study that adapt to advances and trends in business, technology, media production, visual communication, interior design, fashion design, and fashion marketing. In support of career based education, AIU provides qualified faculty, cultivates relationships with corporate mentors and potential employers, offers portfolio development and review, sponsors on-site visits to businesses and design studios, and provides career counseling services. In AIU's business and information technology programs, students solve real-world problems in a collaborative, team-based environment, which simulates the work environment. In addition, the program curriculum maximizes contact hours with faculty to accelerate the student learning process. Students can earn a degree at AIU more rapidly than at a traditional university and begin their careers sooner. By reducing the opportunity cost of foregone income while in school, AIU graduates can increase the return on their educational investment. 5 8 AIU's business and information technology programs are targeted to careers with high growth potential. The MIT and BIT degree programs educate students to become IT professionals. AIU also offers advanced business programs at the undergraduate and graduate levels for full-time students and working adults. Better Quality Learning Environment. AIU's new Power Campuses are equipped with state-of-the-art technologies, which aid in accelerating student learning. They are "plug-and-play" environments, with hundreds of ports to give students easy access to the Internet and electronic learning resources. The interiors are also configured with classroom/team room modules to complement student learning. Working Adult Programs. AIU's programs for working adults in business and information technology are designed to meet the unique needs of this market segment. They are offered in the evenings and during the day at convenient times, can be completed at a faster pace, and provide practical education based upon solving problems likely to be encountered in the workplace. International Programs. AIU's Global Studies program is composed of the Study Abroad and Study in America programs. The Study in America program recruits international students to attend AIU's U.S. campuses. Marketing efforts are targeted to those countries most likely to send students to U.S. universities. The Study Abroad program provides students from U.S. universities the opportunity to earn a degree from their home university while studying at AIU's international campuses. Program advisors for both programs ensure a smooth transition for students studying at an international campus. BUSINESS STRATEGY EduTrek's strategic goal is to become the high quality and lower cost provider of higher education programs for traditional students, working adults, and international students by opening additional campus locations, developing or acquiring new programs, and increasing enrollment at existing campuses through targeted marketing programs. Opening New Campuses The Company opened four new campuses during 1998: Atlanta (Dunwoody) in July, Los Angeles and Washington, D.C. in October, and Miami in November. The Company suspended its expansion plans for 1999 and 2000, and will be closing the Washington D.C. campus due to its failure to meet enrollment goals and the resulting negative campus contribution. See "- Recent Developments". If the Company's financial condition improves, or if the Company affiliates with strategic partners, it intends to add Power Campuses in high-growth markets throughout the United States and worldwide. The Company would select new locations based on an analysis of a variety of factors including the population of working adults, the number of university graduates, the number of IT employers and their educational reimbursement policies, the number of and projected growth in IT jobs, the availability of similar programs offered by other institutions, and the timing of attaining state licenses to do business in the area. The Company has plans to open a new campus in northern Virginia (near Washington D.C.) once a suitable site and sufficient capital are secured. Given sufficient market demand and availability of capital resources, EduTrek may open additional campuses in markets where the Company currently has campuses in order to enhance operating and marketing efficiencies. 6 9 The Company has invested significant time and capital developing the Power Campuses, which focus on providing state-of-the-art education in information technology. The following chart details the Company's cumulative investment in developing and proving the Power Campus business model as of December 31, 1999. Cumulative Investment in Power Campus Operations January 1, 1998 through December 31, 1999 (Thousands of dollars) ITI Original License and Program Development $ 3,083 Market Development 2,920 Corporate G & A Dedicated to Power Program Development 2,735 Start-Up Operating Costs by Campus Dunwoody $ 2,183 Los Angeles 3,027 Miami 1,950 Washington, D.C. (teach-out and closure underway) 3,368 10,528 ------- Capital Investments Furniture and Equipment Dunwoody $ 2,204 Los Angeles 1,457 Miami 802 Washington, D.C. 1,334 5,759 ------ Leasehold Improvements Dunwoody $ 178 Los Angeles 1,811 Miami 386 Washington, D.C. 493 2,868 ------ IT Infrastructure, Video and Library Dunwoody $ 401 Los Angeles 297 Miami 129 Washington, D.C. 168 995 9,660 ------ ------ Corporate Computers 714 AIU Developed Curriculum Capitalized 1,244 Investment in Campus Management System 1,815 -------- Total Cumulative Power Campus Investment $ 32,699 ========
As a result of these efforts, Power Campus enrollment has increased dramatically from the first prototype classes started in an experimental classroom in December 1997. A second classroom with 46 additional students began January 1, 1998. Subsequent growth through January 2000 is shown in the following schedule detailing the total enrolled students (census) by campus: Total Power Campus Enrollment (Total Student Census)
January 2000 January 1999 January 1998 Term Term Term ------------- ------------ ------------ Dunwoody (Atlanta) 1,010 745 86 Los Angeles Power 335 107 Miami 402 103 Washington, D.C. 205 53 -- ------------- ------------ ------------ Total Power Campuses 1,952 1,008 86 Average Tuition Revenue Per Power Student $16,700 $16,230
7 10 Developing or Acquiring Additional Degree Programs EduTrek may choose to introduce degree programs in additional fields of study and at different degree levels if there is sufficient market demand and if capital resources are readily available. In calendar 1998, AIU introduced four new programs, including the MIT, BIT, BBA in International Business, and MBA in International Business. No new programs were introduced in 1999. The retention rate for students in new programs is in excess of 90% as of December 31, 1999. EduTrek believes that the development and introduction of new high quality programs will result in higher retention rates and higher revenues and operating profits per student. Increasing Enrollment at Existing Campuses In an effort to increase enrollment at existing campuses, EduTrek has implemented an integrated marketing program. This program utilizes direct mail (both regular mail and Internet), and print, radio, television and Internet advertising. Sales efforts are directed at high school counselors, community colleges, corporations and other referral sources. Referrals from graduates and existing students are also emphasized. The goal of marketing and the public relations program is to build enrollment of students from local markets. Management believes that the existing Traditional Campuses will also benefit from greater brand awareness resulting from increased advertising for AIU's newer Power Campus programs in information technology and business. In addition, EduTrek, through its Study in America program, markets to students from countries outside of the United States. AIU's enrollments and revenues have been adversely affected by weak international economies. The most significant effect has been to constrain enrollment growth at the Traditional Campuses, most notably in London and Los Angeles, which have historically appealed to international (especially Asian) students. Many of the Company's former Asian students were unable to return to school as the devaluation of their home currency made tuition too expensive. Management estimates that between student attrition and failed recruiting attempts, weak international economies have cost AIU over 500 students. Management believes that it will continue to find alternative students, and that there is the potential for some return of Asian students as their home economies improve, although there can be no assurance that these students will return. Meanwhile, AIU has maintained enrollment at the Traditional Campuses. This has been achieved through new academic programs and investments in technology-based education. Additionally, the recruiting effort has been refocused on domestic and local markets, and on non-Asian international markets. Total students enrolled at the Traditional Campuses is detailed in the following table: Total Enrollment (Student Census)
January 2000 January 1999 January 1998 Term Term Term ------------ ------------ ------------ Buckhead (Atlanta) 910 936 965 Los Angeles Traditional 430 497 505 London, UK 824 807 855 Dubai 657 591 498 ------------ ------------ ------------ Total Traditional Campuses 2,821 2,831 2,823 Average Tuition Revenue Per Traditional Student $ 12,096 $ 11,520
Management estimates that once the fixed cost base of a Traditional Campus is established, each incremental tuition dollar returns approximately 80% to campus contribution. 8 11 The Company offers a Study Abroad program and has expanded enrollment at its London and Dubai campuses. The Company estimates that more than 500 domestic colleges and universities, both public and private, have sent students to AIU's overseas campuses. In Study Abroad, U.S. students (who are sometimes subsidized by government or their home schools) incur all the costs associated with studying abroad. Enrollment growth in the Study Abroad Program is detailed in the following table:
Study Abroad Enrollment by Campus (Total Student Census) January 2000 January 1999 January 1998 Term Term Term ------------ ------------ ------------ London, UK 294 232 168 Dubai 8 3 0 ------------ ------------ ------------ Total Study Abroad 302 235 168
CAMPUS CONTRIBUTION The Company believes campus contribution to be a key performance measure. Campus contribution is defined as total campus revenue (tuition and fees) less campus based expenditures (which includes all direct marketing costs). The following table shows the campus contribution for the twelve month period ended December 31, 1999 and the twelve month period ended December 31, 1998. Campus Contribution(1) (Thousands of dollars)
Fiscal Year Ended Twelve Months Ended December 31, 1999 December 31, 1998 ----------------- ------------------- Revenues (2) Buckhead (Atlanta) $ 11,106 $ 10,905 Los Angeles Traditional 7,449 7,332 London, UK 14,252 14,312 Dubai (4) 6,873 6,019 -------- -------- Total Traditional Campuses 39,680 38,568 -------- -------- Dunwoody (Atlanta) 12,579 5,555 Los Angeles Power 3,681 194 Miami 3,028 111 Washington, D.C. 2,528 216 -------- -------- Total Power Campuses 21,816 6,076 -------- -------- Other 160 1,952 -------- -------- Total Revenue 61,656 46,596 Campus Expenses (3) Buckhead (Atlanta) 7,968 7,000 Los Angeles Traditional 6,104 4,661 London, UK 10,372 9,365 London Study Abroad Marketing 755 551 Dubai (4) 5,868 5,143 -------- -------- Total Traditional Campuses 31,067 26,720 -------- -------- Dunwoody (Atlanta) 12,365 7,402 Los Angeles Power 5,803 706 Miami 4,605 363 Washington, D.C. 4,605 920 -------- -------- Total Power Campuses 27,378 9,391 -------- -------- Other 935 783 -------- -------- Total Expense 59,380 36,894 -------- -------- Campus Contribution Buckhead (Atlanta) 3,138 3,905 Los Angeles Traditional 1,345 2,671 London, UK 3,125 4,396 Dubai (4) 1,005 876 -------- -------- Total Traditional Campuses 8,613 11,848 -------- -------- Dunwoody (Atlanta) 214 (1,847) Los Angeles Power (2,122) (512) Miami (1,577) (252) Washington, D.C. (2,077) (704) -------- -------- Total Power Campuses (5,562) (3,315) Other (775) (1,169) -------- -------- Total Campus Contribution $ 2,276 $ 9,702 ======== ========
(1) Excludes corporate general and administrative expense, interest expense, and goodwill amortization on the original acquisition of the Traditional Campuses (2) Includes all tuition and fees generated at the campus level in accordance with the Company's revenue recognition policies (3) Includes all expenses incurred at the campus level, including direct marketing costs, but excluding goodwill amortization on the original acquisition of the Traditional Campuses of $1,008,000 per year (4) Represents minority interest in Dubai PROGRAMS OF STUDY AIU offers the following degree programs and related areas of specialization. Unless otherwise noted, each of the degree programs is offered at all of AIU's campuses.
TRADITIONAL CAMPUSES (ATLANTA (BUCKHEAD), LOS ANGELES, LONDON, AND DUBAI) - ------------------------------------------------------------------------------------------------------------------- ACADEMIC DISCIPLINE DEGREE (JANUARY 2000 ENROLLMENT) OFFERED DEGREE PROGRAMS - ------------------------------------------------- --------------- ---------------------------------------------- International Business (945 students) A.A., B.B.A. Business Administration M.B.A.* International Business International Design (1,876 students) A.A., B.F.A. Fashion Design Fashion Marketing Fashion Design and Marketing Interior Design Visual Communications Video Production** Study Abroad Program English as a Second Language - ------------------------------------------------- Total Students - 2,821 - -------------------------------------------------------------------------------------------------------------------
* Offered at London and Dubai campuses only ** Offered at Atlanta (Buckhead) and London campuses only
POWER CAMPUSES (ATLANTA (DUNWOODY), LOS ANGELES, MIAMI, AND WASHINGTON, D.C.) - ------------------------------------------------------------------------------------------------------------ ACADEMIC DISCIPLINE DEGREE (JANUARY 2000 ENROLLMENT) OFFERED DEGREE PROGRAMS - ------------------------------------------------- --------------- ------------------------------------- Information Technology (1,459 students) B.I.T. Information Technology M.I.T. Information Technology International Business (493 students) B.B.A. International Business M.B.A. International Business - ------------------------------------------------- Total Students - 1,952 - ------------------------------------------------------------------------------------------------------------
9 12 AIU, as an institution, is accredited to award Master's, Bachelor's, and Associate's degrees by the Commission on Colleges of the Southern Association of Colleges and Schools ("SACS"). Additionally, the Atlanta (Buckhead) and Los Angeles campuses hold professional level accreditation from the Foundation for Interior Design (FIDER) for the Bachelor of Fine Arts degree in Interior Design. The Dubai campus is approved by the International Advertising Association for its advertising concentration. The London campus is approved as an accredited institution of the United Kingdom by the Open University. The Los Angeles campus is approved to operate in the State of California by the Bureau for Private Postsecondary and Vocational Education ("the California Bureau"). The Atlanta campuses (Buckhead and Dunwoody) are authorized to operate by the State of Georgia Nonpublic Postsecondary Education Commission. The Miami campus is licensed to operate by the State of Florida Board of Independent Colleges and Universities. Finally, the London, Dubai, and Washington D.C. campuses are also licensed by the Educational Licensure Commission of the District of Columbia. Information Technology. AIU offers the MIT program for both full-time students during the day and working adults in the evening. The full-time program is 10 1/2 months in length, and the evening program is 21 months. Both programs educate university graduates from a variety of backgrounds to become IT professionals. The IT curriculum is market-driven and changes frequently in response to advances in technology. The technical portion of the curriculum includes Microsoft Access(R), Oracle(R), Visual Basic(R), JAVA(TM) plus network administration for Windows 95(TM), Windows NT(TM), network and hardware support, and Windows NT(TM) Internet Information Server. Students also learn professional development skills and business strategy, including financial accounting, marketing, and professional sales. The program features a method of delivery that emphasizes problem-based, collaborative learning. Class size is limited to cohorts, or groups, of 24 students to ensure interactive learning and one-on-one attention from the faculty. MIT students enjoy new, state-of-the-art facilities, including classrooms and team rooms designed specifically for the MIT program. AIU also offers an undergraduate BIT program for full-time students and working adults. AIU is currently working with Oracle and Microsoft to develop state-of-the-art university curricula for bachelor's and master's degrees. In conjunction with this effort, AIU was selected as a charter member of the Oracle Academic Initiative ("OAI"). The OAI partnership provides AIU with software, support, and instructor education and certification to develop cutting edge technology courses and programs. Other OAI institutions include Rochester Institute of Technology, Washington State University, and Emory University. AIU has also been named to the Microsoft Authorized Academic Training Program, which allows students to prepare for industry-recognized certification through AIU's new curriculum. International Business. AIU offers associate's, bachelor's, and master's degrees in international business. The associate's and bachelor's degree programs for working adults are focused on the unique needs of the adult learner. Working adults can earn an accelerated BBA degree in about four years or less, depending upon previously earned transfer credits. Classes meet one evening per week, and class size is limited to 24 students to encourage group discussion and the exchange of information and ideas. In addition to the regular class meetings, students participate in weekly project team sessions. These sessions give students the opportunity to find solutions to real-life problems, applying their business knowledge in a collaborative learning environment. AIU also offers a master's degree program in international business for working adults. The international business programs for Traditional students provide students with a broad exposure to international business from the basic elements through technical and functional areas. Students may follow a general business track or choose advanced classes leading to a concentration in areas such as marketing and management. The master's degree program in international business was introduced at AIU's London campus in 1994 and the Dubai campus in 1995. Students learn about the business environment on a global scale, focusing on areas such as international banking, business ethics, and international law, as well as accounting, information technology, management, marketing, and business strategy. International Design. The international design program educates students in the fields of fashion design and marketing, commercial and residential interior design, and multimedia communications, including visual communication, graphic design, photography, illustration, and video production. The fashion design program offers students a solid foundation in designing and the opportunity to develop their own design collection. The fashion-marketing program prepares students for executive careers in the 10 13 retail and wholesale fashion industry and related businesses. The interior design programs, which at the Atlanta (Buckhead) and Los Angeles campuses are accredited by FIDER, provide students with a thorough understanding of the fundamentals and advanced principles of interior design. Taught by working professionals, the multimedia communication programs offer a balance of practical experience and theoretical concepts, providing a firm grounding in the business aspects of the multimedia communication industry. TUITION AND FEES AIU's undergraduate tuition is priced between the tuition levels of non-profit private universities and the comparatively lower tuition charged to resident students at public universities. The tuition is comparable to the tuition of public universities for non-resident and international students. For Traditional programs (excluding Dubai), the tuition ranges from $3,810 to $5,445 per academic term, or $11,430 to $16,335 for the full academic year, depending upon campus location. The tuition for the Power Campus programs is as follows:
- -------------------------------------------------------------------------------- ANNUAL TUITION ------------------------- PROGRAM DAY EVENING - ------- ------- -------- Master's in Information Technology (MIT) $26,696 $13,840 Master's in Business Administration (MBA) $21,180 $11,070 Bachelor's in Information Technology (BIT) $20,150 $10,500 Bachelor's of Business Administration (BBA) $19,100 $10,000 - --------------------------------------------------------------------------------
AIU offers a number of institutional scholarships for selected students who meet specific eligibility requirements, ranging from $500 to full tuition scholarships. For the fiscal year ended December 31, 1999, institutional scholarships had a value of approximately $860,428, or 1.4% of the Company's net revenues. Historically, AIU has increased tuition and fees without consumer resistance. AIU increased tuition and fees by approximately 5% for the 1999-2000, 1998-99, and 1997-98 academic years. EduTrek anticipates that future tuition increases will at least keep pace with inflation. FACULTY Faculty members are hired in accordance with criteria established by AIU, accrediting bodies, and applicable federal and state regulatory authorities. The critical measures of faculty competence are a combination of teaching excellence, prior education, and/or the degree and relevance of prior work experience to the curriculum. AIU has developed a competency-based hiring model designed to target and screen qualified faculty members. AIU has implemented a faculty development program to ensure that the skills and knowledge base of all IT faculty are continually updated as new technologies are introduced into the marketplace. In addition, the faculty is trained in collaborative learning techniques so that student learning in the team environment is optimized. Many AIU faculty members are working professionals who are experts in their fields, rather than professional educators. For this reason, management believes that the AIU faculty provides students with a practical education that can be directly applied to their chosen careers. IT program faculty members are employed primarily on a full-time basis. Most other faculty members are employed on a contract basis and are compensated based on the number of courses taught. Low student-teacher ratios at the Traditional Campuses (approximately 14:1, 15:1, 14:1, and 18:1 in Fall 1999 for AIU's campuses in Atlanta, Los Angeles, London, and Dubai, respectively) and the absence of a faculty tenure track promote a student-focused environment. In AIU's Power Campus programs, students rotate from classroom instruction (with a maximum of 24 students) to problem-solving sessions (with teams of six students). Students and administrative staff evaluate faculty members each academic term on the basis of teaching abilities and demonstrated technical knowledge. STUDENT RECRUITMENT 11 14 To generate interest in AIU's academic programs, EduTrek engages in a broad range of marketing activities, including print and radio advertising, Internet advertising, direct mail, and direct contact with targeted corporations, high schools, and community colleges. EduTrek also attempts to locate its campuses near major highways to provide high visibility and easy access. Alumni, employers, embassies, and currently enrolled students refer a substantial portion of new students. EduTrek also has Web sites (www.edutrek.com, www.aiuniv.edu) that allow electronic access to company and program information, as well as on-line applications. AIU's advertising is controlled centrally and is targeted at local markets where the campuses are located, U.S. universities (for the Study Abroad Program), and international markets to attract students from other countries. Direct responses to advertising and direct mail are received, tracked, and forwarded promptly to the appropriate admissions officers. All responses are analyzed in order to continually improve AIU's marketing efforts. AIU employs over 40 admissions representatives who make visits and presentations to various organizations and who follow up on leads generated by advertising and marketing efforts and referrals. Representatives pursue leads by arranging interviews with prospective students at the campus and generally assist students with clarifying their career goals and completing the application process. The interview is designed to establish the student's qualifications, academic background, and goals, to determine his or her suitability for specific programs, and to administer any required tests. Recruiting policies and processes are established centrally but implemented at the campus level through a director of admissions. To supplement its advertising efforts, AIU employs personnel who recruit students at high schools, community colleges, universities, embassies, college fairs, and corporations. AIU's international student recruiters visit international high schools, college fairs, embassies, and consulates. Study Abroad recruiters visit selected university professors and study abroad advisors, who most directly influence a student's decision to study abroad. STUDENT RETENTION The ability to retain students until graduation is a critical indicator of AIU's success, and early academic intervention is crucial to improving student completion rates. To minimize student withdrawals, AIU devotes staff and other resources to assist and advise students regarding academic and financial matters, part-time employment, and housing. AIU employs guidance counselors at all its campuses to advise students. Students must pass special examinations and successfully complete an admissions interview in order to gain admittance to AIU's Power Campus programs. As a result of these careful screening efforts, retention in AIU's Power Campus programs was in excess of 90% at December 31, 1999. GRADUATE PLACEMENT The successful placement of graduates in occupations related to their fields of study is critical to AIU's ability to continue to recruit students successfully. The company tracks its placement rates to ensure program quality and customer satisfaction. The following placement rates were achieved for those students who reported their career information upon graduation and who participated in the Professional Development Modules described below: - - 81% of U.S. graduates from AIU's Traditional programs in 1999, excluding those who continued their education, obtained employment within approximately six months of graduation, as compared to 84% in 1998. The approximate average starting salary of 1999 bachelor's degree graduates from AIU's Traditional programs was $30,027, as compared to $28,100 in 1998 and $27,900 in 1997. - - The 1999 placement rate for all Power campuses was 87%, with an average starting salary of $45,100 per year. To increase placement rates and starting salaries, AIU has done the following: - - Maintained a dedicated placement staff of 14 professionals - - Standardized all Professional Development Modules and classes 12 15 - - Developed and published delivery schedules for all Professional Development Modules and classes at all campus locations - - Made participation in the Professional Development Modules and classes mandatory - - Made additional resources, including printed books, tapes and on-line initiatives, available to students through media centers - - Increased the number and depth of Advisory Councils to improve the relationship between AIU and the corporate community As a standard component of AIU's curriculum in all programs, placement personnel assist students in developing individualized career plans, selecting classes to further these plans, obtaining internships, and formulating job search strategies. Students also receive instruction during their program of study on basic job search skills, including identifying potential employment opportunities, writing resumes and letters of introduction, and preparing for interviews. COMPETITION The higher education market is highly fragmented and competitive, with no private or public institution having a significant market share. In the U.S. and London, AIU competes primarily with four-year and two-year degree granting public and private regionally accredited colleges and universities. Many of these institutions have far greater financial resources than AIU. The Company's campus in Dubai is currently the only U.S.-accredited postsecondary institution offering degree programs in the United Arab Emirates and competes with numerous institutions in the Persian Gulf region. Some of these institutions are government sponsored and charge a lower tuition than AIU. AIU competes primarily at a local and regional level with other regionally accredited colleges and universities based on the quality of the academic programs, the accessibility of the programs and learning resources, the cost of the program, the perceived quality of the instruction, the employability of its graduates, and the time necessary to earn a degree. Supervision and Regulation ACCREDITATION Accreditation is a process for evaluating the quality of educational institutions and their programs against established criteria and standards. This process entitles institutions of higher education to gain the confidence of the educational community and the public. In the United States, an institution submits itself to qualitative review by an organization of peer institutions to obtain accreditation. There are three types of accrediting agencies in the United States: (i) regional accrediting associations, of which there are six, which accredit degree-granting institutions located within their geographic areas, (ii) national accrediting agencies, which accredit institutions without regard to their locations, and (iii) specialized accrediting agencies, which accredit specific programs within an institution. Accrediting agencies primarily examine the institutional and programmatic operations and the academic quality of the instructional programs. A grant of accreditation is generally viewed as verification that the institution's programs meet generally accepted or specific academic standards. Accrediting agencies also review the administrative, service, and financial operations of institutions to ensure that each has the resources to accomplish its educational mission. College and university administrators depend on accreditation to evaluate transfers of credit and applications to graduate schools. Employers rely on the accreditation when evaluating a candidate's credentials, and parents and high school counselors look to accreditation for assurance that an institution meets quality educational standards. Moreover, accreditation is necessary for students to qualify for eligibility for federal financial assistance. Also, most scholarship commissions restrict their awards to students attending accredited institutions. Pursuant to provisions of the Higher Education Act of 1965, as amended (the "HEA"), the Department of Education relies on accrediting agencies to determine whether institutions' educational programs qualify them to participate in Title IV Programs. The HEA specifies certain standards that all recognized accrediting agencies must adopt in connection with their review of postsecondary institutions. Accrediting agencies that meet Department of Education standards are recognized as the arbiters of the 13 16 quality of the education or training offered by an institution. Each of AIU's campuses is accredited by SACS, an accrediting agency recognized by the Department of Education. In addition, AIU's interior design programs in Atlanta (Buckhead) and Los Angeles are accredited by FIDER, and the advertising program in Dubai is accredited by the International Advertising Association. The HEA requires each recognized accrediting agency to submit to a periodic review of its procedures and practices by the Department of Education as a condition of its continued recognition. SACS, AIU's regional accreditor for purposes of participation in Title IV Programs, has been reviewed within the last five years and has had its recognition extended. An accrediting agency may place an institution on private or public "reporting" status in order to monitor one or more specified areas of a school's performance. An institution placed on reporting status is required to report periodically to its accrediting agency on that school's performance in the specified areas. While on reporting status, an institution may not open and commence teaching at new locations without first receiving a waiver from its accrediting agency. Frequently, sanctions may be attached to this "reporting" status. Failure to demonstrate compliance with accrediting standards could result in the loss of accreditation. None of AIU's campuses has been placed on reporting status by its respective accrediting agencies. STUDENT FINANCIAL ASSISTANCE Students attending AIU finance their education through a combination of family contributions, individual resources, financial aid, and employer tuition reimbursement. As at most other postsecondary institutions, many students enrolled at AIU must rely, at least in part, on financial assistance to pay the cost of their education. The largest source of such support for AIU's U.S. students is the federal programs of student financial assistance under Title IV of the HEA. Additional sources of funds include other federal grant programs, state grant and loan programs, private loan programs, and institutional grants and scholarships. Because international students attending AIU are not eligible to participate in U.S. government-sponsored student loan programs, the majority of their funding is derived from personal and family resources. To provide students access to Title IV Programs, a school must be (i) authorized to offer its programs of instruction by the relevant agency of the state in which it is located, (ii) accredited by an agency recognized by the Department of Education, and (iii) certified as an eligible institution to participate in the Title IV Programs by the Department of Education. In addition, that school must ensure that Title IV Program funds are properly accounted for and disbursed in the correct amounts to eligible students. Under the HEA and its implementing regulations, AIU must comply with certain standards on an institutional basis. For purposes of these standards, the Regulations define an institution as a main campus with additional locations (formerly called branch campuses), if any. Under this definition, all of AIU's campuses are treated as one institution for purposes of complying with the HEA with the main campus located in Atlanta (Buckhead), GA. NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION While states support public colleges and universities primarily through direct state subsidies, the federal government provides a substantial part of its support for postsecondary education in the form of grants and loans to students enrolled at eligible institutions. Title IV Programs have provided aid to students for more than 30 years and, since the enactment of the HEA in 1965, the scope and size of such programs have steadily increased. Since 1972, Congress has expanded the scope of the HEA to provide for the needs of the changing national student population. Among other things, the amended HEA provides that students at proprietary schools are eligible for assistance under Title IV Programs, establishes a program for loans to parents of eligible students, opens Title IV Programs to part-time students, increases maximum loan limits, and eliminates the requirement that students demonstrate financial need to obtain unsubsidized federally guaranteed student loans. Most recently, the Direct Loan program was enacted, enabling students to obtain loans from the federal government rather than from commercial lenders. Students at AIU participate in the following Title IV Programs. 14 17 Pell. The Federal Pell Grant ("Pell") program is the principle means by which the Department of Education makes grants to students who demonstrate financial need. Every eligible student is entitled to receive a Pell grant; there is no institutional allocation or limit. Grants presently range from $400 to $3,125 per year. Amounts received by students enrolled in AIU for the fiscal year ended December 31, 1999 under the Pell program equaled approximately $1.4 million or 2.3% of the Company's net revenues. FSEOG. Federal Supplemental Educational Opportunity Grant ("FSEOG") program awards are designed to supplement Pell grants for the neediest students. FSEOG grants generally range in amount from $100 to $4,000 per year. The availability of FSEOG awards is limited by the amount of those funds allocated to an institution under a formula that is based upon the size of the institution, its costs, and the income levels of its students. FSEOG awards at AIU generally do not exceed $1,500 per eligible student per year. The Company is required to make, at a minimum, a 25% matching contribution for all FSEOG program funds disbursed. Resources for this institutional contribution may include institutional grants and scholarships and, in certain states, portions of state scholarships. Amounts received by students enrolled in AIU under the FSEOG program for the fiscal year ended December 31, 1999 equaled approximately $58,782 or 0.1% of the Company's net revenues. FFEL and Federal Direct Student Loans. The Federal Family Education Loans ("FFEL") programs include the Federal Stafford Loan Program ("Stafford Loan") and the Federal PLUS Loan Program ("PLUS"), whereby private lenders make loans to a student or his or her parents to pay the cost of attendance at a postsecondary school. The FFEL Program is administered through state and private non-profit guarantee agencies that insure loans directly, collect loans in default, and provide various services to lenders. The federal government provides interest subsidies in some cases and reinsurance payments for borrower default, death, disability, and bankruptcy. The Direct Loan program is substantially the same as the FFEL program in providing Stafford and PLUS loans. Under the Direct Loan program, however, funds are provided directly by the federal government to the students, and the loans are administered through the school. For schools electing to participate, the Direct Loan program replaces the FFEL program (unless participation in both programs is permitted by the Department of Education), although loans are made on the same general terms and conditions. Direct and FFEL Stafford Loan Program. Undergraduate students may borrow an aggregate of $2,625 for their first undergraduate academic year, $3,500 for their second academic year, and $5,500 for their third and fourth academic years under the FFEL Stafford Loan or Direct Stafford Loan program. Graduate students may borrow up to $8,500 each academic year. If the student qualifies for a subsidized loan, based on financial need, the federal government pays interest on the loan while the student is attending school and during certain grace and deferment periods. If the student does not qualify for a subsidized loan, the student must pay the interest accruing on the loans. In addition, independent students may qualify for an additional $4,000 to $10,000 a year in unsubsidized Stafford loans. For the fiscal year ended December 31, 1999, AIU chose to participate in only the FFEL program. FFEL loans amounted to approximately $27.7 million or approximately 44.9% of the Company's net revenues for the fiscal year ended December 31, 1999. Direct and FFEL PLUS Loan Program. Parents of dependent students may receive loans under the FFEL PLUS Loan Program or the Direct PLUS Loan Program on an academic year basis. The maximum amount of any PLUS loan is the total cost of a student's education for each relevant academic year less other financial aid received by the student attributable to such year. These loans are repayable commencing 60 days following the last disbursement, with flexible payment schedules over a ten-year period. The FFEL PLUS loans are made by lending institutions and guaranteed by the federal government. The Direct PLUS Loan Program provides PLUS loans issued directly by the federal government on the same general terms as the FFEL PLUS loans. For the fiscal year ended December 31, 1999, AIU chose to participate in only the FFEL PLUS Loan Program. FFEL PLUS loans amounted to approximately $1.4 million, or approximately 2.3% of the Company's net revenues for the fiscal year ended December 31, 1999. Federal Work-Study. Under the Federal Work-Study ("FWS") program, federal funds are made available to pay up to 75% of the cost of part-time employment of eligible students, based on their financial 15 18 need, to perform work for the institution or for off-campus public or non-profit organizations. At least 5% of an institution's FWS allocation must be used to fund student employment in community service positions. For the fiscal year ended December 31, 1999, FWS funds amounted to approximately $73,354 or 0.1% of the Company's net revenues. AVAILABILITY OF LENDERS Five lending institutions currently provide over 85% of all federally guaranteed loans to students attending AIU. While the Company believes that other lenders would be willing to make federally guaranteed student loans to its students if loans were no longer available from its current lenders, there can be no assurance in this regard. In addition, the HEA requires the establishment of lenders of last resort in every state to make loans to students at any school that cannot otherwise identify lenders willing to make federally guaranteed loans to its students. Moreover, because AIU is eligible to participate in the Direct Loan program, students are able to obtain loans directly from the federal government. OTHER FINANCIAL ASSISTANCE SOURCES Students at AIU participate in state grant programs, including Georgia's HOPE Scholarship and Tuition Equalization Grant programs, as well as the California Grant Program and Florida State Grant Program. For the fiscal year ended December 31, 1999, approximately $479,882 or 0.8% of the Company's net revenues was derived from state grant programs. In addition, certain students attending AIU receive financial aid provided by the United States Department of Veterans Affairs, the United States Department of the Interior (Bureau of Indian Affairs), and the Rehabilitative Services Administration of the Department of Education (vocational rehabilitation funding). For the fiscal year ended December 31, 1999, financial assistance from such federal programs equaled less than 0.2% of the Company's net revenues. AIU also provides institutional scholarships to qualified students. For the fiscal year ended December 31, 1999, institutional scholarships had a value equal to approximately $860,428 or 1.4% of the Company's net revenues. FEDERAL OVERSIGHT OF TITLE IV PROGRAMS The substantial amount of federal funds disbursed through Title IV Programs and the large numbers of participating students and institutions have led to instances of fraud, waste, and abuse. As a result, the United States Congress has required the Department of Education to increase its level of regulatory oversight of schools to ensure that public funds are properly used. Therefore, to obtain and maintain eligibility to participate in the Title IV Programs, AIU must comply with the rules and regulations set forth in the HEA and the Regulations thereunder. An institution must obtain certification by the Department of Education as an "eligible institution" to participate in Title IV Programs. Certification as an "eligible institution" to participate in Title IV Programs requires, among other things, that the institution be authorized to offer its educational programs by the state in which it operates. It must also be accredited by an accrediting agency recognized by the Department of Education. The HEA provides standards for institutional eligibility to participate in the Title IV Programs. The standards are designed, among other things, to limit dependence on Title IV Program funds, prevent schools with unacceptable student loan default rates from participating in Title IV Programs, and, in general, require institutions to satisfy certain criteria intended to protect the integrity of the federal programs, including criteria regarding administrative capability and financial responsibility. A school that has been certified as eligible to participate in the Title IV Programs continues to remain eligible for the period of its certification, which is generally up to six years. A school must apply for a renewal of its certification prior to its expiration, and must demonstrate compliance with the eligibility requirements in its application. Under certain circumstances, the Department of Education may provisionally certify a school to participate in Title IV Programs. Provisional certification may be imposed when a school undergoes a change in ownership resulting in a change of control or when a school is reapplying for certification, if the school (i) does not satisfy all the financial responsibility standards, (ii) has a cohort default rate of 25% or more in any single fiscal year of the three most recent federal fiscal years for which data is available, and (iii) under other circumstances determined by the Secretary of Education. Provisional certification may last no longer than three years. Provisional certification differs from certification in that a provisionally certified school may be terminated from eligibility to participate in the Title IV Programs without the same 16 19 opportunity for a hearing before an independent hearing officer and an appeal to the Secretary of Education as is afforded to a fully certified school faced with termination, suspension, or limitation of eligibility prior to expiration of its certification. Additionally, the Department of Education may impose such further conditions on a provisionally certified institution's eligibility to continue participating in the Title IV Programs, as the Department of Education deems necessary. In connection with the Company's acquisition of American European Corporation in October 1996, which resulted in a change of control of AIU, the Company was provisionally certified to participate in Title IV Programs. As of December 1999, AIU was fully certified; this new program participation expires December 31, 2003. Cohort Default Rates. A significant component of the Congressional initiative aimed at reducing fraud, waste, and abuse was the imposition of limitations on participation in Title IV Programs by institutions whose former students defaulted on the repayment of federally guaranteed student loans at an "excessive" rate. Since the Department of Education began to impose sanctions on institutions with cohort default rates above certain levels, more than 600 institutions have lost their eligibility to participate in some or all Title IV Programs. However, many institutions, including AIU, have responded by implementing aggressive student loan default management programs aimed at reducing the likelihood of student defaults. A school's cohort default rate under the FFEL and Direct Loan program is calculated on an annual basis as the rate at which student borrowers scheduled to begin repayment on their loans in one federal fiscal year default on those loans by the end of the next federal fiscal year. Any institution whose FFEL and Direct Loan cohort default rates equal or exceed 25% for three consecutive years will no longer be eligible to participate in that program or the Direct Loan program for the remainder of the federal fiscal year in which the Department of Education determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. In addition, an institution whose FFEL and Direct Loan cohort default rate for any federal fiscal year exceeds 40% may have its eligibility to participate in all Title IV Programs limited, suspended, or terminated. Since the calculation of FFEL and Direct Loan cohort default rates involves the collection of data from many non-governmental agencies (i.e., lenders and private guarantors), as well as the Department of Education, the HEA provides a formal process for the review and appeal of the accuracy of FFEL and Direct Loan cohort default rates before the Department of Education takes any action against an institution based on its FFEL and Direct Loan cohort default rates. An institution may continue to participate in the FFEL and Direct Loan programs during the appeal process. AIU has had average FFEL and Direct Loan cohort default rates of less than 25% for three consecutive federal fiscal years. AIU's FFEL and Direct Loan cohort default rate was 16.7% and 13.1% for 1995 and 1996 respectively. The 1997 (most recently published rate) FFEL and Direct Loan cohort default rate was 8.9%. If an institution's FFEL and Direct Loan cohort default rate equals or exceeds 25% in any of the three most recent federal fiscal years, that institution may be placed on provisional certification status for up to six years. Provisional certification does not limit an institution's access to Title IV Program funds; however, an institution with provisional status is under closer review by the Department of Education and may be subject to summary adverse action if it commits violations of Title IV Program requirements. To the Company's knowledge, the Department of Education reviews an institution's compliance with the cohort default rate thresholds only when that school is otherwise subject to a Department of Education certification review. AIU has not had a FFEL and Direct Loan cohort default rate of 25% or greater during any of the last three fiscal years. Increased Regulatory Scrutiny. The 1992 reauthorization of the HEA contained a three-part initiative, referred to as the Program Integrity Triad, intended to increase regulatory scrutiny of postsecondary education institutions. Part one of that initiative required each state to establish a State Postsecondary Review Entity ("SPRE") to review certain institutions to determine their eligibility to continue participating in Title IV Programs. However, the United States Congress has declined to provide funding for SPREs in appropriations legislation that has been signed into law, and the Department of Education has not requested any future funding for SPREs. With the enactment of the Higher Education Amendments of 1998, the provision for SPREs has been repealed and the statute renames the Title, Program Integrity. While there continues to be a role for the State as a member of the Triad, it is less encompassing than the provisions which had existed under the SPREs. Part two of the Program Integrity Triad, now Program Integrity, expanded the role of accrediting agencies in the oversight of institutions participating in Title IV Programs. As a result, the accrediting agencies that accredit AIU have increased the depth and intensity of reviews and have expanded 17 20 examinations in such areas as financial responsibility and timeliness of student refunds. The Program Integrity provisions also require each accrediting agency recognized by the Department of Education to undergo comprehensive periodic reviews to ascertain whether such accrediting agency is adhering to required standards. No accrediting agency or association may be approved by the Department of Education for a period of more than five years. SACS, AIU's primary accrediting agency, has been reviewed by the Department of Education under the Program Integrity provisions and reapproved for continued recognition by the Department of Education. Part three of the Program Integrity tightened the standards to be applied by the Department of Education in evaluating the financial responsibility and administrative capability of institutions participating in Title IV Programs, and mandated that the Department of Education periodically review the eligibility and certification to participate in Title IV Programs of every such eligible institution. The Higher Education Amendments of 1992 required all institutions to undergo a recertification review by the Department of Education by 1997 and every four years thereafter. With the enactment of the Higher Education Amendments of 1998, institutions may be recertified for up to six years. Under these standards, AIU would be evaluated by the Department of Education more frequently than in the past. A denial of recertification would preclude AIU from continuing to participate in Title IV Programs. Financial Responsibility Standards. All institutions participating in Title IV Programs must satisfy a series of specific standards of financial responsibility. Institutions are evaluated for compliance with those requirements as part of the Department of Education's recertification process and also annually as each institution submits its audited financial statements to the Department of Education. In November 1997, the Department of Education published new regulations regarding financial responsibility, which were effective on July 1, 1998. The new regulations took effect for audited financial statements submitted to the Department of Education on or after July 1, 1998 and applied to the institution's fiscal years commencing June 1, 1997 and thereafter. The new standards replace the acid test ratio, the tangible net worth standard, and the net operating results test with three different ratios: an equity ratio, a primary reserve ratio, and a net income ratio. The equity ratio measures an institution's capital resources, ability to borrow, and financial viability. The primary reserve ratio measures an institution's ability to support current operations from expendable resources. The net income ratio measures the ability to operate at a profit. The results of each ratio are assigned a strength factor on a scale from negative 1.0 to positive 3.0, with negative 1.0 reflecting financial weakness and a positive 3.0 reflecting financial strength. An institution's strength factors are then evaluated based on an assigned weighting percentage for each ratio. The weighted scores for the three ratios are then added together to produce a composite score for the institution. The composite score must be at least 1.5 for the institution to be deemed financially responsible by the Department of Education without the need for further financial monitoring. If the institution's composite score is less than 1.5, but equal to or greater than 1.0, the institution may continue in the Title IV Programs for a maximum period of three years, subject to more rigorous financial aid disbursement and financial monitoring requirements by the Department of Education. While the Company is required to notify the Department of Education of a change in fiscal years, the audited financial statements for the seven months ended December 31, 1998 were not required to be submitted until the audited financial statements for the twelve months ended December 31, 1999 are submitted, which must be submitted no later than June 30, 2000. The composite score will be based on the audited financial statements for the twelve months ended December 31, 1999. Based on the audited financial statements for the year ended May 31, 1998, the Company's composite score met the minimum standard of 1.5. Based on the audited financial statements for the year ended December 31, 1999, the Company's composite score did not meet the minimum requirements. The Company is evaluating various alternatives to address the failure as of December 31, 1999 to meet the financial responsibility standards of the Department of Education. In connection therewith, the Company has retained The Robinson-Humphrey Company LLC as its financial advisor. The Robinson-Humphrey Company will advise the Board of Directors of EduTrek on various strategic alternatives, which may include, but are not limited to, business combinations, a strategic investment in the Company by third parties and current shareholders, or a refinancing of the Company's debt, or a combination thereof. It is expected that the proceeds of any such transactions would be sufficient to correct the ratio deficiencies, and also to enable the Company to post any letters of credit, if required by the Department of Education. Because the Company is not 18 21 in compliance with the financial responsibility standards, the Company anticipates that it may be required to post an irrevocable letter of credit in an amount equal to 10% to 50% of the Title IV funds received by AIU students during the year ended December 31, 1999. At 50% of the Title IV funds received by AIU students during the year ended December 31, 1999, an irrevocable letter of credit of approximately $15.0 million would need to be posted in favor of the Department of Education after June 30, 2000. Proceeds from strategic alternatives would be used to ensure that the Company is meeting the financial responsibility standards, and also to post any letters of credit required by the Department of Education. There can be no assurance that the Company will successfully complete any of these transactions. Failure to post a letter of credit in the amount required would result in the termination of the Company as an institution eligible for Title IV financial aid. Such an event would negatively affect cash flows of the Company. In addition, if the Company is not in compliance with financial responsibility standards, and if the Company is deemed not to be in compliance with good administrative practice with respect to financial aid, then, on or about July 2000, the Company might be required to receive its Title IV funds from the Department of Education under the reimbursement method. Under this method, the Company would first make disbursements to eligible students and parents through credits to the students' accounts before it requests or receives funds for those disbursements from the Department of Education. Any requirement that the Company operate under the reimbursement method may result in an approximate 30-60 day delay in the receipt by the Company of tuition monies under Title IV. The Company believes that its administrative practice with respect to financial aid is in accordance with good practice and that the posting of the approximately $15.0 million letter of credit would meet the financial responsibility concerns of the Department of Education. However, there can be no assurance that the Department of Education would reach the same conclusion. Failure to finance the liquidity required under the reimbursement method would create material working capital shortages for the Company. Certain states in which the Company operates have regulatory agencies which perform their own financial capability reviews, which include fiscal tests. The Company is not currently in compliance with some of these state requirements. Management believes that, by successfully addressing the financial responsibility standards of the Department of Education, it will meet the financial requirements of all the states in which it operates, although there can be no assurance of such. An institution that is determined by the Department of Education not to meet the standards of financial responsibility on the basis of failing to meet one or more of the specified numeric indicators is nonetheless entitled to participate in Title IV Programs if it can demonstrate to the Department of Education that it is financially responsible on an alternative basis. An institution may do so by demonstrating, with the support of a statement from a certified public accountant, proof of prior compliance with the numeric standards and other information specified in the regulations, and that its continued operation is not jeopardized by its financial condition. Alternatively, an institution may post surety either in an amount equal to one-half of the total Title IV Program funds received by students enrolled at such institution during the prior year or in an amount equal to 10% of such prior year's funds and agree to disburse those funds only on an "as-earned" basis. The Department of Education has interpreted this surety condition to require the posting of an irrevocable letter of credit in favor of the Department of Education. In addition to the financial responsibility standards, an institution is required to make timely refunds when a student who receives Title IV Program funds withdraws from an institution. Depending on when during the academic term the student withdraws, the institution is required to refund all or a portion of the Title IV Program funds paid by the withdrawing student. Beginning with the 1995-1996 award year, an institution that has failed to make all Title IV Program refunds on a timely basis during the previous two years is required to post a letter of credit in favor of the Department of Education equal to 25% of the Title IV Program refunds that the institution was required to make for the previous year. As of the fiscal year ended December 31, 1999, AIU believes it has taken appropriate steps to ensure this requirement is met. Administrative Capability. The Regulations set certain standards of "administrative capability" which a school must satisfy to participate in the Title IV Programs. These criteria require, among other things, that the school comply with all applicable Title IV Regulations, have capable and sufficient personnel to administer the Title IV Programs, have acceptable methods of defining and measuring the satisfactory academic progress of its students, provide financial aid counseling to its students, timely submit all reports and financial statements required by the Regulations, and have cohort default rates not equal to or in excess of 25% for any one of the three most recent fiscal years. See "--Cohort Default Rates." Failure to satisfy any of the criteria may lead the Department of Education to determine that the school lacks the requisite administrative capability and may subject the school to provisional certification 19 22 when it seeks to renew its certification as an eligible institution, or may subject it to a fine or to a proceeding for the limitation, suspension, or termination of its participation in Title IV Programs. Proceedings to fine, limit, suspend, or terminate an institution are conducted before an independent hearing officer of the Department of Education and are subject to appeal to the Secretary of Education, prior to any sanction taking effect. Thereafter, judicial review may be sought in the federal courts pursuant to the federal Administrative Procedures Act. Restrictions on Operating Additional Campuses. The HEA generally requires that certain institutions, including proprietary schools, be in full operation for two years before applying to participate in Title IV Programs. However, under the HEA and the Regulations, an institution that is certified to participate in Title IV Programs may establish an additional location within a state or selected territory of the United States (as identified in the Regulations) and apply to participate in Title IV Programs at that location without reference to the two-year requirement, if such additional location satisfies all other applicable requirements. In addition, a school which undergoes a change in ownership resulting in a change of control must be reviewed and recertified for participation in Title IV Programs under its new ownership. See "--Change of Control." In the past, pending recertification, the Department of Education has suspended Title IV Program funding to that school's students. If a school is recertified, it will be on a provisional basis. During the time a school is provisionally certified, it may be subject to summary adverse action for violations of Title IV Program requirements, but provisional certification does not otherwise limit an institution's access to Title IV Program funds. With the enactment of the Higher Education Amendments of 1998, the Department of Education may grant provisional certification to an institution seeking approval of a change in ownership based on the preliminary review of a materially complete application and to extend that status on a month-by-month basis as necessary. Thus, funding would not be suspended under this new provision. Any future Company expansion plans would be based, in part, on its ability to add additional locations and acquire schools that can be recertified. Certain of the state authorizing agencies and accrediting agencies with jurisdiction over AIU also have requirements that may, in certain instances, limit the ability of the Company to open a new school, acquire an existing school, or establish an additional location of an existing school. The Company does not believe that those standards will have a material adverse effect on the Company or its future expansion plans. Change of Control. Upon a change in ownership resulting in a change of control of the Company, as defined in the HEA and the Regulations, AIU could lose its eligibility to participate in Title IV Programs for an indeterminate period of time during which it applies to regain eligibility. A change of control also could have significant regulatory consequences for the Company at the state level and could affect the accreditation of AIU's campuses. In connection with the Company's acquisition of American European in October 1996, AIU was required to be recertified by the Department of Education as well as obtain the reaccreditation of SACS. In addition, AIU's campus in Los Angeles was required to be reauthorized by the State of California. The Department of Education has granted AIU full certification to participate in Title IV Programs which will expire December 31, 2003. Because the acquisition of American European was found to be an excluded transaction under the Regulations, AIU's Title IV Program funding was not suspended during the Department of Education's review of its recertification application. On August 5, 1996 the change of control was approved by SACS and following a Substantive Change Visit to AIU in April 1997, as required to ensure compliance with accreditation standards following a change of control, on April 18, 1997 SACS issued a final report on AIU with no recommendations. On August 14, 1996, AIU's Los Angeles campus was reapproved by the State of California's Council for Private Postsecondary and Vocational Education (the "California Council"). The Department of Education's regulations provide that after a Company becomes publicly traded, a change of control occurs when a report on Form 8-K is required to be filed with the Commission disclosing a change of control. Most states and accrediting agencies have similar requirements, but they do not provide a uniform definition of change of control. If the Company were to lose its eligibility to participate in Title IV Programs for a significant period of time pending an application to regain eligibility, or if it were determined not to be eligible, its operations would be materially adversely effected. The possible loss of Title IV eligibility resulting from a change of control may also discourage or impede a tender offer, proxy contest, or other similar transaction involving control of the Company. 20 23 The "90/10 Rule" (formerly the "85/15 Rule"). With the enactment of the Higher Education Amendments of 1992, proprietary schools, such as AIU, would cease to be eligible to participate in Title IV Programs if on a cash basis of accounting more than 85% of its revenues from eligible programs for the prior fiscal year were derived from Title IV funds. This was known as the 85/15 Rule. The percentages have been changed to 90/10 with the enactment of the Higher Education Amendments of 1998 for any fiscal year containing the October 1, 1998 effective date. Any school that violates the 90/10 Rule immediately becomes ineligible to participate in Title IV Programs and is unable to apply to regain its eligibility until the following fiscal year. Each year, every institution participating in the Title IV Programs must submit consolidated financial statements demonstrating compliance with this standard. The Company has calculated that, since this requirement took effect in fiscal 1995, AIU has not derived more than 50% of its revenues from Title IV Programs for any fiscal year, including the fiscal year ended December 31, 1999. The Company regularly monitors compliance with this requirement in order to minimize the risk that AIU would derive more than 90% of its revenues from Title IV Programs for any fiscal year. If AIU appears likely to approach the 90% threshold, the Company would evaluate the appropriateness of making changes in student funding and financing to ensure compliance. Branching and Classroom Locations. The Regulations contain specific requirements governing the establishment of new main campuses, branch campuses, and classroom locations at which any student receives not less than 50% of his or her instruction. In addition to classrooms at campuses, locations affected by these requirements include the business facilities of client companies used by AIU. AIU has obtained approval for all locations required to be approved by the Regulations. Should the Department of Education change its regulations with respect to this approval process, or delay approvals of new locations beyond the current approval time rate, the Company's business strategy may be impacted negatively. Restrictions on Payment of Bonuses, Commissions, or Other Incentives. Schools participating in Title IV Programs are prohibited from providing any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to persons engaged in any student recruitment, admission, or financial aid awarding activity (the "Incentive Compensation Rule"). If the Department of Education were to determine that AIU's methods of compensation do not comply with the Incentive Compensation Rule, AIU could be required to modify its compensation system, repay certain previously disbursed Title IV Program funds, pay administrative fines, or lose its eligibility to participate in Title IV Programs. The Company believes AIU's compensation policies do not violate the Incentive Compensation Rule. STATE AUTHORIZATION AIU's campuses in Atlanta and Los Angeles are authorized to offer education programs and grant degrees or diplomas by the States of Georgia and California, respectively. The Dubai campus has also been authorized to offer education programs and grant degrees or diplomas by the State of Georgia. In addition, because AIU's campuses located in London and Dubai are operated by a corporation whose parent corporation is organized under the laws of the District of Columbia, the London and Dubai campuses in addition to the District of Columbia campus are authorized to offer education programs and grant degrees or diplomas by the Education Licensure Commission of the District of Columbia. The level of regulatory oversight varies substantially from state to state. In some states, campuses are subject to licensure by the state education agency and also by a separate higher education agency. State laws establish standards for instruction, qualifications of faculty, location and nature of facilities, financial policies and responsibility, and other operational matters. State laws and regulations may limit the ability of the Company to obtain authorization to operate in certain states or to award degrees or diplomas or offer new degree programs. As discussed below, California prescribes standards of financial responsibility that are different from those prescribed by the Department of Education. California. In January 1991, the State of California adopted legislation that requires private, postsecondary educational institutions to meet certain financial tests in order to continue operating in the state. These financial tests include three requirements: (i) not having an operating loss in each of an institution's two most recent fiscal years; (ii) having positive net worth in its latest fiscal year; and (iii) maintaining a ratio of current assets to current liabilities of 1.25:1 or greater. The California Bureau also has discretion under this statute to allow an educational institution to continue operating if it does not satisfy the financial tests, if the institution can demonstrate that it has maintained sufficient financial resources to sustain all of its promised educational services. Accordingly, if AIU's campus in Los Angeles fails to meet one of the above- 21 24 described tests, the Company has the opportunity to demonstrate to the California Bureau its financial strength and ability to continue to operate. For the fiscal year ended December 31, 1999, AIU's Los Angeles campus did not satisfy the above requirements. In connection with granting authority for continued operations, California law also requires an on-site visit to all postsecondary institutions having accreditation from a regional accrediting association other than the Western Association of Colleges and Schools. The California Bureau conducted a visit to AIU's campus in Los Angeles in June 1996 and issued its report, granting approval for continued degree-granting operation for the maximum four-year period. In 1997, the state legislature transferred regulatory control of out-of-state institutions from the California Council to the Bureau of Private Postsecondary and Vocational Education, State of California Department of Consumer Affairs as of January 1, 1998 (The New Private Postsecondary and Vocational Education Reform Act). As the name suggests, this new state agency has a greater consumer protection focus than the former Council, which treated out-of-state institutions in a manner similar to an accreditation agency. The new Bureau is still in the process of fully establishing itself and developing its regulatory relationship with its institutions. In spite of this regulatory change, the Los Angeles campus did receive approval for its new IT degree programs and the relocation of the campus to its new Playa Vista location near the new Dream Works development. The University does not anticipate any material change in its regulatory situation in this state as a result of the shift in regulatory responsibility to the new state agency. Georgia. Until May 1, 1997 AIU's campus in Atlanta was exempt from the regulatory oversight of the State of Georgia. Beginning May 1, 1997, AIU did subject its operations to the oversight of the State of Georgia in order to become eligible to participate in Georgia's HOPE Scholarship and Tuition Equalization Grant programs as well as to use the term "University" as part of its name. In the State of Georgia, the Georgia Nonpublic Postsecondary Education Commission ("NPEC") reviews for-profit institutions such as AIU. NPEC regulations require for-profit institutions to meet minimum standards relating to educational quality, ethical business practices, health and safety, and fiscal responsibility. These standards include, but are not limited to, requirements that the institution demonstrate that it has adequate facilities and equipment, that its instructors and administrators have the requisite education and experience, and that the quality and content of each program meet stated objectives. Other NPEC standards address such areas as the institution's library resources, catalog disclosures, support services, student complaints, advertising, admissions, recruitment, student refunds, and student records. In order to demonstrate fiscal responsibility, NPEC requires that the institution have sufficient resources to support its operation for at least the length of its degree program, funds to operate which are not limited to current tuition, and accounts receivable and funds available to operate the institution for at least the quarter or semester, as the case may be. NPEC determined that AIU satisfied its requirements and issued a certificate of authorization for the period of September 19, 1997 through April 30, 1998. New certificates of authorization have been issued for the Buckhead, Dunwoody and Dubai campuses through April 30, 2000. The Company must seek renewal of this authorization on a yearly basis and will soon submit its annual report for reauthorization. The Company will seek to demonstrate to the the California Bureau and the Georgia NPEC its financial strength and ability to operate. In connection therewith, the Company has retained The Robinson-Humphrey Company LLC as its financial advisor. The Robinson-Humphrey Company will advise the Board of Directors of EduTrek on various strategic alternatives, which may include, but are not limited to, business combinations, a strategic investment in the Company by third parties and current shareholders, or a refinancing of the Company's debt, or a combination thereof. However, there can be no assurance that the Company will be able to achieve one of these alternatives. Failure to restructure or recapitalize the Company in a manner satisfactory to the California Bureau and NPEC would result in the termination of the ability of the Company to operate its Atlanta and Los Angeles campuses, or to expand its operations in these states. 22 25 District of Columbia. AIU's campuses in London, Dubai, and the District of Columbia are subject to the regulatory oversight of the District of Columbia Education Licensure Commission (the "Licensure Commission"). The Licensure Commission's standards governing degree granting institutions address such areas as administration, the adequacy of the institution's finances, faculty qualifications, curricula, admissions, procedures for assessing student outcomes, student services, the adequacy of the library and equipment, maintenance of student records, and advertising. Additionally, in connection with conferring degree-granting status, the Licensure Commission requires an on-site visit to all post-secondary institutions with accreditation under the laws of the District of Columbia. The Licensure Commission conducted a visit to AIU's campuses in London and Dubai in December 1997 and is expected to conduct a visit to AIU's campus in the District of Columbia in the first half of 2000. The Licensure Commission granted AIU a license, which will remain in effect until June 30, 2001. These licenses are subject to periodic review under various circumstances including a change in ownership and changes in accreditation status, location, and degrees or certificates offered. Florida. The State of Florida through its State Board of Independent Colleges and Universities ("SBICU") regulates the establishment of in-state and out-of-state higher educational enterprises within the territorial jurisdiction of the state. The SBICU utilizes a multi-stage process by which to grant institutions permission to operate and move through a series of progressive steps toward "full approval." Each approval stage is accompanied by a mandated report and an appearance before the SBICU in public session. Two of the four stages are preceded by visitations of staff or a peer review team to the Miami campus location. AIU was granted Temporary Licensure in April of 1998 and moved to Level I Provisional Licensure in July of that same year. A staff member visited the parent campus for information collection purposes and further analysis of the institution prior to the July action. AIU was then authorized to advertise, admit students, and operate an institution of higher education in Florida. At the January 1999 meeting, AIU Level I Provisional Licensure was extended for an additional six months. AIU was granted Level II Provisional status in June 1999. AIU has since applied for regular licensure, which will be considered at the June 2000 meeting. Virginia. AIU is reevaluating the development and staffing, as well as financing, of its planned Northern Virginia campus. Plans to open the facility are not yet finalized. When and if plans are finalized, AIU will file the mandatory annual reports required by the Commonwealth of Virginia. Virginia regulates both in-state and out-of-state institutions through the Council of Higher Education, commonly referred to as the State Council of Higher Education of Virginia. This state agency requires an extensive review of out-of-state institutions desiring to operate within the Commonwealth. This review and application process follows criteria and standards that are similar to those developed by the Commission on Colleges of SACS relative to faculty, library resources, student services, degree program, administration, physical plant, and credit hour requirements. In addition, customary consumer protection requirements addressing truth in advertising, student complaint, financial aid, tuition, academic advisement, and student refund requirements are mandated by the state. The Council received the application of AIU for the initial development of a northern Virginia campus in the Dulles area in November 1998. The Council met and approved the operation of the AIU campus on February 16, 1999. Staff and peer review visitations to the campus are a part of the ongoing review process in Virginia and will take place if and when the campus becomes fully operational. EXECUTIVE OFFICERS The following table sets forth information concerning the Company's executive officers.
Name AGE POSITION ---- --- -------- Steve Bostic 56 Chairman of the Board and Chief Executive Officer Tina A. Garrison 37 Senior Vice President of Campus Operations David J. Horn 47 Chief Financial Officer and Corporate Secretary Donna L. West 42 Vice President, Human Resources
23 26 Steve Bostic has served as Chairman of the Board and Chief Executive Officer of the Company since its inception in July 1996. Since October 1996, Mr. Bostic has also served on AIU's Governing Board, and since June 1997, Mr. Bostic has served as the President of AIU. Prior to founding the Company in 1996, from 1993 to 1996 Mr. Bostic was the Chairman of the Board of EduTrek Systems, Inc. From 1989 to 1993, Mr. Bostic was the chairman of the Board of Delphi Technology, Inc., a company specializing in the scientific development and application of cognitive-based learning systems. Mr. Bostic was the principal owner and Chairman of American Photo Group, an operator of consumer photo processing labs, from 1981 to 1987. In addition, Mr. Bostic serves as a member of the Board of Trustees of Presbyterian College, the Dean's Advisory Council of the Indiana School of Business, and the Board of the School of Public Policy at Georgia Institute of Technology. Tina Garrison has served as the Senior Vice President of Campus Operations for the Company since February 1999. Ms. Garrison has been with AIU for 11 years in various positions including serving as the Buckhead Campus President, Program Chair for Business, Institutional Effectiveness Coordinator, Acting Dean of Students, and Program Chair of Fashion Marketing. She is concluding her Ph.D. in Higher Education Administration (A.B.D.) at Georgia State University. Prior to her career at AIU, she worked in retail operations where she managed multiple retail sites. David J. Horn was appointed Chief Financial Officer effective November 16, 1999. Prior to joining the Company, Mr. Horn served as the interim Chief Financial Officer of the Atlanta Public School System reporting to the Atlanta Board of Education from September 1998 to October 1999. From June 1996 through September 1998, Mr. Horn was Chief Financial Officer of AJC International, Inc., a privately held global food distributor. From 1995 to 1996 Mr. Horn served as Corporate Controller at ECC International, a global minerals and chemical company. From 1990 through 1995, Mr. Horn was at Cabot Corporation, where he was first Director of Finance for the North American Carbon Black Division and later Global Raw Materials Director. Donna L. West has served as Vice President of Human Resources since January 2000. Prior to joining the Company, from 1991 to 2000, Ms. West was the Vice President of Human Resources at Lynk Systems, Inc., a national provider of electronic payment, cash dispensing and e-commerce services, where she provided long-range planning, analysis and strategies in such areas as human resources, risk management, facilities development and employee welfare. EMPLOYEES As of December 31, 1999, the Company employed 498 persons on a full-time basis and 197 persons on a part-time basis, including 177 full-time and 129 part-time faculty members. 24 27 ITEM 2. PROPERTIES AIU maintains well-equipped campuses and facilities that support the university's focus on technology in education. Classrooms and team rooms provide a comfortable but professional environment to facilitate collaborative learning and better prepare students for the workplace. An advanced technical infrastructure allows students to work on-line from thousands of data ports, communicating with each other, instructors, and the world via the Internet. In the undergraduate areas of study, fashion and interior design studios feature sophisticated equipment. The visual communication facilities include professionally equipped darkrooms and photography studios as well as classrooms with drafting tables and other studio supplies. Video production studios house advanced sound and video equipment. Macintosh and PC labs feature computers, printers, and the latest software available, including programs for computer-aided design. The Library Resource Center on each campus includes audiovisual and interior design resources. The Company leases all of its administrative and educational facilities. The table below sets forth certain information regarding the Company's facilities as of December 31, 1999:
APPROXIMATE LOCATION SQUARE FOOTAGE EXPIRATION -------- -------------- ---------- Atlanta, GA AIU - Buckhead 60,800 January 3, 2009 AIU - Dunwoody 50,500 January 31, 2010 Administration 34,214 January 31, 2010 Administration 11,400 December 31, 1999 Administration 2,200 April 30, 2001 Los Angeles, California 88,200 March 31, 2009 Miami, Florida (old site) 13,400 February 29, 2000 Washington, D.C. 36,300 July 1, 2008 London, England 46,000 November 27, 2005 Dubai, United Arab Emirates 34,300 Leased by Middle East Colleges, Ltd. Miami, Florida (new site) 27,400 August 30, 2009 Louden, Virginia 17,800 May 30, 2009 (terminated February 24, 2000)
Typically, AIU's facilities occupy an entire building or several floors or portions of floors in a building. Leases typically have terms of six months to ten years, with up to five-year renewal options. The Company also leases facilities for student parking and housing. The Company actively monitors facility capacity in light of current utilization and projected enrollment growth. Management believes that in order to accommodate projected increases in student enrollment at each of its campuses over the next two years, AIU may be required to acquire additional space. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings, the adverse outcome of which, in management's opinion, would have a material adverse effect on the Company's operating results. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders of the Company during the fourth quarter ended December 31, 1999. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS From its initial public offering in September 1997 through December 20, 1999, the Company's Class A Common Stock traded on the Nasdaq National Market under the symbol "EDUT". Effective December 21, 1999, the Class A Common Stock began trading in the over-the-counter market, with quotations available on the OTC Bulletin Board (under the symbol "EDUT"). The Company's Class B Common Stock, which does not trade on any market and which is held entirely by the Company's 25 28 Chairman and Chief Executive Officer and his affiliates, may be converted into Class A Common Stock, in whole or in part, at any time on the basis of one share of Class A Common Stock for each share of Class B Common Stock. The following table sets forth, for the periods indicated the reported high and low bid prices of the Company's Class A Common Stock, as reported by The Nasdaq Stock Market and the OTC Bulletin Board. Quotations from the OTC Bulletin Board reflect inter-dealer prices without retail markup, markdown or commission and may not necessarily represent actual transactions.
HIGH LOW ---- --- TWELVE MONTHS DECEMBER 31, 1999 First Quarter ended March 31, 1999 $7.88 $5.50 Second Quarter ended June 30, 1999 7.13 3.44 Third Quarter ended September 30, 1999 6.00 1.75 Fourth Quarter ended December 31, 1999 2.06 0.50 HIGH LOW TWELVE MONTHS ENDED DECEMBER 31, 1998 First Quarter ended March 31, 1998 $25.75 $18.50 Second Quarter ended June 30, 1998 28.25 21.88 Third Quarter ended September 30, 1998 25.75 6.50 Fourth Quarter ended December 31, 1998 9.38 3.94
According to the records of the Company's transfer agent, the Company had 105 and 3 holders of record of Class A and Class B Common Stock, respectively, at December 31, 1999. The Company believes that a substantially larger number of beneficial owners hold Class A shares in depository or nominee form. The Company has never declared nor paid cash dividends on its Common Stock and does not anticipate paying any cash dividends on its Common Stock in the near future. It is the current policy of the Company's Board of Directors to retain earnings, if any, to finance the operations and expansion of the Company's business. Holders of Class A Common Stock are entitled to receive cash dividends on at least an equal per share basis as holders of Class B Common Stock if and when such dividends are declared by the Board of Directors of the Company. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth certain consolidated financial and other operating data for the Company and American European Corporation and Subsidiaries (the "Predecessor"). This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this Form 10-K and the Company's and Predecessor's Consolidated Financial Statements and Notes thereto included in Item 8 of this Form 10-K. Selected Consolidated Financial Data (In thousands, except per share and enrollment data)
The Company (1) -------------------------------------------------------------------------------- Fiscal Year Ended Seven Months Ended Fiscal Year December 31, December 31, Ended May 31, Period from July 1, 1996 ----------------- ------------------ ------------- (Date of Formation) to 1999 1998 (3) 1998 May 31, 1997 ----------------- ------------------ ------------- ------------------------ Statement of Operations Data (4): Net revenues $ 61,656 $ 23,848 $ 41,914 $ 23,590 Cost of education and facilities 36,408 12,775 16,927 9,014 Selling and promotional expenses 11,516 5,770 6,321 2,428 General and administrative expenses 21,806 9,189 10,516 5,468 Acquisition costs -- -- 487 -- Restructure expense 4,803 -- -- -- Write-off of license fees and accrual of termination costs -- 3,533 -- -- Rents paid to majority shareholder -- -- -- -- Amortization of goodwill 1,011 588 1,008 696 -------- -------- -------- -------- Total costs and expenses 75,544 31,855 35,259 17,606 -------- -------- -------- -------- Income (loss) from campus operations (13,888) (8,007) 6,655 5,984 Income (loss) from management agreement -- -- 23 479 -------- -------- -------- -------- Income (loss) from operations (13,888) (8,007) 6,678 6,463 Interest expense 1,526 234 1,328 2,499 Interest income -- shareholder notes -- -- -- -- Other income -- net 21 64 1,539 20 -------- -------- -------- -------- Income (loss) before income taxes, minority interest, and extraordinary item (15,393) (8,177) 6,889 3,984 (Provision) benefit for income taxes (5) (944) 3,280 (2,581) (1,981) -------- -------- -------- -------- Income (loss) before minority interest and extraordinary item (16,337) (4,897) 4,308 2,003 Minority interest in earnings of American University in Dubai (1,878) (619) (1,445) -- -------- -------- -------- -------- Income (loss) before extraordinary item (18,215) (5,516) 2,863 2,003 Extraordinary loss less applicable income taxes -- -- (960) -- -------- -------- -------- -------- Net income (loss) $(18,215) $ (5,516) $ 1,903 $ 2,003 ======== ======== ======== ======== Basic income (loss) per share before extraordinary item (6) $ (1.68) $ (0.52) $ 0.30 $ 0.29 Basic income (loss) per share (6) $ (1.68) $ (0.52) $ 0.20 $ 0.29 Diluted income (loss) per share before extraordinary item (6) $ (1.68) $ (0.52) $ 0.28 $ 0.26 Diluted income (loss) per share (6) $ (1.68) $ (0.52) $ 0.19 $ 0.26 Average shares outstanding 10,829 10,639 9,527 7,000 Dilutive effect of stock options and warrants -- -- 681 569 -------- -------- -------- -------- Average shares outstanding assuming dilution 10,829 10,639 10,208 7,569 Selected Operating Data: Net cash (used in) provided by operating activities $ (3,817) $ 2,694 $ 2,686 $ 1,356 Net cash used in investing activities $ (3,884) $ (7,203) $ (2,045) $(31,428) Net cash provided by (used in) financing activities $ 8,023 $ 1,460 $ 4,510 $ 30,780 AIU Fall term enrollment (8) 4,643 3,610 3,045 2,822 Balance Sheet Data: Working capital deficiency $(26,020) $(11,309) $ (281) $ (9,772) Total assets $ 66,908 $ 64,534 $ 55,769 $ 47,671 Long-term debt, including current portion $ 20,382 $ 9,327 $ 1,241 $ 30,075 Shareholders' equity $ 21,615 $ 38,761 $ 44,294 $ 7,877 The Predecessor (1) (2) ------------------------------------------------- Period from June 1, Fiscal Year Ended May 31, 1996 through ------------------------- October 8, 1996 1996 1995 ------------------- --------- --------- Statement of Operations Data (4): Net revenues $ 6,189 $ 26,493 $ 23,696 Cost of education and facilities 3,256 11,144 10,051 Selling and promotional expenses 1,335 3,614 3,083 General and administrative expenses 2,739 6,677 6,115 Acquisition costs -- -- -- Restructure expense -- -- -- Write-off of license fees and accrual of termination costs -- -- -- Rents paid to majority shareholder 49 150 145 Amortization of goodwill -- -- -- ------- -------- -------- Total costs and expenses 7,379 21,585 19,394 ------- -------- -------- Income (loss) from campus operations (1,190) 4,908 4,302 Income (loss) from management agreement (21) 127 -- ------- -------- -------- Income (loss) from operations (1,211) 5,035 4,302 Interest expense 258 730 607 Interest income -- shareholder notes 98 361 153 Other income -- net 66 72 25 ------- -------- -------- Income (loss) before income taxes, minority interest, and extraordinary item (1,305) 4,738 3,873 (Provision) benefit for income taxes (5) -- (107) (124) ------- -------- -------- Income (loss) before minority interest and extraordinary item (1,305) 4,631 3,749 Minority interest in earnings of American University in Dubai -- -- -- ------- -------- -------- Income (loss) before extraordinary item (1,305) 4,631 3,749 Extraordinary loss less applicable income taxes -- -- -- ------- -------- -------- Net income (loss) $(1,305) $ 4,631 $ 3,749 ======= ======== ======== Pro Forma Data (7): Income before income taxes, as reported $(1,305) $ 4,738 $ 3,873 Pro forma provision for income taxes 509 1,848 1,510 ------- -------- -------- Pro forma net income (loss) $ (796) $ 2,890 $ 2,363 ======= ======== ======== Selected Operating Data: Net cash (used in) provided by operating activities 1,413 5,798 5,522 Net cash used in investing activities (288) (2,662) (1,507) Net cash provided by (used in) financing activities (1,197) (3,442) (3,916) AIU Fall term enrollment (8) 2,822 2,441 2,200 Balance Sheet Data: Working capital deficiency (8,696) (8,355) Total assets 7,253 6,682 Long-term debt, including current portion 4,756 2,874 Shareholders' equity (7,287) (6,166)
(1) The Company was organized on July 1, 1996 for the purpose of acquiring the Predecessor. On October 8, 1996, the Company acquired the Predecessor and EduTrek Systems. See note 1 of notes to consolidated financial statements. (2) Because the Company did not acquire the Predecessor until October 8, 1996, the financial information with respect to the Company for the period from July 1, 1996 through October 8, 1996 does not include the Predecessor. EduTrek Systems is included in the financial information of the Company in a manner similar to a pooling of interests because the Company and EduTrek Systems were under common control. Financial information for EduTrek Systems is not included in the Selected Consolidated Financial Data prior to July 1, 1996 because, EduTrek Systems had not generated revenues and in the years ended December 31, 1992, 1993, 1994, and 1995 and for the period ended October 8, 1996, EduTrek Systems incurred losses of $321,000, $90,911, $312,954, $584,627, and $819,430, respectively. Such amounts are not considered to be relevant to the Company and the Predecessor because, in prior years, EduTrek Systems had no revenues and existed solely to provide a corporate structure through which its controlling shareholder could pursue a variety of opportunities and activities. 26 29 (3) In 1998, following the filing of its Annual Report on form 10-K for the fiscal year ended May 31,1998, the Company changed its fiscal year-end from May 31 to December 31. Accordingly, the Company filed a Transition Report for the seven-month transition period from June 1, 1998 to December 31, 1998. (4) The Company experiences seasonality in its results of operations primarily as a result of changes in the level of student enrollments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Seasonality." (5) As a result of its election to be treated as an S Corporation for income tax purposes, the Predecessor was not subject to federal and most state income taxes. Accordingly, the historical provision for income taxes includes income taxes only for those jurisdictions that do not recognize S Corporation status. (6) Income per share information for the Predecessor is not presented, as the amounts are not considered meaningful due to the minimal number of outstanding shares and the S Corporation election of the Predecessor. (7) As a result of its election to be treated as an S Corporation for income tax purposes, the Predecessor was not subject to federal and most state income taxes. Accordingly, the historical provision for income taxes includes income taxes only for those jurisdictions that do not recognize S Corporation status. The pro forma provision for income taxes (computed under the provisions of Statement of Financial Accounting Standards No. 109) reflects provisions that would have been recorded had the Predecessor been a C Corporation for income tax purposes during the periods shown using an estimated income tax rate of 40.0%. Prior to the initial public offering, distributions in the form of cash dividends were made principally to assist the shareholders with their income tax obligations arising from the Predecessor's S Corporation status. Such distributions amounted to $4,068,962, $3,800,000, $4,500,000, and $1,889,694 for the fiscal years ended May 31, 1994, 1995, and 1996 and for the period from June 1, 1996 through October 8, 1996, respectively. (8) Represents enrollment data as measured on the first day of each Fall term. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition of the Company should be read in conjunction with the "Selected Consolidated Financial Data" and the Company's and Predecessor's Consolidated Financial Statements and Notes thereto. OVERVIEW The Company has reported net losses of $18.2 million for the year ended December 31, 1999 and $5.5 million for the seven-month transition period ended December 31, 1998 (the seven month transition period in 1998 resulted from the Company changing its fiscal year-end from May 31 to December 31 during 1998). For the year ended December 31, 1999, the Company's loss from operations was $13.9 million compared to a loss of $8.0 million for the seven-month transition period ended December 31, 1998. The results for the year ended December 31, 1999 include restructuring accruals of $4.8 million, primarily in the following areas, in order to reduce overall expenditures and to restore positive cash flow: - - Reduction of Corporate operations overhead through elimination and consolidation of positions and space reductions; - - Teaching out current classes in the Washington D.C. campus and closing that operation; and - - Termination of the lease for a new Northern Virginia campus site. The loss from operations reported for the quarter ended December 31, 1999 was $7.1 million. This included restructuring accruals of $4.8 million and amortization of goodwill of $0.3 million. Excluding the restructuring accruals the loss from operations was $2.3 million for the quarter ended December 31, 1999. The Company is significantly leveraged and recent developments have had a material adverse effect on the Company's short-term liquidity and ability to service its debts. The Company has a $10 million revolving line of credit (Line A) and a $4,350,000 revolving line of credit (Line B) with a bank (the two lines of credit, as amended, are referred to collectively as the "Credit Agreement"). As of March 30, 2000, the Company had $8.1 million outstanding under Line A, and an additional $1.9 million of letters of credit issued against line A. Line A matures on April 30, 2001. As of March 30, 2000, the Company had $4.3 million outstanding under Line B ($2.3 million as of December 31, 1999). The indebtedness under Line B is required to be reduced to $3.5 million as of July 1, 2000, with remaining maturity on September 30, 2000. Substantially all of the Company's assets are pledged as collateral under the Credit Agreement. The Credit Agreement requires interest only payments until maturity, except for the required principal reductions described above. While the Company believes it will be able to make the regular interest payments, its ability to make the required payments of principal on a timely basis is presently in doubt, based upon management's current projected earnings and cash flow of the Company, without proceeds from some form of capital infusion, pursuant to business combinations, a strategic investment in the Company, or a refinancing of the Company's debt, or a combination thereof. If the Company does not make either the July 1, 2000, September 30, 2000, or the April 30, 2001 required debt payments, it may be unable to continue its normal operations, except to the extent permitted by its lender. For the year ended December 31, 1999, the Company failed to meet the financial responsibility standards of the United States Department of Education. As a result, the Company may be required to post an irrevocable letter of credit in an amount equal to 10% to 50% of the Title IV funds received by AIU students during the year ended December 31, 1999. At 50% of the Title IV funds received by AIU students during the year ended December 31, 1999, an irrevocable letter of credit of approximately $15.0 million would need to be posted in favor of the Department of Education after June 30, 2000. The Company is evaluating various strategic alternatives, including, but not limited to, a business combination, strategic 27 30 investment in the Company, or a refinancing of the Company's debt. Proceeds from such strategic alternatives would be used to insure that the Company is meeting the financial responsibility standards, and also to post any letters of credit required by the Department of Education. There is no assurance that the Company can successfully complete any of these transactions. Failure to post a letter of credit in the amount required, would result in the termination of the Company as an institution eligible for Title IV student financial aid, which would negatively affect cash flows of the Company. Certain states in which the Company operates have regulatory agencies which perform their own financial capability reviews. The Company is not currently in compliance with some of these state requirements. Management believes that, by successfully addressing the financial responsibility standards of the Department of Education, it will meet the financial requirements of all the states in which it operates, although there can be no assurance of such. In response to recent developments and the associated liquidity requirements, the Company has retained The Robinson-Humphrey Company LLC as its financial advisor. The Robinson-Humphrey Company will advise the Board of Directors of EduTrek on various strategic alternatives, which may include, but are not limited to, business combinations, a strategic investment in the Company by third parties and current shareholders, or a refinancing of the Company's debt, or a combination thereof. There are currently no arrangements or agreements in place with respect to any such alternative. In addition, management has restructured certain areas of the Company and implemented cost management controls to reduce expenses. Management estimates that corporate staff and space reductions will save approximately $2.5 million annually when fully implemented in the twelve-month period ended December 31, 2000. The accrual for severance and employment contracts included 16 employees. Management has further announced the teach-out and eventual closure of its Washington, D.C. Power Campus, which has failed to meet its enrollment goals. The Washington, D.C. campus recorded a $2.1 million deficit in "campus contribution" in the twelve-month period ended December 31, 1999. The Company has plans to open a new campus in northern Virginia, in the Washington D.C. metro area, once a suitable site and sufficient capital are secured. The components of the restructure accrual consist of the following: - - Lease termination and other related costs $4,137,135 - - Severance, employment expense, and other related costs $ 666,340 EduTrek acquired AIU (formerly The American College) through its acquisition of the American European Corporation (the "Predecessor") on October 8, 1996. EduTrek's principal sources of revenue are tuition, related fees, and payments for student housing collected from students. Other sources of revenue include sales of textbooks, application fees, other student fees, consulting, and other income. Net revenues are calculated by deducting AIU awarded scholarships from gross revenues. AIU's academic year for the Traditional programs is divided into three 10-week terms (Fall, Winter, Spring) and two eight-week summer terms (Summer I and Summer II). Summer terms are shorter and more concentrated, and the two terms combined equal a 10-week term as it relates to the contribution to net revenues. The average term enrollment levels for Winter, Spring, Summer I and Summer II terms are approximately 95%, 90%, 53% and 33%, respectively, of the Fall term benchmark. The following table correlates AIU's academic terms to EduTrek's fiscal quarters as of December 31, 1999.
FISCAL QUARTERS ACADEMIC TERMS - --------------- -------------- First (January- March) Winter; one-fifth of Spring Second (April-June) Last four-fifths of Spring; one-half of Summer I Third (July-September) Last half of Summer I; Summer II Fourth (October-December) Fall
AIU's Power Campus programs (MIT, BIT, MBA, and BBA) have four enrollment periods per year, which correspond with EduTrek's fiscal quarters: January, April, July, and October. The full-time 28 31 day programs are divided into four 10-week terms, and the evening programs are divided into seven 10-week terms. In addition, enrollment periods for AIU's BBA evening programs occur approximately once every two months. Net revenues from these programs vary from period to period based on several factors that include (1) the aggregate number of students attending classes; (2) the number of classes held during the period; and (3) the average tuition per credit hour. Tuition and fees are payable prior to the start of each term. A portion of the funds is received in advance of the term's start date. The balance is collected through financial aid and under cash payment schedules established on a student-by-student basis. A review is made at least annually for possible uncollectible receivables with appropriate reserves being made at that time. Such items are written off as needed. Actual write-offs have not exceeded 2.0% of net revenues during the fiscal years 1999, 1998 or 1997. Each of AIU's campuses is 100% controlled by EduTrek except the campus in Dubai, which is controlled by EduTrek under a management agreement with an investment group based in the United Arab Emirates. Under the terms of that agreement, the investment group provided all the start-up capital required to open the campus in Dubai and is responsible for ongoing capital expenditures in exchange for 65% of the net operating cash flow from that campus. In exchange for its management services, EduTrek receives 35% of the net operating cash flow. As tuition is received, it is recorded as unearned revenues, a current liability. During the term, the applicable portion of the deferred tuition income is recognized as revenue each month based on the aggregate number of credit hours taken by students during the term. Unearned revenues historically has been at its highest level at the end of September before the start of the academic year and the Fall term for two reasons: (1) the Fall term represents the highest enrollment level in the year, and (2) some students, principally non-U.S. students in London, pay a full year's tuition in advance. EduTrek's expenses generally consist of cost of education and facilities, selling and promotional expenses, general and administrative expenses, and the amortization of goodwill. Education costs include salaries of full-time and adjunct faculty, instructional support, academic administrators, student development and support costs relating to library and classroom expenses, curriculum costs, and royalty payments to ITI. Facility costs consist of leasing, maintenance, and other occupancy costs relating to campus facilities. Student housing costs are also included. Selling and promotional expenses include salaries of personnel involved in recruitment, admissions and marketing at the campus and corporate office level, their related costs, advertising costs, and the cost of producing marketing materials. General and administrative expenses include the salaries of personnel engaged in general administration, accounting, financial aid, personnel and compliance at the campus level, all corporate personnel, and their related expenses. These expenses also include depreciation and amortization of related fixed assets, deferred costs, provisions for bad debt, and benefits relating to personnel at the campus and corporate levels. The amortization of goodwill is the result of the October 1996 acquisition of the Predecessor. Goodwill costs are amortized over a 40-year period. Prior to the year ended December 31 1999, the Company's income tax provision provided for income taxes at rates approximating statutory federal and state rates (approximately 40.0%). Recent losses have led to the accumulation of significant deferred tax assets due to net operating losses as well as book versus tax differences. Due to the uncertainties related to continuing losses, and the Company's recapitalization/restructuring efforts, the ability of the company to realize such tax benefits is not reasonably assured. Therefore, as of December 31, 1999, all existing deferred tax assets were adjusted to reflect a 100% valuation reserve. Thus no tax benefits were provided for the year ended December 31, 1999, and the results of operations in the year ended December 31, 1999 include the reversal of the benefit of all deferred tax items in the amount of approximately $2.8 million. 29 32 RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship of certain statement of operations items to net revenues for the Company and Predecessor:
The Company ---------------------------------------------------------------------------------- Fiscal Year Ended Seven Months Ended Fiscal Year Ended Period from July 1, 1996 December 31, December 31, May 31, (Date of Formation) to ----------------- ------------------ ----------------- 1999 1998 1998 May 31, 1997 ----------------- ------------------ ----------------- ------------------------ Net revenues 100.0% 100.0% 100.0% 100.0% Costs and expenses: Cost of education and facilities 59.1 53.6 40.4 38.2 Selling and promotional expenses 18.7 24.2 15.1 10.3 General and administrative expenses 35.4 38.5 25.1 23.2 Acquisition costs -- -- 1.2 -- Restructure expense 7.8 -- -- -- Write-off of license fees and accrual of termination costs -- 14.8 -- -- Amortization of goodwill 1.6 2.5 2.4 2.9 ----- ----- ----- ---- Total costs and expenses 122.5 133.6 84.2 74.6 ----- ----- ----- ---- Income (loss) from campus operations (22.5) (33.6) 15.8 25.3 Income (loss) from management agreement -- -- 0.1 2.0 ----- ----- ----- ---- Income (loss) from operations (22.5) (33.6) 15.9 27.3 Interest expense 2.5 1.0 3.2 10.6 Other income -- net 0.0 0.3 3.7 0.1 ----- ----- ----- ---- Income (loss) before income taxes and minority interest and extraordinary item (25.0) (34.3) 16.4 16.8 Income tax (provision) benefit (1.5) 13.8 (6.2) (8.4) ----- ----- ----- ---- Income (loss) before minority interest and extraordinary item (26.5) (20.5) 10.2 8.4 Minority interest in earnings of American University in Dubai (3.0) (2.6) (3.4) -- ----- ----- ----- ---- Net income (loss) before extraordinary item (29.5) (23.1) 6.8 8.4 Extraordinary loss less applicable income taxes -- -- (2.3) -- ----- ----- ----- ---- Net income (loss) (29.5)% (23.1)% 4.5% 8.4% ===== ===== ===== ====
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE FISCAL YEAR ENDED MAY 31, 1998 Net revenues. Net revenues increased approximately $19.7 million or 47.1% to $61.6 million from $41.9 million. This increase was primarily due to an increase in student enrollments at the four new Power Campuses in Atlanta (Dunwoody), Los Angeles, Miami, and Washington, D.C., and a tuition increase (see note 2 of notes to consolidated financial statements). Cost of education and facilities. Cost of education and facilities increased approximately $19.5 million or 115.1% to $36.4 million from $16.9 million. Education costs increased approximately $12.5 million or 122.5% to $22.7 from $10.2 million. This increase was primarily due to salary and classroom supply cost increases for the four new Power Campuses (including laptop computers for each student, as well as electronic based instructional equipment). Facility costs increased approximately $7.0 million or 104.5% to $13.7 million from $6.7 million. This increase was primarily due to the full year operation of the four new Power Campuses. Cost of education and facilities increased as a percentage of net revenues to 59.1% from 40.4% for the reasons set forth above. Selling and promotional expenses. Selling and promotional expenses increased by approximately $5.2 million or 82.2% to $11.5 million from $6.3 million. This increase was primarily due to increases in salary and other selling and promotional expenses related to the full year operation of the new Power Campuses. Selling and promotional expenses increased as a percentage of net revenues to 18.7% from 15.1%. General and administrative expenses. General and administrative expenses increased approximately $11.3 million or 107.4% to $21.8 million from $10.5 million. This increase was primarily due to the addition of personnel at the home office and campuses to support the Company's growth, particularly the opening of the new Power Campuses. As a percentage of net revenues, general and administrative expenses increased to 35.4% from 25.1%. Restructuring costs. In December 1999, the Company decided to restructure its corporate overhead and certain of its operations in order to reduce overall expenditures and restore positive cash flow of the Company. The three areas of restructure were: 1) reduction of Corporate overhead through elimination and consolidation of positions and space reductions, 2) the teach-out of current classes in the Washington D.C. campus and closure of the operation, and 3) termination of the lease for the current Northern Virginia campus site. As a result of this restructuring, the Company established restructuring accruals at December 31, 1999 in the amount of $4.8 million. 30 33 Write-off of license fees and accrual of termination costs. The Company had historically capitalized and then amortized over ten years the license fees paid to ITI Education Corporation for IT curriculum. The Company decided to phase out the licensed ITI curriculum in favor of its own internally developed IT curriculum and to negotiate the termination of the licensing agreement. As a result, the Company elected to write-off related license fees of $3,333,000 during the 1998 period. The Company also accrued $200,000 to cover certain expenses in connection with the phase out of this curriculum; however, actual expenses in connection with this phase out may exceed $200,000. The estimated phase-out costs range between $200,000 and $500,000 of which management believes the ultimate cost to phase-out this curriculum agreement will be $200,000. As of March 30, 2000, a final negotiated settlement had not been reached (see note 8 of notes to consolidated financial statements). Amortization of goodwill. Amortization of goodwill of approximately $1.0 million in both the 1999 and 1998 periods were the result of the October 1996 acquisition of the Predecessor with goodwill costs being amortized over a 40-year period. Interest expense. Interest expense increased approximately $198,000 or 14.9% to $1.5 million from $1.3 million as a result of the increased borrowings needed to support the Company's growth in the Power Campuses (see note 15 of notes to consolidated financial statements). Other income, net. Other income, net decreased approximately $1.5 million to $21,000 from $1.5 million. The 1998 period included the sale of a company airplane. The 1999 period contained no such items. Provision for Income Taxes. Income tax expense decreased approximately $1.6 million to $1.0 million from $2.6 million. The Company generated a pretax loss for the fiscal year ended December 31, 1999, thus generating a deferred tax benefit. However, management believes the recoverability of the Company's current and prior year's unused deferred tax asset is uncertain due to the recent losses and therefore provided a valuation reserve allowance of 100% against this asset in 1999. Also in 1999, the Company utilized a net operating loss carryback of $4,622,239 and $4,091,322 for federal and state income tax purposes, respectively, which resulted in an income tax receivable of $1,717,000. Minority interest in earnings of American University in Dubai. Minority interest in earnings increased approximately $433,000 or 30.0% to $1.9 million from $1.4 million due to the increase in Dubai's operating income. SEVEN MONTHS ENDED DECEMBER 31, 1998 (TRANSITION PERIOD) COMPARED TO SEVEN MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED) The following discussion compares the Company's results for the seven-month transition period ended December 31, 1998 ("seven month 1998 period") to the seven months ended December 31, 1997 ("seven month 1997 period"). The transition period from June 1,1998 to December 31, 1998 resulted from the Company changing its fiscal year-end in October 1998 from May 31 to December 31. Net revenues. Net revenues increased approximately $4.6 million or 24.4% from $19.2 million in the seven month 1997 period to $23.8 million in the seven month 1998 period. This increase was primarily due to an increase in student enrollments and a tuition increase, and, to a lesser extent, the consolidation of the American University in Dubai ("Dubai") (see note 2 of notes to consolidated financial statements). Cost of education and facilities. Cost of education and facilities increased approximately $4.5 million or 54.6% from $8.3 million in the seven month 1997 period to $12.8 million in the seven month 1998 period. Education costs increased approximately $3.9 million or 82.3% from $4.7 million in the seven month 1997 period to $8.6 million in the seven month 1998 period due to salary and other cost increases and, to a lesser extent, the consolidation of Dubai. Facility costs increased approximately $626,000 or 17.7% from $3.5 million in the seven month 1997 period to $4.2 million in the seven month 1998 period due to the consolidation of Dubai and additional rent increases, including new campuses in Atlanta (Dunwoody), Los Angeles, Miami, and Washington, D.C. Cost of education and facilities increased as a percentage of net revenues from 43.1% in the seven month 1997 period to 53.6% in the seven month 1998 period for the reasons set forth above. 31 34 Selling and promotional expenses. Selling and promotional expenses increased by approximately $2.5 million or 75.9% from $3.3 million in the seven month 1997 period to $5.8 million in the seven month 1998 period due to increases in salary and other selling and promotional expenses related to new educational programs and to new campuses in Atlanta (Dunwoody), Los Angeles, Miami, and Washington, D.C. Selling and promotional expenses increased as a percentage of net revenues from 17.1% in the seven month 1997 period to 24.2% in the seven month 1998 period. General and administrative expenses. General and administrative expenses increased approximately $3.3 million or 54.5% from $5.9 million in the seven month 1997 period to $9.2 million in the seven month 1998 period. This increase was primarily due to additions of personnel at the home office to support the Company's growth, particularly the opening of new campuses in Atlanta (Dunwoody), Los Angeles, Miami, and Washington, D.C. The remaining increase was due to the consolidation of Dubai. As a percentage of net revenues, general and administrative expenses increased from 31.0% in the seven month 1997 period to 38.5% in the seven month 1998 period. Write-off of license fees and accrual of termination costs. The Company has historically capitalized and then amortized over ten years license fees paid to ITI for IT curriculum. The Company has decided to phase out the licensed ITI curriculum in favor of its own internally developed IT curriculum and to negotiate the termination of the licensing agreement. As a result, the Company has elected to write-off related license fees of $3,333,000 during the 1998 period. The Company has also accrued $200,000 to cover certain expenses in connection with the phase out of this curriculum; however, actual expenses in connection with this phase out may exceed $200,000. The estimated phase-out costs range between $200,000 to $500,000 of which management believes the ultimate cost to phase-out this curriculum agreement will be $200,000 (see note 8 of notes to consolidated financial statements). Amortization of goodwill. Amortization of goodwill of approximately $588,000 in the seven month 1997 and 1998 periods were the result of the October 1996 acquisition of the Predecessor with goodwill costs being amortized over a 40-year period. Income from management agreement. Income from the Dubai campus management agreement decreased from $23,000 in the seven month 1997 period to zero in the seven month 1998 period due to the consolidation of Dubai effective September 1, 1997. Interest expense. Interest expense decreased approximately $998,000 or 81.0% in the seven month 1998 period compared to the seven month 1997 period as a result of the application of the proceeds of the Company's September 1997 initial public offering to retire debt. Other income, net. Other income, net remained relatively constant during the seven month 1997 and 1998 periods. Minority interest in earnings of American University in Dubai. Minority interest in earnings increased approximately $156,000 or 33.7% due to the consolidation of Dubai effective September 1, 1997 and the increase in Dubai's operating income. YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 31, 1997 Prior to the Company's acquisition of the Predecessor in October 1996, the Company's operations were de minimis as its principal operations primarily related to the acquisition of the Predecessor. The following discussion compares the Company's results for the twelve months ended May 31, 1998 to the eleven month period from July 1, 1996 through May 31, 1997 which, because the operations of the Company were de minimis prior to October 1996, essentially presents the operations of the Company for the eight month period ended May 31, 1997. Net revenues. Net revenues increased approximately $18.3 million or 77.7% from $23.6 million for the eleven months ended May 31, 1997 (the "1997 period") to $41.9 million for the year ended May 31, 1998 (the "1998 period"). Of this 77.7% increase, 26.6% or approximately $4.9 million was due to the consolidation of Dubai (see note 2 of notes to consolidated financial statements). The remaining increase in net revenues was due to an increase in student enrollments and a tuition increase. Cost of education and facilities. Cost of education and facilities increased approximately $7.9 million or 88.1% from $9.0 million in the 1997 period to $16.9 million in the 1998 period. Education costs 32 35 increased approximately $4.8 million or 89.3% from $5.4 million in the 1997 period to $10.2 million in the 1998 period due to the consolidation of Dubai and salary and other cost increases. Facility costs increased approximately $3.1 million or 86.2% from $3.6 million in the 1997 period to $6.7 million in the 1998 period due to the consolidation of Dubai, rent increases, and an increase in the number of housing students. Cost of education and facilities increased as a percentage of net revenues from 38.2% in the 1997 period to 40.4% in the 1998 period. Selling and promotional expenses. Selling and promotional expenses increased by approximately $3.9 million or 160.3% from $2.4 million in the 1997 period to $6.3 million in the 1998 period. Of the 160.3% increase, 9.2% or approximately $223,000 was due to the consolidation of Dubai. The remaining increase was due to increases in salary and other selling and promotional expenses related to new educational programs such as the Master's in Information Technology and the Bachelor's in Business Administration for adult evening students. As a percentage of net revenues, selling and promotional expenses increased from 10.3% in the 1997 period to 15.1% in the 1998 period. General and administrative expenses. General and administrative expenses increased approximately $5.0 million or 92.3% from $5.5 million in the 1997 period to $10.5 million in the 1998 period. Of the 92.3% increase, 20.4% or approximately $1.1 million was due to the consolidation of Dubai. The remaining increase was primarily due to additions of personnel at the home office to support the Company's growth. As a percentage of net revenues, general and administrative expenses increased from 23.2% in the 1997 period to 25.1% in the 1998 period. Acquisition costs. Acquisition costs include $487,000 of accounting, legal, and other costs in the 1998 period associated with the planned combination with ITI Education Corporation ("ITI"). In March 1998, the Company and ITI announced that their planned combination was terminated in favor of amended and expanded licensing arrangements under which the Company acquired rights to ITI's information technology system. Amortization of goodwill. Amortization expenses, principally goodwill expenses, of approximately $1.0 million in the 1998 period and approximately $696,000 in the 1997 period were the result of the October 1996 acquisition of the Predecessor with goodwill costs being amortized over a 40-year period. Income from management agreement. Income from the Dubai campus management agreement decreased approximately $456,000 or 95.2% from approximately $479,000 in the 1997 period to approximately $23,000 in the 1998 period due to the consolidation of Dubai effective September 1, 1997. The portion of income from operations related to Dubai was approximately $789,000 for the 1998 period, which represents an increase of 64.7% primarily due to an increase in enrollment. Interest expense. Interest expense decreased approximately $1.2 million or 46.9% in the 1998 period compared to the 1997 period as a result of the application of the proceeds of the Company's September 1997 initial public offering to retire debt. Other income, net. Other income, net increased from $20,000 in the 1997 period to approximately $1.5 million in the 1998 period primarily due to a $991,000 gain on the sale of aircraft, which offset $481,000 of related net operating costs during the 1998 period. The remaining increase is related to interest income after the initial public offering and a one-time sales tax recovery. Minority interest in earnings of American University in Dubai. Effective September 1, 1997, the Company modified its joint venture agreement relating to Dubai, which resulted in the change in presentation of income from management agreement to minority interest in earnings (see note 2 of notes to consolidated financial statements). Extraordinary loss less applicable income taxes. The extraordinary loss of $960,000 is the result of the early retirement of debt after the Company's initial public offering. QUARTERLY RESULTS OF OPERATIONS The following table sets forth quarterly financial data for each of the four fiscal quarters ended December 31, 1999 and May 31,1998, respectively, as well as the fiscal quarters for the seven months ended December 31, 1998. The Company believes that this information includes all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of such quarterly information when read in conjunction with the Company's Consolidated Financial Statements and Notes thereto. The operating results for any quarter are not necessarily indicative of the results for any future period. 33 36 Quarterly Data (in thousands except per share data)
Fiscal Year Ended December 31, 1999 Fiscal Year Ended May 31, 1998 ------------------------------------------ --------------------------------------- 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ------- -------- ------- -------- ------- ------- ------- ------- Net revenues $16,733 $ 15,305 $11,898 $ 17,720 $ 6,228 $ 9,312 $12,701 $13,673 Income (loss) from operations 411 (1,816) (5,400) (7,083) (526) 768 3,115 3,321 Income (loss) before extraordinary item (406) (1,665) (3,631) (12,513) (962) 214 1,778 1,833 Net income (loss) $ (406) $ (1,665) $(3,631) (12,513) $ (962) $ (746) $ 1,778 $ 1,833 Basic income (loss) per share before extraordinary item $ (0.04) $ (0.15) $ (0.34) $ (1.15) $ (0.13) $ 0.02 $ 0.17 $ 0.17 Basic income (loss) per share $ (0.04) $ (0.15) $ (0.34) $ (1.15) $ (0.13) $ (0.08) $ 0.17 $ 0.17 Diluted income (loss) per share before extraordinary item $ (0.04) $ (0.15) $ (0.34) $ (1.15) $ (0.13) $ 0.02 $ 0.16 $ 0.17 Diluted income (loss) per share $ (0.04) $ (0.15) $ (0.34) $ (1.15) $ (0.13) $ (0.07) $ 0.16 $ 0.17
Seven Months Ended December 31, 1998 ------------------------------------ 1st Qtr 2nd Qtr December ------- ------- -------- Net revenues $ 7,825 $11,642 $ 4,381 Loss from operations (1,462) (3,701) (2,844) Loss before extraordinary item (985) (2,596) (1,935) Net loss $ (985) $(2,596) $(1,935) Basic loss per share before extraordinary item $ (0.09) $ (0.24) $ (0.19) Basic loss per share $ (0.09) $ (0.24) $ (0.19) Diluted loss per share before extraordinary item $ (0.09) $ (0.24) $ (0.19) Diluted loss per share $ (0.09) $ (0.24) $ (0.19)
34 37 SEASONALITY IN RESULTS OF OPERATIONS The Company experiences seasonality in its results of operations primarily as a result of changes in the level of student enrollments. While the Company enrolls students throughout the year, with a fiscal year that historically ended on May 31, the Company's first and second fiscal quarter enrollments and related revenues generally were lower than the third and fourth quarter fiscal quarters due to traditionally lower student enrollment levels in the summer terms. In addition, first and second fiscal quarter costs and expenses historically were higher as a percentage of net revenues as a result of certain fixed costs which are not significantly affected by the seasonal first and second fiscal quarter declines in net revenues. Under the new fiscal year ending December 31, the second and third fiscal quarter revenues are lower than the first and fourth fiscal quarters, and the second and third fiscal quarter costs and expenses are higher as a percentage of net revenues than the first and fourth fiscal quarters. This seasonality is partially mitigated by educational programs, which are offered throughout the year, at Power Campuses in California, Georgia, Florida, and the District of Columbia. LIQUIDITY AND CAPITAL RESOURCES Since the Company's acquisition of the Traditional Campuses, through the acquisition of AIU, on October 8, 1996, the Traditional Campuses have made annual positive income and cash flow contributions. However, due to the start-up of the Power Campuses in 1998, the Company has had a need to incur a significant amount of debt financing. The Company has a $10,000,000 revolving line of credit ("Line A") and a $4,350,000 revolving line of credit ("Line B") with a bank (collectively, as amended, the "Credit Agreement"). The Credit Agreement is secured by substantially all of the Company's assets. Line A, as amended, matures on the earlier of April 30, 2001, or 30 days after demand for payment by the bank. Amounts outstanding bear interest at the London Interbank Offered Rate ("LIBOR") plus 2.75%. At March 30, 2000, the Company had outstanding borrowings under Line A of $8,088,640. In addition, the Company had issued $1,911,360 in letters of credit against Line A. These letters of credit are required as security under building leases in Los Angeles, Washington, D.C., and Miami. Line B, as amended, matures on the earlier of September 30, 2000, or 30 days after demand for payment by the bank. Line B requires that the principal amount outstanding must be reduced to $3,500,000 by July 1, 2000. Line B amounts outstanding bear interest at the Prime rate plus 2.00%. At March 30, 2000, the Company had outstanding borrowings under Line B of $4,350,000. The Company agreed to pay the bank a fixed Arrangement Fee of $750,000, of which $250,000 was charged to operations in 1999. This entire Arrangement Fee is payable on the later of (1) the Facility B termination date or (2) the Termination Date of the Credit Agreement. The Company also agreed to pay a Contingent Arrangement Fee to the bank equal to: (a) $200,000 upon failure of the Company to deliver to the bank by April 15, 2000, a letter of intent for the sale of assets or stock of the Company that generates sufficient proceeds to pay all amounts due to bank and (b) $200,000 upon failure of the Company to deliver to the bank by June 15, 2000, a definitive executed contract for the sale of assets or stock of the Company that generates sufficient proceeds to pay all amounts due to bank. The Credit Agreement requires interest only payments until maturity, except for the required principal reductions described above. While the Company believes it will be able to make the regular interest payments, based on management's current projected earnings and cash flow, its ability to make the required payments of principal on a timely basis is presently in doubt. On August 27, 1999, the Company borrowed $1.0 million from R. Steven Bostic, the Company's Chairman and Chief Executive Officer. The amount outstanding under the Promissory Note was convertible, at any time at the option of Mr. Bostic, into shares of the Company's Class B common stock at a price equal to the lower of $2.875 per share or the closing price of the Company's Class A common stock on the date of notice of such conversion. On December 2, 1999, Mr. Bostic gave notice of his conversion of the Promissory Note into the Company's Class B common stock. Based on the closing price of the Company's Class A common stock on December 2, 1999, the Promissory Note was converted into 1,066,667 shares of the Company's Class B common stock. Purchases of property, plant, and equipment for the fiscal year ended 1999 were approximately $3.0 million. These purchases were primarily for: (1) the completion of the build-out of the Washington, D.C. and Miami campuses; (2) hardware and software costs related to the installation of a new management information system; (3) improvements to the Company's computer facilities and telecommunications equipment at the corporate level; (4) investments in computer technology to support information technology curriculum; and (5) increases in normal recurring capital expenditures due to the overall increases in student and employment levels resulting from the Company's growth. For the fiscal 35 38 year ended December 31, 1999, the Company also capitalized curriculum development costs totaling approximately $901,000. The Company expects to fund capital expenditures for existing and any future new campuses through cash from operations and, if the Company is able to obtain sufficient refinancing, through debt or sale of equity. However, there can be no assurance that the Company will be able to fund its capital programs. The Company's ability to fund its working capital and capital expenditure requirements, implement new programs, make interest and principal payments, and meet its other cash requirements, depends on, among other things, current cash and cash equivalents, internally generated funds, the proceeds of the Company's Credit Agreement, and other loans. Based on current estimates of cash flow, the Company cannot be certain it will have sufficient cash resources to make required debt payments and to meet its other cash requirements. The Company is evaluating various alternatives to address both its liquidity requirements and the failure as of December 31, 1999 to meet the financial responsibility standards of the Department of Education. The Company has retained The Robinson-Humphrey Company LLC to assist in determining short-term and long-term financial requirements. The Robinson-Humphrey Company LLC will advise the Company on various strategic alternatives, which may include, but are not limited to, business combinations, a strategic investment in the Company, or a refinancing of the Company's debt, or a combination thereof. It is expected such transactions would inject sufficient capital to alleviate the current liquidity crisis, correct the ratio deficiencies, and also to post any letters of credit, if required by the Department of Education. There can be no assurance that the Company will be able to obtain such funding as and when required, or on acceptable terms. The Department of Education requires that Title IV program funds collected by an institution for unbilled tuition be kept in a separate cash or cash equivalent account until the students are billed for the portion of their program related to these funds. In addition, all funds transferred to the Company through electronic funds transfer programs are held in a separate cash account until certain conditions are satisfied. As of December 31, 1999 the Company had $176,500 in these separate accounts to comply with these requirements. These funds generally remain in these separate accounts for an average of 14 days from the date of collection. These restrictions on cash have not affected the Company's ability to fund daily operations. All institutions participating in Title IV programs must satisfy specific standards of financial responsibility. Institutions are evaluated for compliance with those standards annually as each institution submits its audited financial statements to the Department of Education (no later than July 1, 2000 for the Company with respect to the year ended December 31, 1999). The standards consist of an equity ratio, a primary reserve ratio, and a net income ratio. An institution that is determined by the Department of Education not to meet the standards is nonetheless entitled to participate in Title IV programs if it can demonstrate to the Department of Education that it is financially responsible on an alternative basis. An institution may do so by demonstrating, with the support of a statement from a certified public accountant, proof of prior compliance with the numeric standards and other information specified in the regulations, and that its continued operation is not jeopardized by its financial condition. Alternatively, an institution may post surety either in an amount equal to 50% of the total Title IV program funds received by students enrolled at such institution during the prior year, or in an amount equal to 10% of such prior year's funds. Additionally, an institution would agree to disburse those funds only on a reimbursement basis (as described below). The Department of Education has interpreted this surety condition to require the posting of an irrevocable letter of credit in favor of the Department of Education. As of December 31, 1999, the Company was not in compliance with the financial responsibility standards of the Department of Education. The Company anticipates that it may be required to post an irrevocable letter of credit on or about July 2000 in the amount of up to approximately $15.0 million, which represents approximately 50% of the Title IV funds received by students during the prior year, or to reach some other acceptable arrangement with the Department of Education. Approximately 50% of the Company's revenue is derived from Title IV funds. Failure to post a letter of credit, or reach some other acceptable agreement with the Department of Education would result in the termination of the Company as an institution eligible for Title IV financial aid and would negatively impact future cash flows of the Company and possibly result in the Company being unable to continue its normal operations. 36 39 If the Company were deemed not to meet financial responsibility standards, or not to be in compliance with good administrative practice with respect to financial aid, the Company could be required to receive Title IV funds from the Department of Education under the reimbursement payment method. Under this method, the Company would be required to first make disbursements to eligible students and parents through credits to the student's accounts before it requests or receives funds for those disbursements from the Department of Education. Any requirement that the Company operate under the disbursement method would result in an approximate 30-60 day delay in the receipt by the Company of tuition monies under Title IV. Failure to finance the resulting additional liquidity needs could create material working capital shortages for the Company, if the Company is required to receive payments from the Department of Education under the reimbursement method. This liquidity financing could be in addition to posting of a letter of credit in the amount of $15.0 million, which represents approximately 50% of the Title IV funds received by students during the prior year. The Company believes that its administrative practice with respect to financial aid is in accordance with acceptable practice. Certain states in which the Company operates have regulatory agencies which perform their own financial capability reviews, which include fiscal tests. The Company is not currently in compliance with some of these state requirements. Management believes that, by successfully addressing the financial responsibility standards of the Department of Education, it will meet the financial requirements of all the states in which it operates, although there can be no assurance of such. 37 40 YEAR 2000 ISSUES During 1999, management completed the process of preparing for the year 2000 date change. This process involved identifying and remediating problems in computer systems, software and other operating equipment, working with third parties to address their Year 2000 issues, and developing contingency plans to address potential risks in the event of Year 2000 failures. To date, neither EduTrek nor any of its subsidiaries has experienced any problems related to the Year 2000 issue. The Company has reviewed its material relationships with third parties such as vendors and evaluated the consequences of third party year 2000 problems on the Company. The Company did require contract letters of compliance from all vendors. The Company determined that the year 2000 problems of these third parties did not pose a material risk to the Company. However, because the Company is in a regulated industry and indirectly relies on only a few sources for a substantial portion of its cash receipts, the Company is dependent upon those entities' efforts to address their own year 2000 issues. The Company currently uses the latest version of Department of Education software, which is year 2000 compliant, and to date has not experienced any adverse effects from third party vendor year 2000 problems. Should any such third parties experience year 2000 related disruptions, it could have a material adverse impact on the Company's business, results of operations, liquidity, or financial condition. For example, as with all postsecondary education-oriented businesses whose students receive governmental financial aid, the Company's operations and liquidity depend upon the student funding provided by Title IV Programs for its students. Processing of applications for this funding is handled by the Department of Education's computer systems. While the Company does not believe those systems experienced any significant problems with the date change, any such problems that arise in the future could have an adverse effect on the Company. The Company is continuing implementation of its new centralized information system which is used to integrate its operations and financial data including admissions, financial aid, student services, placement services, and default management. The new system was designed to properly recognize the year 2000. To date the Company has incurred approximately $1.4 million in system costs to design, purchase and implement this new integrated system. The Company estimates it can complete implementation of the full information system at all campuses excluding Dubai for a total cost of approximately $2.0 million, although there can be no assurance that total expenditures will not exceed $2.0 million. EFFECT OF INFLATION The Company does not believe its operations have been materially affected by inflation. 38 41 NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), was issued in June 1998. Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133", was issued in June 1999, deferring the effective date of FAS 133 from June 15, 1999 to June 15, 2000 for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not yet completed its evaluation of the effect of this standard on its financial statements. However, at this time the Company does not expect FAS 133 to have a material effect on its financial position, results of operations, cash flows or financial statement disclosures. ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. No response is required to this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements are filed with this Report:
PAGE Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
39 42 INDEPENDENT AUDITORS' REPORT Board of Directors of EduTrek International, Inc. We have audited the accompanying consolidated balance sheets of EduTrek International, Inc. (the "Company") and its subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for the year ended December 31, 1999, the seven months ended December 31, 1998, the year ended May 31, 1998, and the period from July 1, 1996 (date of formation) to May 31, 1997. We also audited the accompanying consolidated statements of operations, changes in shareholders' equity and cash flows of American European Corporation and subsidiaries (the Predecessor) for the period from June 1, 1996 to October 8, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 1999 and 1998 and the results of their operations and their cash flows for the year ended December 31, 1999, the seven-months ended December 31, 1998, the year ended May 31, 1998, and the period from July 1, 1996 (date of formation ) to May 31, 1997, and the results of their operations and their cash flows of the Predecessor for the period from June 1, 1996 to October 8, 1996 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 18 to the consolidated financial statements, the Company has had recurring losses from operations resulting in technical defaults of some financial covenants in connection with its revolving line of credit. All technical defaults have been waived by the lender. As more fully discussed in Note 15 to the consolidated financial statements, the Company and its lender have entered into five amendments in 1999 and a sixth amendment in February 2000 to modify maturity dates of amounts outstanding under the line of credit and to modify financial covenants. The Company currently has $8.1 million outstanding under Line A of the line of credit, which matures the earlier of April 30, 2001 or 30 days subsequent to demand by the lender. The Company currently has $4.3 million ($2.3 million as of December 31, 1999) outstanding under Line B of the Credit Agreement, as amended, which is required to be reduced to $3.5 million as of July 1, 2000 with full maturity on September 30, 2000. Based on current estimates of available cash flow from operations, management can not be certain it will have sufficient cash resources to make these required debt payments. In addition, as discussed in Note 16 the Company has failed to meet the financial monitoring standards of the Department of Education ("DOE"). Consequently, management anticipates that the Company may be required to post an irrevocable letter of credit of approximately $15.0 million with the DOE by July 2000. Failure to post a letter of credit would result in the termination of the Company as an institution eligible for Title IV financial aid. This would severely negatively impact future cash flow of the Company. In addition, certain states, in which the Company operates, have regulatory agencies which perform their own financial capability reviews. These reviews include fiscal tests, which the Company was not in compliance with as of December 31, 1999. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 18. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. DELOITTE & TOUCHE LLP Atlanta, Georgia March 10, 2000 (March 30, 2000 as to Note 15) 40 43 EduTrek International, Inc. Consolidated Balance Sheets (In thousands, except share amounts)
December 31, December 31, 1999 1998 ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 3,061 $ 2,779 Accounts receivable -- net of allowance of $1,985 and $277, respectively 2,444 3,054 Income taxes receivable 1,717 166 Deferred income taxes -- 308 Other 1,123 1,288 -------- -------- Total current assets 8,345 7,595 Property, plant, and equipment -- net of accumulated depreciation 19,414 14,971 Goodwill -- net of accumulated amortization of $3,303 and $2,292, respectively 37,357 38,369 Deferred income taxes -- 2,496 Other 1,792 1,103 -------- -------- $ 66,908 $ 64,534 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 4,060 $ 4,816 Accrued expenses 3,482 1,632 Accrued related party transactions 112 -- Value-added tax payable 445 473 Unearned revenues 9,412 8,477 Restructure accrual - current 3,970 -- Line of credit 10,687 1,820 Current maturities -- capital leases and other 2,197 1,686 -------- -------- Total current liabilities 34,365 18,904 Capital leases and other--less current maturities 7,498 5,821 Deferred rent 2,346 966 Restructure accrual - long term 834 -- Other liabilities 250 82 -------- -------- Total liabilities 45,293 25,773 SHAREHOLDERS' EQUITY Common stock, Class A voting, one vote per share, without par value, 40,000,000 shares authorized, 4,485,168 and 4,362,605 issued and outstanding, respectively 36,737 36,611 Common stock, Class B voting, ten votes per share, without par value, 10,000,000 shares authorized, 7,359,667 and 6,293,000 issued and outstanding, respectively 4,973 3,973 Accumulated other comprehensive income (loss) (33) 24 Accumulated deficit (20,062) (1,847) -------- -------- Total shareholders' equity 21,615 38,761 -------- -------- $ 66,908 $ 64,534 ======== ========
See notes to consolidated financial statements. 41 44 EduTrek International, Inc. Consolidated Statements of Operations (In thousands, except per share amounts)
The Company ---------------------------------------------------------------------------------- Fiscal Year Ended Seven Months Ended Fiscal Year Ended Period from July 1, 1996 December 31, December 31, May 31, (Date of Formation) to 1999 1998 1998 May 31, 1997 ----------------- ------------------ ----------------- ------------------------ Net revenues $ 61,656 $ 23,848 $ 41,914 $23,590 Costs and expenses: Cost of education and facilities 36,408 12,775 16,927 9,014 Selling and promotional expenses 11,516 5,770 6,321 2,428 General and administrative expenses 21,806 9,189 10,516 5,468 Restructure expense 4,803 -- -- -- Amortization of goodwill 1,011 588 1,008 696 Acquisition costs -- -- 487 -- Write-off of license fees and accrual of termination costs -- 3,533 -- -- -------- ------- -------- ------- Total costs and expenses 75,544 31,855 35,259 17,606 -------- ------- -------- ------- Income (loss) from campus operations (13,888) (8,007) 6,655 5,984 Income from management agreement -- -- 23 479 -------- ------- -------- ------- Income (loss) from operations (13,888) (8,007) 6,678 6,463 Interest expense 1,526 234 1,328 2,499 Other income -- net 21 64 1,539 20 -------- ------- -------- ------- Income (loss) before income taxes, minority interest, and extraordinary item (15,393) (8,177) 6,889 3,984 (Benefit) provision for income taxes 944 (3,280) 2,581 1,981 -------- ------- -------- ------- Income (loss) before minority interest and extraordinary item (16,337) (4,897) 4,308 2,003 Minority interest in earnings of American University in Dubai (1,878) (619) (1,445) -- -------- ------- -------- ------- Income (loss) before extraordinary item (18,215) (5,516) 2,863 2,003 Extraordinary loss less applicable income taxes -- -- (960) -- -------- ------- -------- ------- Net income (loss) $(18,215) $ (5,516) $ 1,903 $ 2,003 ======== ======= ======== ======= Earnings (loss) per share: Basic income (loss) per share before extraordinary item $ (1.68) $ (0.52) $ 0.30 $ 0.29 Basic net income (loss) per share $ (1.68) $ (0.52) $ 0.20 $ 0.29 Diluted income (loss) per share before extraordinary item $ (1.68) $ (0.52) $ 0.28 $ 0.26 Diluted net income (loss) per share $ (1.68) $ (0.52) $ 0.19 $ 0.26 Average shares outstanding 10,829 10,639 9,527 7,000 Dilutive effect: Warrants -- -- 240 569 Options -- -- 441 -- -------- ------- -------- ------- -- -- 681 569 -------- ------- -------- ------- Average shares outstanding assuming dilution 10,829 10,639 10,208 7,569
See notes to consolidated financial statements. 42 45 EDUTREK INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
The Predecessor ------------------- Period from June 1, 1996 through October 8, 1996 ------------------- Net revenues $ 6,189 Costs and expenses: Cost of education and facilities 3,256 Selling and promotional expenses 1,335 General and administrative expenses 2,739 Rents paid to majority stockholders 49 ------ Total costs and expenses 7,379 ------ Income (loss) from campus operations (1,190) Income (loss) from management agreement (21) ------ Income (loss) from operations (1,211) Interest expense 258 Other income - net 164 ------ Income (loss) before income taxes, minority interest, and extraordinary item (1,305) Provision for income taxes -- ------ Net income (loss) $(1,305) ======
See notes to consolidated financial statements. 43 46 EDUTREK INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
The Predecessor ------------------- Period from June 1, 1996 through October 8, 1996 ------------------- Net income (loss) $ (1,305) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 392 Bad debt expense 69 Increase in accounts receivable (192) Increase (decrease) in accounts payable and accrued liabilities (461) Increase in unearned revenues 3,135 Increase in value-added taxes payable 190 Decrease in income taxes payable -- Other (415) ------------------- Net cash provided by operating activities 1,413 ------------------- INVESTING ACTIVITIES Purchases of property, plant, and equipment (118) Net increase in note receivable from related parties and former stockholders (170) ------------------- Net cash used in investing activities (288) ------------------- FINANCING ACTIVITIES Proceeds from long-term borrowings 750 Principal repayments on long-term debt (234) Principal payments under capital lease obligations (94) Net receipts (payments) -- line-of-credit 151 Distributions to stockholders (1,890) Capital contribution from stockholder -- Other 120 ------------------- Net cash used in financing activities (1,197) ------------------- Effect of change rate changes on cash (12) ------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (84) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 453 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 369 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 295 Income taxes --
See notes to consolidated financial statements. 44 47 EduTrek International, Inc. Consolidated Statements of Changes in Stockholders' Equity (In thousands)
Accumulated Other Stockholders' Comprehensive Accumulated Predecessor Common Stock Paid-In Capital Notes Income Deficit Total - ----------- ------------ --------------- ------------- ------------- ----------- ----- Balance -- May 31, 1996 $ 1 $477 $(4,559) $ 102 $(3,309) $ (7,288) Distribution to shareholders (1,890) (1,890) Capital contributed by stockholder 1,239 1,239 Comprehensive loss: Net loss (1,305) (1,305) Foreign currency translation (18) (18) -------- Total comprehensive loss (1,323) Notes receivable and advances from shareholders (1,016) (1,016) ---- ---- ------- ----- ------- -------- Balance -- October 8, 1996 $ 1 $477 $(5,575) $ 84 $(5,265) $(10,278) ==== ==== ======= ===== ======= ========
Common Stock -- Accumulated Retained Number of Shares Common Stock Common Other Earnings ---------------- ---------------- Stock Comprehensive (Accumulated Company Class A Class B Class A Class B Warrants Income (loss) Deficit) Total - ------- ------- ------- ------- ------- -------- ------------- ------------ -------- Issuance of common stock -- July 1, 1996 2,240 $1,000 $ 1,000 Issuance of common stock in connection with the acquisition of EduTrek Systems, Inc. 105 1,995 $ (237) (237) Sale of common stock in connection with acquisition of Predecessor 2,100 3,000 3,000 Issuance of common stock in exchange for certain fees 350 $ 500 500 Issuance of warrants in connection with acquisition of Predecessor $ 677 677 Issuance of common stock in exchange for stock of Predecessor 210 787 787 Comprehensive income: Foreign currency translation $ 147 147 Net income 2,003 2,003 -------- Total comprehensive income 2,150 ----- ----- ------- ------ ------ --------- -------- -------- Balance -- May 31, 1997 665 6,335 1,287 4,000 677 147 1,766 7,877 Issuance of common stock net of initial public offering costs -- September 29, 1997 2,733 34,560 34,560 Conversion of warrants to common stock 879 677 (677) -- Conversion of Class B Common Stock to Class A Common Stock 42 (42) 27 (27) -- Issuance of common stock under stock option plan 16 13 13 Comprehensive income: Foreign currency translation (59) (59) Net income 1,903 1,903 -------- Total comprehensive income 1,844 ----- ----- ------- ------ ------ --------- -------- -------- Balance -- May 31, 1998 4,335 6,293 36,564 3,973 -- 88 3,669 44,294 Issuance of common stock under stock option plan 28 47 47 Comprehensive loss: Foreign currency translation (64) (64) Net loss (5,516) (5,516) -------- Total comprehensive loss (5,580) ----- ----- ------- ------ ------ --------- -------- -------- Balance -- December 31, 1998 4,363 6,293 36,611 3,973 -- 24 (1,847) 38,761 Issuance of common stock under stock option plan 81 93 93 Issuance of common stock under the Employee Stock Purchase Plan 41 33 33 Issuance of Class B common stock in exchange for Steve Bostic convertible debt 1,067 1,000 1,000 Comprehensive loss: -- Foreign currency translation (57) (57) Net loss (18,215) (18,215) -------- Total comprehensive loss (18,272) ----- ----- ------- ------ ------ --------- -------- -------- Balance -- December 31, 1999 4,485 7,360 $36,737 $4,973 $ -- $ (33) $(20,062) $ 21,615 ===== ===== ======= ====== ====== ======== ======== ======== See notes to consolidated financial statements.
45 48 EduTrek International, Inc Consolidated Statements of Cash Flows (In thousands)
The Company --------------------------------------------- Fiscal Year Ended Seven Months Ended December 31, December 31, 1999 1998 ------------------- ------------------- Net income (loss) $ (18,215) $ (5,516) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 3,936 1,801 Restructure expense 4,803 -- Bad debt expense 1,851 310 Write-off of license fees -- 3,533 Write-off of pre-opening costs -- 141 Extraordinary loss -- -- Gain on sale of aircraft -- -- Amortization of loan discount -- -- Decrease (increase) in accounts receivable (1,242) (477) Decrease (increase) in prepaid expenses 141 -- Decrease (increase) in deferred taxes 2,804 (2,177) Decrease (increase) in income taxes receivable (1,551) -- Increase (decrease) in accounts payable and accrued liabilities 1,206 3,216 Increase (decrease) in unearned revenues 935 4,154 Increase (decrease) in value-added taxes payable (28) 316 Increase (decrease) in income taxes payable -- (1,616) Other 1,543 (991) ---------------- --------------- Net cash (used in) provided by operating activities (3,817) 2,694 ---------------- --------------- INVESTING ACTIVITIES Purchases of property, plant, and equipment (2,983) (3,651) Additions to licenses, pre-opening, and curriculum development costs (901) (3,552) Sale of property, plant, and equipment -- -- Acquisition of Predecessor -- -- Net increase in note receivable from related parties and former stockholders -- -- ---------------- --------------- Net cash used in investing activities (3,884) (7,203) ---------------- --------------- FINANCING ACTIVITIES Borrowings - Net 9,568 1,820 Principal payments under capital lease obligations (1,483) (460) Increase in deferred loan costs (223) -- Principal repayments on long-term debt -- 54 Proceeds from issuance of common stock -- -- Proceeds from long-term borrowings -- -- Other 161 46 ---------------- --------------- Net cash provided by financing activities 8,023 1,460 ---------------- --------------- Effect of exchange rate changes on cash (40) (15) ---------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 282 (3,064) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,779 5,843 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,061 $ 2,779 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest 1,505 $ 150 Income taxes 198 679 The Company ------------------------------------------------- Fiscal Year Ended Period from July 1, 1996 May 31, (Date of Formation) to 1998 May 31, 1997 ----------------- ------------------------ Net income (loss) $ 1,903 $ 2,003 Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Depreciation and amortization 2,718 1,626 Restructure expense -- -- Bad debt expense 307 126 Write-off of license fees -- -- Write-off of pre-opening costs -- -- Extraordinary loss 1,600 -- Gain on sale of aircraft (991) -- Amortization of loan discount 22 146 Decrease (increase) in accounts receivable (2,920) 1,334 Decrease (increase) in prepaid expenses -- Decrease (increase) in deferred taxes (137) 225 Decrease (increase) in income taxes receivable -- Increase (decrease) in accounts payable and accrued liabilities 561 796 Increase (decrease) in unearned revenues 325 (6,508) Increase (decrease) in value-added taxes payable (449) (323) Increase (decrease) in income taxes payable (140) 1,537 Other (113) 394 ------------- ----------- Net cash (used in) provided by operating activities 2,686 1,356 ------------- ----------- INVESTING ACTIVITIES Purchases of property, plant, and equipment (2,681) (681) Additions to licenses, pre-opening, and curriculum development costs (1,440) -- Sale of property, plant, and equipment 2,076 -- Acquisition of Predecessor -- (30,747) Net increase in note receivable from related parties and former stockholders -- -- ------------- ----------- Net cash used in investing activities (2,045) (31,428) ------------- ----------- FINANCING ACTIVITIES Borrowings - Net -- (938) Principal payments under capital lease obligations (346) (52) Increase in deferred loan costs -- (1,321) Principal repayments on long-term debt (33,347) (26) Proceeds from issuance of common stock 34,560 4,000 Proceeds from long-term borrowings 4,043 29,117 Other (400) -- ------------- ----------- Net cash provided by financing activities 4,510 30,780 ------------- ----------- Effect of exchange rate changes on cash 14 (30) ------------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,165 678 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 678 -- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,843 $ 678 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 1,567 $ 1,690 Income taxes 2,047 45
See notes to consolidated financial statements. 46 49 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMPANY--AS OF DECEMBER 31, 1999 AND 1998, AND FOR THE YEAR ENDED DECEMBER 31, 1999, THE SEVEN MONTHS ENDED DECEMBER 31, 1998, THE YEAR ENDED MAY 31, 1998, AND THE PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997, PREDECESSOR--FOR THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996 NOTE 1 - ORGANIZATION AND BUSINESS Organization - EduTrek International, Inc. (the "Company"), through its subsidiary American InterContinental University, Inc. ("AIU"), is a leading provider of career-oriented, internationally focused higher education programs. The Company operates campuses in Atlanta, the District of Columbia, Los Angeles, Miami, London, and Dubai, United Arab Emirates, with curricula focusing on international business, multimedia communications, design, and information technology. AIU is accredited by the Commission on Colleges of the Southern Association of Colleges and Schools. Acquisition - The Company, formerly known as E Holdings, Inc., was organized by Mr. Steve Bostic, the Company's current Chairman and Chief Executive Officer, on July 1, 1996 for the purpose of acquiring all of the capital stock of EduTrek Systems, Inc. ("EduTrek Systems") (a company also controlled by Mr. Bostic), AIU (formerly known as American European Corporation), and American College in London, Ltd. U.S., as well as 85% of the membership interests of American European Middle East Corporation, L.L.C. ("AEMEC" which, together with AIU and American College in London, Ltd., U.S. are collectively referred to herein as the "Predecessor"). On October 8, 1996, the Company acquired the capital stock and membership interests of the Predecessor, which, prior to its acquisition, operated The American College, now known as AIU. The purchase price for the acquisition of the Predecessor was approximately $38.0 million. Also on October 8, 1996, the Company acquired all of the issued and outstanding capital stock of EduTrek Systems for an aggregate of 105,000 shares of Class A Common Stock and 1,995,000 shares of Class B Common Stock. The Company did not acquire the Predecessor until October 8, 1996. Accordingly, the financial statements of the Company for the period from July 1, 1996 through October 7, 1996 do not include the Predecessor. EduTrek Systems is included in the financial statements of the Company from July 1, 1996, the date of the Company's formation, in a manner similar to a pooling of interests. The results of operations of the Company include losses arising from the operation of EduTrek Systems of approximately $380,000 for the period from July 1, 1996 to May 31, 1997. Financial information for EduTrek Systems is not included prior to July 1, 1996. The Company's acquisition of the Predecessor has been accounted for as a purchase. Accordingly, the purchase price has been allocated to the Predecessor's identifiable assets and liabilities based on estimated fair values at the acquisition date. The excess of the purchase price over the fair value of the Predecessor's identifiable net assets has been classified as goodwill. The purchase price, net of noncash items totaling approximately $1.5 million, of the Predecessor has been allocated as follows (in millions): Current assets $ 3.9 Property, plant, and equipment 3.1 Goodwill 40.4 Other assets 2.1 Liabilities assumed 13.0
The following unaudited pro forma information presents a summary of consolidated results of operations of the Company and the results of the acquisition of the Predecessor for the period from July 1, 1996 to May 31, 1997 as if the acquisition had occurred as of July 1, 1996: Net revenue $27,926,000 Net income $ 276,000 Basic income per share $ 0.04 Diluted income per share $ 0.03
Public Offering - On September 29, 1997, the Company completed an initial public offering of 2,990,000 shares of its Class A Common Stock, of which 2,732,890 shares were sold by the Company, 47 50 including 390,000 shares sold as the result of the Underwriter's exercise of an over-allotment option, at $14 per share, which after underwriting discounts and commissions and payment of offering expenses raised $34,560,000 for the Company. The Company used $28,571,000 of the proceeds to retire long-term debt and related accrued and unpaid interest incurred in connection with the acquisition, $620,000 to repay short-term indebtedness outstanding under the Revolving Loan, and the remaining net proceeds of $5,369,000 were used for general corporate purposes, including increased working capital requirements of the Company resulting from its growth. Government Regulation - The Company and AIU are subject to extensive regulation by federal, state, and foreign governmental agencies, and accrediting agencies. In particular, the Higher Education Act of 1965, as amended (the "HEA"), and the regulations promulgated thereunder by the U.S. Department of Education (the "Regulations") set forth numerous standards that schools must satisfy in order to participate in the various federal student financial assistance programs under Title IV of the HEA ("Title IV Programs"). For example, the HEA and Regulations: (i) establish certain financial responsibility and administrative capability standards, (ii) establish maximum acceptable rates of default by students on federally guaranteed or funded student loans, (iii) restrict the ability of a school or its parent corporation to engage in certain types of transactions that would result in a change in ownership and control of that school or corporation, (iv) limit the proportion of school revenues that may be derived from Title IV Programs, and (v) prohibit the payment of certain types of incentives to personnel engaged in student recruiting and admissions activities. See Note 16 for discussion of the Company's noncompliance with financial responsibility standards as of December 31, 1999. With the enactment of the Higher Education Amendments of 1992, proprietary schools, such as AIU, would cease to be eligible to participate in Title IV Programs if on a cash basis of accounting, more than 85% of its revenues from eligible programs for the prior fiscal year were derived from Title IV Programs. This was known as the 85/15 Rule. The percentages have been changed to 90/10 with the enactment of the Higher Education Amendments of 1998 for any fiscal year containing the October 1, 1998 effective date. Any school that violates the 90/10 Rule immediately becomes ineligible to participate in Title IV Programs and is unable to apply to regain its eligibility until the following fiscal year. Each year, every institution participating in Title IV Programs must submit consolidated financial statements demonstrating compliance with this standard. For the fiscal year end December 31, 1999 not more than 50% of AIU's revenues were derived from Title IV Programs. The Company regularly monitors compliance with this requirement in order to minimize the risk that AIU would derive more than 90% of its revenues from Title IV Programs for any fiscal year. If AIU appears likely to approach the 90% threshold, the Company would evaluate the appropriateness of making changes in student funding and financing to ensure compliance. Other - The Company effected a 7 for 1 stock split in June 1997. All share and per share data information in the accompanying consolidated financial statements have been restated to reflect the stock split as if such had occurred as of the earliest period presented. Also in June 1997, one warrant holder exercised its option to purchase 257,110 shares of Class A Common Stock at an exercise price of $.0014 per share. In September 1997, another warrant holder exercised its option to purchase 444,318 shares of Class A Common Stock at the same exercise price. In December 1997, one warrant holder exercised its option to purchase 177,723 shares of Class A Common Stock at an exercise price of $.0014 per share. There are no remaining warrants outstanding. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES Change in Fiscal Year - During the seven months ended December 31, 1998, the Board of Directors adopted a change in the fiscal year end of the Company from May 31 to December 31. The Company historically experienced seasonality in its results of operations as a result of lower student enrollments in the summer terms. This seasonality will be mitigated by new educational programs which are offered throughout the year, thereby decreasing seasonality and the need for a May 31 year-end. Principles of Consolidation - Effective September 1, 1997, AEMEC entered into an agreement with Middle East Colleges, Ltd. ("MEC") to modify certain aspects of their joint venture agreement relating to the operation of the American University in Dubai ("Dubai"). These modifications give effective control of the joint venture to AEMEC as defined in Statement of Financial Accounting Standards 48 51 ("SFAS") 94, "Consolidation of All Majority-Owned Subsidiaries," and require consolidation of the financial statements of Dubai with those of the Company as of September 1, 1997. Prior to this date, AEMEC's portion of the net income from Dubai had been reported in the income statement of the Company as "income from management agreement." Effective September 1, 1997, the Company records MEC's ownership interest in the joint venture of 49.9% as minority interest in the consolidated financial statements. The consolidated financial statements include the accounts of the Company, AIU, the American College in London Ltd. U.S., AEMEC, Dubai, and the American College in London, Ltd., a registered British corporation that is wholly owned by The American College in London, Ltd. U.S. Significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents - The Company considers cash equivalents to be all demand deposits and highly liquid unrestricted investments with an original maturity of three months or less which can be readily converted to cash on demand without penalty. Cash at December 31, 1999, December 31, 1998 and May 31, 1998 includes approximately $176,500, $474,000 and $218,000, respectively, which is restricted to expenditures for scholarships and other awards to students. A corresponding liability has been recorded for these funds until they are disbursed. Property and Equipment - Property and equipment is stated at cost less accumulated depreciation. Depreciation for property and equipment is calculated on a straight-line basis over the estimated useful lives of the assets, which range from five to ten years. Intangible Assets - Goodwill is amortized over 40 years using the straight-line method. Curriculum Development Costs - The Company's policy is to capitalize direct costs incurred in the production of and improvements to educational courses. These direct costs, which are included in other assets, primarily include salaries for staff directly engaged in the curriculum development process and are amortized over a two to three year period beginning in the month the courses are placed into service. Pre-opening Costs - The Company's policy was to capitalize all pre-opening costs, except those costs related to advertising, prior to the commencement of a new educational program. Pre-opening costs were amortized over twelve months upon commencement of a new program. American Institute of Certified Public Accountants Statement of Position 98-5, "Reporting on the Costs of Start-up Activities," (SOP 98-5) requires the Company to expense all pre-opening costs as incurred and to write off any pre-opening costs included on the balance sheet beginning in January 1999 or earlier. The Company wrote-off the remaining deferred pre-opening costs of $141,000 in December 1998. Licenses - The Company capitalizes license fees and amortizes the fees over the life of the agreement. During the year ended May 31, 1998, the Company capitalized and began amortizing a $450,000 license fee paid to ITI Education Corporation ("ITI") for the use of an information technology curriculum in the Masters of Information Technology program in Atlanta, GA. Also during the year ended May 31, 1998, the Company entered into a ten-year license agreement with ITI Learning Systems, Inc. (a wholly-owned subsidiary of ITI) for the use of an information technology curriculum at subsequent locations. The cost of this license was $750,000, which was paid in July 1998. The license fee for subsequent locations in the District of Columbia, Los Angeles, and Miami was $900,000 per location and was paid during the seven months ended December 31, 1998. The Company decided to phase out the licensed ITI curriculum in favor of its own internally developed information technology curriculum and to negotiate the termination of the licensing agreement. As a result, the Company elected to write-off related license fees during the seven months ended December 31, 1998 (see note 8). 49 52 Impairment of Long-Lived Assets - The Company reviews long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company periodically reviews projected undiscounted cash flows of the underlying long-lived asset to determine if the assets are impaired. If there is an indication of impairment, the Company records a valuation allowance against the applicable long-lived assets. All long-lived assets to be disposed of will be reported at the lower of carrying amount or fair value less cost to sell. Revenue Recognition - Revenue is recognized when all educational related services have been performed. The Company records accounts receivable and related unearned revenue when students are billed for tuition, fees, and dorm payments. Unearned Revenues - Unearned revenues represent the portion of student tuition, fees, and dorm payments received in advance of services being performed. Deferred Rent - The Company records rent expense under operating leases with escalating rent payments by amortizing the total operating lease obligation over the lease term on a straight-line basis. Income Taxes - Deferred income taxes are recognized for the tax consequences of "temporary differences" by applying currently enacted statutory rates to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. Earnings Per Share - Basic net income per share is computed by dividing net income by the weighted-average number of shares outstanding. Diluted net income per share includes the dilutive effect of stock options and warrants. New Accounting Pronouncements - Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"), was issued in June 1998. Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", was issued in June 1999, deferring the effective date of FAS 133 from June 15, 1999 to June 15, 2000 for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not yet completed its evaluation of the effect of this standard on its financial statements. However, at this time the Company does not expect FAS 133 to have a material effect on its reported financial position, results of operations, cash flows or financial statement disclosures. Foreign Currency Translation - Assets and liabilities of the Company's United Kingdom operations are translated from Pounds Sterling into U.S. dollars at the rate of currency exchange at the end of the fiscal period. Revenues and expenses are translated at average monthly exchange rates prevailing during the period. Resulting translation differences are recognized as a component of shareholders' equity and comprehensive income. Fair Value of Financial Instruments - Management has reviewed the various assets and liabilities of the Company and has concluded that substantially all of the Company's financial instruments have terms such that their book value approximates fair value. Reclassifications - Certain prior period amounts have been reclassified to conform to current year presentation. 50 53 NOTE 3 - OTHER CURRENT ASSETS Other current assets at December 31, 1999 and December 31, 1998 consist of the following (in thousands):
December 31, 1999 December 31, 1998 ----------------- ----------------- Prepaid expenses $1,107 $1,248 Other 16 40 ------ ------ $1,123 $1,288 ====== ======
NOTE 4 - PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at December 31, 1999 and December 31, 1998 are summarized as follows (in thousands):
December 31, 1999 December 31, 1998 ----------------- ----------------- Furniture, fixtures, and equipment $16,199 $11,754 Leasehold improvements 6,911 4,683 Library books 807 653 Other 80 0 ------- ------- 23,997 17,090 Less accumulated depreciation and amortization 4,583 2,119 ------- ------- $19,414 $14,971 ======= =======
Depreciation expense for property, plant, and equipment was approximately $2,346,600, $887,000, $1,275,000, $766,000, and $391,000 for the fiscal year ended December 31, 1999, the seven months ended December 31, 1998, the fiscal year ended May 31, 1998, the period from July 1, 1996 to May 31, 1997, and the period from June 1, 1996 to October 8, 1996, respectively. NOTE 5 - CAPITAL LEASES AND OTHER Capital leases and other at December 31, 1999 and December 31, 1998 is summarized as follows (in thousands):
December 31, 1999 December 31, 1998 ----------------- ----------------- Capital lease obligations $9,620 $7,167 Directors and officers insurance and other 75 340 ------ ------ 9,695 7,507 Less current portion $2,197 $1,686 ------ ------ $7,498 $5,821 ====== ======
NOTE 6 - EMPLOYEE BENEFIT PLAN The Company maintains a qualified 401(k) Plan available to full-time employees who meet the Plan's eligibility requirements. This Plan, which is a defined contribution plan, contains a profit sharing component, with tax-deferred contributions to each employee based on an allocated portion of a discretionary annual contribution. Company contributions to the Plan for matching of employee contributions were approximately $122,000, $50,000, $77,000, and $51,000 for the fiscal year ended December 31, 1999, the seven months ended December 31, 1998, the year ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997, respectively. NOTE 7 - LEASES The Company leases office and classroom space, dormitories, and various items of equipment under lease agreements with varying expiration dates through January 2010. Many of the lease agreements contain renewal clauses with various terms; however, none of the leases contain any significant restrictions. 51 54 These lease agreements contain provisions for rent escalations, which are either tied to the Consumer Price Index or require a specific percentage increase annually. These leases are classified as operating leases. The Company also leases various other assets under agreements, which are classified as capital leases. The net book value of these assets at December 31, 1999 and December 31, 1998 was as follows (in thousands):
December 31, 1999 December 31, 1998 ----------------- ----------------- Furniture, fixtures, and equipment $11,625 $8,129 Less accumulated amortization 1,753 605 ------- ------ $ 9,872 $7,524 ======= ======
For the years ending December 31, future minimum lease payments and present value of net minimum lease payments under capital leases and future minimum lease payments under noncancellable operating leases are as follows:
Capital Operating Year ending December 31: Leases Leases ------ ------ 2000 $ 3,147,633 $11,994,754 2001 2,607,474 10,768,400 2002 2,208,107 9,360,194 2003 2,094,878 8,544,354 2004 1,695,632 8,270,888 Thereafter 264,452 38,900,287 ----------- ----------- Total minimum lease payments $12,018,176 $87,838,876 =========== =========== Less amount representing interest (2,398,261) ----------- Present value of net minimum lease payments $ 9,619,915 ===========
Rent expense incurred for the fiscal year ended December 31, 1999, the seven months ended December 31, 1998, the year ended May 31, 1998, the period from July 1, 1996 to May 31, 1997, and the period from June 1, 1996 to October 8, 1996, under all operating leases was approximately $14,000,700, $3,472,500, $5,444,000, $3,101,000 and $1,337,000, respectively. NOTE 8 - WRITE-OFF OF LICENSE FEES AND ACCRUAL OF TERMINATION COSTS During the year ended May 31, 1998, the Company and ITI entered into an agreement whereby the Company licensed information technology curriculum from ITI. The Company's practice was to capitalize and then amortize over ten years license fees paid to ITI. The Company decided to phase out the licensed ITI curriculum in favor of its own internally developed information technology curriculum and to negotiate the termination of the licensing agreement. As a result, the Company elected to write-off related license fees of $3,333,000 during the seven months ended December 31, 1998. The estimated phase-out costs range from $200,000 to $500,000; management believes the ultimate cost to phase-out this curriculum agreement will be $200,000, which is accrued as of December 31, 1999 and 1998. NOTE 9 - CONSULTING AND EMPLOYMENT AGREEMENTS In connection with the acquisition of the Predecessor, the Company entered into consulting and employment agreements with the selling shareholders and other officers of American European Corporation. Additionally, the Company entered into an employment agreement with an officer of the Company. During 1999, the employment agreement with the officer of the Company was terminated. Amounts paid to the officer relating to the employment contract, and charged to operations, totaled approximately $165,000, $96,250, $165,000, and $27,500 for the fiscal year ended December 31,1999, the seven months ended December 31, 1998, for the year ended May 31, 1998, and for the period from July 1, 1996 to May 31, 1997, respectively. Also during 1999, the remaining portion of one of the consulting agreements was negotiated for a settlement amount of approximately $131,000, which was charged to operations. For the fiscal year ended December 31, 1999, seven months ended December 31, 1998, the year ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997, such consulting and employment 52 55 agreement payments, which were charged to operations, totaled $525,000, $464,000, $716,000, and $705,000, respectively. Future payments under these agreements for the years ending December 31 are as follows (in thousands): 2000 $285 2001 $214
NOTE 10 - INCOME TAXES Income tax expense for the fiscal year ended December 31, 1999, the seven months ended December 31, 1998, the fiscal year ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997, respectively consists of (in thousands):
Period from July 1, 1996 Fiscal Year Ended Seven Months Ended Fiscal Year Ended (Date of Formation) to December 31, 1999 December 31, 1998 May 31, 1998 May 31, 1997 ----------------- ------------------ ----------------- ------------------------ Current: Federal $ (1,495) $ (1,103) $ 2,238 $ 1,423 State (365) -- 480 333 --------- --------- --------- --------- Total current (benefit) provision (1,860) (1,103) 2,718 1,756 Deferred: Federal 2,436 (1,600) (117) 194 State 368 (577) (20) 31 --------- --------- --------- --------- Total deferred (benefit) provision 2,804 (2,177) (137) 225 --------- --------- --------- --------- Total provision (benefit) $ 944 $ (3,280) $ 2,581 $ 1,981 ========= ========= ========= =========
The following is a reconciliation of the statutory tax rate to the Company's effective tax rate for the fiscal year ended December 31, 1999, the seven months ended December 31, 1998, the fiscal year ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997, respectively:
Period from July 1, 1996 Fiscal Year Ended Seven Months Ended Fiscal Year Ended (Date of Formation) to December 31, 1999 December 31, 1998 May 31, 1998 May 31, 1997 ----------------- ------------------ ----------------- ------------------------ Statutory rate (34.00)% (34.00)% 34.00 % 34.00% State income taxes (net of Federal benefit) 0.01 % (4.30)% 4.40 % 6.03% Permanent Differences: Nondeductible goodwill and other nondeductible expenses 1.99 % 2.28 % 4.97 % 9.69% Valuation Allowance 39.00 % Other (0.87)% (4.09)% (5.90)% % ------ ------ ----- ----- Effective rate 6.13 % (40.11)% 37.47 % 49.72% ====== ====== ===== =====
The effects of temporary differences, which gave rise to the deferred tax asset at December 31, 1999 and 1998, respectively, are as follows (in thousands):
December 31, 1999 December 31, 1998 --------------------------- ------------------------ Current Long Term Current Long Term --------------------------- ------------------------ Deferred tax assets (liabilities) arising from: Net operating loss carryforward $ 4,411 $2,112 Unearned revenue $ 230 $217 Deferred rent 974 384 Bad debts 788 Property, plant and equipment basis difference (552) Restructuring accrual 1,686 Other 398 (46) 91 ------- ------- ---- ------ $ 3,102 $ 4,787 $308 $2,496 Valuation Allowance $(3,102) $(4,787) $ -- $ -- ------- ------- ---- ------ $ -- $ -- $308 $2,496 ======= ======= ==== ======
In 1999, the Company utilized a net operating loss carryback of $4,622,239 and $4,091,322 for federal and state income tax purposes, respectively, which resulted in an income tax receivable of $1,717,000. The Company received $1,471,990 of the refund in January 2000. The Company's net operating loss carryforward as of December 31, 1999 of $11,470,016 expires in 2019. Management believes the recoverability of the Company's net domestic deferred tax asset is uncertain due to the recent domestic losses and therefore provided a valuation reserve allowance of 100% against this asset in 1999. NOTE 11 - U.S. AND FOREIGN OPERATIONS The Company operates solely in the education industry, and management makes decisions and assesses performance based on the geographic locations of its campuses. Therefore, the Company has elected to report segment information based on geographic areas. The Company's operations are located in the United States, the United Kingdom, and Dubai, United Arab Emirates. The Company's operations in Dubai represented management fees from a management agreement through August 1997 and consolidated operations since September 1, 1997 (see note 2). Net revenues and income (loss) from operations by geographic area for the fiscal year ended December 31, 1999, the seven months ended December 31, 1998, the fiscal year ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997, and identifiable assets by geographic area at December 31, 1999, December 31, 1998, May 31, 1998 and May 31, 1997 are as follows (in thousands):
Period from July 1, 1996 Fiscal Year Ended Seven Months Ended Fiscal Year Ended (Date of Formation) to December 31, 1999 December 31, 1998 May 31, 1998 May 31, 1997 ----------------- ------------------- ----------------- ------------------------ Net revenues: United States $ 40,566 $ 13,981 $ 22,453 $ 13,437 United Kingdom 14,251 6,990 14,595 10,153 Dubai, UAE 6,839 2,877 4,866 -- -------- -------- -------- -------- Total $ 61,656 $ 23,848 $ 41,914 $ 23,590 ======== ======== ======== ======== Income (loss) from operations: United States $ (2,185) $ 6 $ 8,089 $ 10,533 United Kingdom 3,878 1,826 5,873 4,385 Dubai, UAE 2,844 959 2,257 479 Home Office (18,425) (10,798) (9,541) (8,934) -------- -------- -------- -------- Total $(13,888) $ (8,007) $ 6,678 $ 6,463 ======== ======== ======== ======== Identifiable assets: United States 62,248 $ 60,001 $ 52,725 $ 46,141 United Kingdom 2,302 2,753 2,216 1,530 Dubai, UAE 2,358 1,780 828 -- -------- -------- -------- -------- Total $ 66,908 $ 64,534 $ 55,769 $ 47,671 ======== ======== ======== ========
NOTE 12 - STOCK OPTION PLAN On July 1, 1999, the Company offered an Employee Stock Purchase Plan ("ESPP") through which full-time employees have the opportunity to purchase Class A Common Stock at 85% of the fair market value at the start or end date of each six-month enrollment period (whichever is lower). The maximum number of shares that can be sold through the Employee Stock Purchase Plan is 500,000. 53 56 The Company has a stock incentive plan (the "Plan") for key employees and directors under which it may grant incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, or performance awards of Class A Common Stock or cash. The maximum number of shares of Class A Common Stock which can be issued through awards granted under the Plan is 1,200,000. Incentive stock options granted under the Plan expire on the tenth anniversary of the date the option is granted or the fifth anniversary of the date the option is granted in the event that the individual grantee owns more than 10% of the total voting power of all classes of stock of the Company. In the year ended December 31, 1999, fixed stock options to purchase an aggregate of 403,700 shares of Class A Common Stock were granted to certain officers and employees of the Company, exercisable at a weighted average exercise price of $4.58 per share, which was above the weighted average fair market value of $4.49. Generally, these options vest over a five-year period beginning on the first anniversary of the date of grant. On December 14, 1998, the Company repriced all stock options, with the exception of the March 1997 stock options, to an exercise price of $6.50 per share, which was above the fair market value of the stock on that date. In the seven months ended December 31, 1998, fixed stock options to purchase an aggregate of 69,000 shares of Class A Common Stock were granted to certain officers and employees of the Company, exercisable at a weighted average exercise price of $6.50 per share which was above the fair market value at the repricing date. Generally, these options vest over a five-year period beginning on the first anniversary of the date of grant. In the seven months ended December 31, 1998, the Company issued 18,000 fixed stock options at an exercise price of $6.50 per share, which was above the fair market value of the stock, to selected members of the Board of Directors. In the year ended May 31, 1998, fixed stock options to purchase an aggregate of 299,644 shares of Class A Common Stock were granted to certain officers and employees of the Company, exercisable at a weighted average exercise price of $6.50 per share which was above the fair market value at the repricing date. Generally, these options vest over a five-year period beginning on the first anniversary of the date of grant. The estimated weighted average fair value of options granted during the fiscal year ended December 31, 1999, the seven months ended December 31, 1998, and the year ended May 31, 1998 was $1.99, $5.32, and $7.82, respectively. The Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for the ESPP and the Plan. Accordingly, no compensation cost has been recognized for the ESPP or the Plan. Had compensation cost for the Plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the method of SFAS No. 123 "Accounting for Stock Based Compensation", additional compensation expense of $615,000, $306,000, $425,000, and $13,200 would have been recorded for the fiscal year ended December 31, 1999, the seven months ended December 31, 1998, the year ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997, respectively. Accordingly, the Company's net income (loss) and earnings (loss) per share for the fiscal year ended December 31, 1999, the seven months ended December 31, 1998, the year ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997 would have been reduced to the pro forma amounts indicated below:
Year Ended Seven Months Ended Year Ended Period from ---------- ------------------ ---------- --------------- July 1, 1996 to December 31, 1999 December 31, 1998 May 31, 1998 May 31, 1997 ----------------- ----------------- ------------ --------------- Net income (loss): As reported $(18,215,000) $(5,516,000) $1,903,000 $2,002,690 Pro forma $(18,830,000) $(5,822,000) $1,478,000 $1,989,490 Basic net income (loss) per Share: As reported $ (1.68) $ (0.52) $ 0.20 $ 0.29 Pro forma $ (1.74) $ (0.55) $ 0.16 $ 0.28 Diluted net income (loss) per Share: As reported $ (1.68) $ (0.52) $ 0.19 $ 0.26 Pro forma $ (1.74) $ (0.55) $ 0.14 $ 0.26
54 57 The fair value of options granted under the Plan during the above periods was estimated on the date of grant or modification using the Black-Scholes option pricing model with the following weighted average assumptions used for the year ended December 31, 1999, the seven months ended December 31, 1998, the year ended May 31, 1998 and the period from July 1, 1996 to May 31, 1997:
Year Ended Seven Months Ended Year Ended Period from --------------------------------------- ------------------------------------ December 31, 1999 December 31, 1998 May 31, 1998 July 1,1996 to ----------------- ----------------- -------------- May 31, 1997 ---------------- Expected volatility 60.0% 48.6% 52.6% 0.0% Risk-free interest rate 5.35% 4.9% 5.8% 6.2% Dividend yield 0.0% 0.0% 0.0% 0.0% Expected life 3.3 3.74 3.97 3.91 Annual forfeiture rate 15.0% 3.0% 3.0% 3.0%
The following table set forth activity in the Company's Plan:
All Subsequent Options Initial (March 31, 1997) Options ---------------------------------- ------------------------------------ Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price --------- ---------------- --------- ---------------- Outstanding, June 1, 1996 Granted 415,877 $ 0.7714 -------- Outstanding, May 31, 1997 415,877 $ 0.7714 Granted 299,644 $ 17.07 Exercised (16,360) $ 0.7714 Canceled (1,400) $ 0.7714 -------- -------- Outstanding, May 31, 1998 299,644 $ 17.07 398,117 Granted 87,000 $ 12.46 Exercised (2,000) $ 14.00 (22,204) $ 0.7714 Canceled (59,000) $ 14.71 (16,380) $ 0.7714 -------- -------- Outstanding, December 31, 1998 325,644 $ 6.50 359,533 $ 0.7714 Granted 403,700 $ 4.58 Exercised (4,200) $ 0.7714 (128,263) $ 0.7714 Canceled (341,215) $ 6.23 (73,310) $ 0.7714 -------- -------- Outstanding, December 31, 1999 383,929 $ 4.53 157,960 $ 0.7714 Exercisable, December 31, 1999 34,023 $ 6.03 47,430 $ 0.7714
The following table summarizes certain information about the stock options outstanding as of December 31, 1999:
Weighted Average Remaining Exercise Price Options Outstanding Contractual Life (yrs) -------------- ------------------- ---------------------- $ 0.7714 171,260 7.2 $ 1.00 - $3.50 119,500 9.8 $ 4.00 - $4.75 55,500 9.5 $ 5.00 - $6.06 15,450 9.4 $ 6.50 173,179 8.5 $ 7.00 - $7.25 7,000 9.2 --------------- --------- ----- $0.7714 - $7.25 541,889 8.5
NOTE 13 - RELATED PARTY TRANSACTIONS Three members of the family of the Company's Chairman and Chief Executive Officer terminated their employment with EduTrek International, Inc. during the three months ended June 30, 1999. Termination payments of approximately $247,000 were accrued in June 1999 with payments scheduled through May 2000. As of December 31, 1999, there was approximately $112,291 remaining to be paid. On August 27, 1999, the Company borrowed $1,000,000 from R. Steven Bostic, the Company's Chairman and Chief Executive Officer. This loan paid interest at the Eurodollar rate (as defined in the promissory note evidencing this indebtedness), plus 2.0%. The note was convertible, at any time at the option of Mr. Bostic, into shares of the Company's Class B common stock at a price equal to the lower of $2.875 per share or the closing price of the Company's Class A common stock on the date of notice of such conversion. On December 2, 1999, Mr. Bostic gave notice of his conversion of the Promissory Note to the Company's Class B common stock. Based on the closing price of the Company's Class A common stock on December 2, 1999, the Promissory Note was converted into 1,066,667 shares of the Company's Class B common stock. NOTE 14 - LEGAL PROCEEDINGS From time to time, the Company is named as a defendant in various lawsuits arising in the ordinary course of business. A number of such legal proceedings are currently pending. Based on the Company's assessment of known claims and discussions with outside legal counsel, the Company believes that there is no proceeding pending against the Company relating to such matters arising out of the ordinary course of business that, if resolved against the Company, would have a materially adverse effect upon the Company's consolidated financial position, results of operations and liquidity. NOTE 15 - LINE OF CREDIT The Company has a $10,000,000 revolving line of credit ("Line A") and a $4,350,000 revolving line of credit ("Line B") with a bank (collectively, as amended, the "Credit Agreement"). The Credit Agreement is secured by substantially all of the Company's assets. Line A, as amended, matures on April 30, 2001, while amounts outstanding bear interest at the London Interbank Offered Rate ("LIBOR") plus 2.75%. At March 30, 2000, the Company had 55 58 outstanding borrowings under Line A of $8,088,640. In addition, the Company had issued $1,911,000 in letters of credit against Line A. These letters of credit are required as security under building leases in Los Angeles, Washington, D.C., and Miami. Line B, as amended, matures on the earlier of September 30, 2000 or 30 days after demand for payment by the bank. Line B requires that the principal amount outstanding must be reduced to $3,500,000 by July 1, 2000. Line B amounts outstanding bear interest at prime rate plus 2.00%. At March 31, 2000 the Company had outstanding borrowings under Line B of $4,350,000. The Company and its lender have entered into five amendments in 1999 and a sixth amendment in February 2000 to modify maturity dates of amounts outstanding under the line of credit and to modify financial covenants. In consideration for certain amendments to the Credit Agreement, the Company agreed to pay a fixed Arrangement Fee of $750,000, of which $250,000 was charged to operations in 1999. This entire Arrangement Fee is payable on the later of (1) the Facility B termination date or (2) the Termination Date of the Credit Agreement. The Company also agreed to pay a Contingent Arrangement Fee to the Lender equal to: (a) $200,000 upon failure of the Company to deliver to the bank by April 15, 2000, a letter of intent for the sale of assets or stock of the Company that generates sufficient proceeds to pay all amounts due to bank and (b) $200,000 upon failure of the Company to deliver to the Lender by June 15, 2000, a definitive executed contract for the sale of assets or stock of the Company that generates sufficient proceeds to pay all amounts due to bank. The Credit Agreement requires interest only payments until maturity, except for the required principal reductions described above. While the Company believes it will be able to make the regular interest payments, based on management's current projected earnings and cash flow, its ability to make the required payments of principal on a timely basis is presently in doubt. On March 13, 2000, the Lender waived a financial covenant violation as of December 31, 1999. On March 30, 2000, the Lender waived a financial covenant violation as of January 31, 2000. On August 27, 1999, the Company borrowed $1.0 million from R. Steven Bostic, the Company's Chairman and Chief Executive Officer. The amount outstanding under the Promissory Note was convertible, at any time at the option of Mr. Bostic, into shares of the Company's Class B common stock at a price equal to the lower of $2.875 per share or the closing price of the Company's Class A common stock on the date of notice of conversion. On December 2, 1999, Mr. Bostic gave notice of his conversion of the Promissory Note to the Company's Class B common stock. Based on the closing price of the Company's Class A common stock on December 2, 1999, the Promissory Note was converted into 1,066,667 shares of the Company's Class B common stock. The extraordinary loss of $960,000, during the year ended May 31, 1998, net of taxes ($1,600,000 less the related income tax effect of $640,000) was from the retirement of the Company's term loan with NationsBank, N.A. and the retirement of its subordinate debt with Stratford Capital Partners, L.P. and GMM Investors SBIC, L.P. The funds used to retire the debt represented a portion of the proceeds from the sale of 2,990,000 shares of the Company's Class A Common Stock. NOTE 16 - REGULATORY COMPLIANCE All institutions participating in Title IV programs must satisfy specific standards of financial responsibility. Institutions are evaluated for compliance with those standards annually as each institution submits its audited financial statements to the Department of Education (no later than July 1, 2000 for the Company with respect to the year ended December 31, 1999). The standards consist of an equity ratio, a primary reserve ratio, and a net income ratio. An institution that is determined by the Department of Education not to meet the standards is nonetheless entitled to participate in Title IV programs if it can demonstrate to the Department of Education that it is financially responsible on an alternative basis. An institution may do so by demonstrating, with the support of a statement from a certified public accountant, proof of prior compliance with the numeric standards and other information specified in the regulations, and that its continued operation is not jeopardized by its financial condition. As a result, the Company may be required to post an irrevocable letter of credit in an amount equal to 10% to 50% of the Title IV funds received by AIU students during the year ended December 31, 1999. Additionally, an institution would agree to disburse those funds only on a reimbursement basis (as described below). As of December 31, 1999, the Company was not in compliance with the financial responsibility standards of the Department of Education. The Company anticipates that it may be required to post an 56 59 irrevocable letter of credit on or about July 2000 in the amount of up to approximately $15.0 million, which represents approximately 50% of the Title IV funds received by students during the prior year. Approximately 50% of the Company's revenue is derived from Title IV funds. Failure to post a letter of credit, or reach some other acceptable agreement with the Department of Education would result in the termination of the Company as an institution eligible for Title IV financial aid and would severely impact future cash flows of the Company and possibly result in the Company being unable to continue its normal operations. If the Company were deemed not to meet financial responsibility standards, the Company could be required to receive Title IV funds from the Department of Education under the reimbursement payment method. Under this method, the Company would be required to first make disbursements to eligible students and parents through credits to the student's accounts before it requests or receives funds for those disbursements from the Department of Education. Any requirement that the Company operate under the disbursement method would result in an approximate 30-60 days delay in the receipt by the Company of tuition monies under Title IV. Failure to finance the resulting additional liquidity needs could create material working capital shortages for the Company, if the Company is required to receive payments from the Department of Education under the reimbursement method. This liquidity financing could be in addition to the posting of the Letter of Credit in the amount of $15.0 million, which represents approximately 50% of the Title IV funds received by students during the prior year. Certain states, in which the Company operates, have regulatory agencies which perform their own financial capability reviews. These reviews include fiscal tests, which the Company is not in compliance with, as of December 31, 1999. Management believes that, by successfully addressing the financial responsibility standards of the Department of Education, it will meet the financial requirements of all the states in which it operates, although there can be no assurance of such. NOTE 17 - COMPANY RESTRUCTURING ACTIVITIES In December 1999, the Company's Executive Officers and Board of Directors implemented procedures to restructure the Company in three different areas in order to reduce overall expenditures and restore positive cash flow of the Company. The three areas of restructure were: 1) reduction of Corporate overhead through elimination and consolidation of positions and space reductions, 2) the teach-out of current classes in the Washington D.C. campus and closure of the operation, and 3) termination of the lease for the current Northern Virginia campus site (operations never commenced in Northern Virginia), with plans for a new Northern Virginia site yet to be finalized. As a result, the Company established restructuring accruals at December 31, 1999 totaling $4.8 million. The accrual for severance and employment contracts included 16 employees. Revenue and income from operations of the Washington D.C. campus were $2,527,452 and ($2,075,102), respectively, for the year ended December 31, 1999, and $216,284 and ($704,000), respectively, for the seven months ended December 31, 1998 (the campus began operations in October 1998). The components of the restructure accrual consist of the following: - - Lease termination and other related costs $4,137,135 - - Severance and employment contracts, and other related costs $ 666,340
NOTE 18 - GOING CONCERN The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company has reported net losses of $18.2 million for the year ended December 31, 1999 and $5.5 million for the seven-month transition period ended December 31, 1998. The Company is highly leveraged and recent developments have had a material adverse effect on the Company's short-term liquidity and ability to service its debts. As of March 30 2000, the Company had $8.1 million of debt outstanding under Line A of the Credit Agreement, which matures at the earlier of April 30, 2001, or 30 days after the demand of the lender. Additionally, there is $1.9 million of letters of credit issued on behalf of the Company. The Company has an additional $4.3 million outstanding under Line B of the Credit Agreement ($2.3 million as of December 31, 1999), which is required to be reduced to $3.5 million as of July 1, 2000, with remaining maturity on September 30, 2000. Based upon management's current projected earnings and cash flow of the Company, without some form of capital infusion, pursuant to business combinations, strategic investment in the Company, or a refinancing of the Company's debt, or a combination thereof, management cannot be certain it will have the financial resources to make the required debt payments under its line of Credit Agreement when due in years 2000 and 2001. As a result, the Company has retained The Robinson- 57 60 Humphrey Company LLC to assist in determining short-term and long-term financial requirements and to evaluate potential refinancing and restructuring alternatives. If the Company does not make either the July 1, 2000, September 30, 2000, or the April 30, 2001 required debt payments, it may be unable to continue its normal operations, except to the extent permitted by its lender. Substantially all of the Company's assets are pledged as collateral under the line of credit. In addition, as discussed in Note 16, the Company has failed to meet the financial responsibility standards of the Department of Education as of December 31, 1999. As a result, management anticipates that the Company may be required to post a letter of credit of approximately $15.0 million with the Department of Education by July 2000. Therefore, the Company is evaluating certain approaches to restructuring or recapitalization to address this failure. These potential approaches include among other things, business combinations, a strategic investment in the Company, or a refinancing of the Company's debt, or a combination thereof. The objective is for the buyer, or buyers to inject sufficient capital to correct the financial responsibility deficiencies, and also to post any letters of credit required by the Department of Education. Failure to post a letter of credit would result in the termination of the Company as an institution eligible for student Title IV financial aid, which would severely and negatively affect cash flows of the Company and possibly result in the Company being unable to continue its normal operations. Certain states in which the Company operates have regulatory agencies which perform their own financial capability reviews. These reviews include fiscal responsibility tests, which the Company is not complying with, as of December 31, 1999. Management believes that, by successfully addressing the financial responsibility standards of the Department of Education, it will meet the financial requirements of all the states in which it operates, although there can be no assurance of such. These matters raise substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There has been no occurrence requiring a response to this item. PART III Except as to information with respect to executive officers which is contained in a separate heading under Item 1 to this Form 10-K, the information required by Part III of Form 10-K is, pursuant to General Instruction G(3) of Form 10-K, incorporated by reference from the Company's definitive proxy statement to be filed pursuant to Regulation 14A for the Company's 2000 Annual Meeting of Shareholders (the "Proxy Statement"). The Company intends to file, within 120 days of December 31, 1999, a definitive proxy statement pursuant to Regulation 14A with the Securities and Exchange Commission. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning directors and executive officers of the Registrant is set forth in the Proxy Statement under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," which information is incorporated herein by reference. The name, age, and position of each executive officer of the Company is set forth under the heading "Executive Officers" in Item 1 of this Report. ITEM 11. EXECUTIVE COMPENSATION The information concerning executive compensation is set forth in the Proxy Statement under the heading "Executive Compensation," which information is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information concerning security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management," which information is incorporated herein by reference. 58 61 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information concerning certain relationships and related transactions is set forth in the Proxy Statement under the headings "Certain Transactions" and "Compensation Committee Interlocks and Insider Participation," which information is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements. The following financial statements and auditors' report have been filed with Item 8 in Part II of this Report.
PAGE ---- Independent Auditors' Report Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules. All financial statement schedules are omitted as the required information is inapplicable. (a)(3) Exhibits. The exhibits listed below are filed with or incorporated by reference into this Report. The exhibits which are denominated with an asterisk (*) were previously filed as part of, and are hereby incorporated by reference from, either (i) the Company's registration statement on Form S-1, Registration Number 333-29603, as amended, declared effective by the Securities and Exchange Commission on September 23, 1997 (the "S-1"); (ii) the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998 (the "2/28/98 10-Q"); (iii) the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1998 ("May 1998 10-K"); (iv) the Company's Transition Report on Form 10-K for the seven month transition period ended December 31, 1999 (the "December 1998 10-K"); (v) the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (the "6/10/99 10-Q"); or (vi) the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 ( the "9/30/99 10-Q"). Unless otherwise indicated, the exhibit number corresponds to the exhibit number in the referenced document.
Exhibit Number Description -------------- ----------- * 2.1 Stock Purchase Agreement dated July 25, 1996 by and between EduTrek International, Ltd., Thomas J. Barnette and Phillip J. Markert relating to the acquisition of the Predecessor (S-1) * 3(i) Articles of Incorporation (S-1) * 3(i).1 Articles of Amendment to Articles of Incorporation, dated September 6, 1996 (S-1) * 3(i).2 Articles of Amendment to Articles of Incorporation, dated June 17, 1996 (S-1) * 3(ii) Bylaws (S-1) * 4.1 Specimen Certificate of Class A Common Stock (S-1) * 10.1 Amended and Restated 1997 Incentive Plan (December 1998 10-K) * 10.3 Form of Incentive Stock Option Agreement (S-1) * 10.4 Form of Non-qualified Stock Option Agreement (S-1) * 10.5 Credit Agreement dated as of March 25, 1999 by and between the Company and First Union National Bank (December 1998 10-K) * 10.5.1 First Amendment to Credit Agreement dated as of May 27, 1999 between the Company and First Union National Bank (6/30/99 10-Q) * 10.5.2 Second Amendment to Credit Agreement and Waiver dated as of
59 62 August 16, 1999 between the Company and First Union National Bank (9/30/99 10-Q) * 10.5.3 Third Amendment to Credit Agreement dated as of August 27, 1999 between the Company and First Union National Bank (9/30/99 10-Q) * 10.5.4 Fourth Amendment to Credit Agreement and Waiver dated as of November 11, 1999 between the Company and First Union National Bank (9/30/99 10-Q) 10.5.5 Fifth Amendment to Credit Agreement dated as of December 23, 1999 between the Company and First Union National Bank 10.5.6 Sixth Amendment to Credit Agreement dated as of February 9, 2000 between the Company and First Union National Bank * 10.6 Office Lease dated June 19, 1998 between the Company and W9/WLA Real Estate Limited Partnership (December 1998 10-K) * 10.6.1 First Amendment dated September 4, 1998 to Office Lease dated June 19, 1998 between the Company and W9/WLA Real Estate Limited Partnership (December 1998 10-K) * 10.8 Promissory Note dated August 27, 1999 in favor of R. Steven Bostic in the principal amount of $1,000,000 (9/30/99 10-Q) * 10.9 Security Agreement dated as of August 27, 1999 between the Company and R. Steven Bostic (9/30/99 10-Q) * 10.10 Agreement, dated October 1, 1995, by and between American Middle East Corporation, LLC and Middle East College, Ltd., relating to the formation and operation of the University's campus in Dubai (S-1) * 10.10.1 Agreement, dated September 1, 1997, relating to Agreements, dated October 1, 1995 and January 24, 1996, by and between American Middle East Corporation, LLC and Middle East College, Ltd., relating to the formation and operation of the University's campus in Dubai (May 1998 10-K) * 10.11 Financial Operations Agreement, dated October 1, 1995, by and between American European Middle East Corporation, LLC and Middle East Colleges, Ltd., relating to the operation of the University's campus in Dubai (S-1) * 10.12 Memorandum of Understanding, dated January 24, 1996, by and between American European Middle East Corporation, LLC and Middle East Colleges, Ltd. (S-1) * 10.14 Anti-Dilution Rights Agreement, dated October 8, 1996, by and between E Holdings, Inc. and Phillip J. Markert (S-1) * 10.15 Agent Agreement, dated March 13, 1996, by and between Target Marketing Systems, Inc. and EduTrek Systems, Inc. (S-1) * 10.16 License Agreement, dated July 26, 1997, by and between ITI Learning Systems, Inc., American European Corporation and the Company (S-1) * 10.17 Lease: Embassy Row 500 Between EduTrek International, Inc., a Georgia Corporation (Tenant) and a Maryland Corporation (Landlord) (2/28/98 10-Q) * 10.18 Lease Agreement dated June 30, 1998 between 1770 G Street Limited Partnership and American Intercontinental University, Inc. (May 1998 10-K) * 21.1 Subsidiaries of the Registrant (S-1) 23.1 Independent Auditors' Consent 24.1 Power of Attorney of Paul D. Beckham 24.2 Power of Attorney of Fred C. Davison 24.3 Power of Attorney of Ronald P. Hogan 24.4 Power of Attorney of Gaylen D. Kemp 24.5 Power of Attorney of Gerald Tellefsen 24.6 Power of Attorney of J. Robert Fitzgerald 27.1 Financial Data Schedule (SEC only)
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the fourth quarter ended December 31, 1999. 60 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EDUTREK INTERNATIONAL, INC. Date: March 30, 2000 By: /s/ Steve Bostic --------------------------------- Steve Bostic, Chairman and Chief Executive Officer (principal executive officer) Date: March 30, 2000 By: /s/ David J. Horn --------------------------------- David J. Horn, Chief Financial Officer (principal financial and accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- Chairman and Chief Executive March 30, 2000 /s/ Steve Bostic Officer --------------------------- Steve Bostic /s/ David J. Horn Chief Financial Officer March 30, 2000 --------------------------- David J. Horn * Director March 30, 2000 --------------------------- Paul D. Beckham * Director March 30, 2000 --------------------------- Fred C. Davison * Director March 30, 2000 --------------------------- Ronald P. Hogan * Director March 30, 2000 --------------------------- Gaylen D. Kemp * Director March 30, 2000 --------------------------- Gerald Tellefsen * Director March 30, 2000 --------------------------- J. Robert Fitzgerald
* By: /s/ David J. Horn --------------------- David J. Horn, as Attorney in fact pursuant to Powers of Attorney filed as exhibits to this Report 61 64 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - -------------- 10.5.5 Fifth Amendment to Credit Agreement dated December 23, 1999 between the Company and First Union National Bank 10.5.6 Sixth Amendment to Credit Agreement dated February 9, 2000 between the Company and First Union National Bank 23.1 Independent Auditors' Consent 24.1 Power of Attorney of Paul D. Beckham 24.2 Power of Attorney of Fred C. Davison 24.3 Power of Attorney of Ronald P. Hogan 24.4 Power of Attorney of Gaylen D. Kemp 24.5 Power of Attorney of Gerald Tellefsen 24.6 Power of Attorney of J. Robert Fitzgerald 27.1 Financial Data Schedule (SEC only)
EX-10.5.5 2 FIFTH AMENDMENT TO CREDIT AGREEMENT 1 FIFTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER THIS FIFTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER (this "Amendment") is made and entered into as of the 23 day of December, 1999, by and between EDUTREK INTERNATIONAL, INC., a Georgia corporation ("Borrower"), the undersigned Guarantors party hereto (the "Guarantors") and FIRST UNION NATIONAL BANK ("Lender"). WITNESSETH: WHEREAS, Borrower and Lender are a party to that certain Credit Agreement, dated as of March 25, 1999, as amended by a First Amendment to Credit Agreement dated May 27, 1999, by a Second Amendment to Credit Agreement and Waiver dated August 16, 1999, by a Third Amendment to Credit Agreement dated August 27, 1999 and by a Fourth Amendment to Credit Agreement and Waiver dated November 11, 1999 (as amended, the "Credit Agreement") pursuant to which Lender made available to Borrower a $10,000,000 revolving line of credit pursuant to the Facility A Commitment and a line of credit providing a maximum availability of $3,300,000 pursuant to the Facility B Commitment; and WHEREAS, Borrower has requested that the Lender extend the maturity of the Facility B Loans, to waive principal payments on the Facility B Loans prior to maturity, to waive certain Events of Default outstanding under the Credit Agreement and to make certain other modifications to the terms and conditions in the Credit Agreement; and WHEREAS, Lender is willing to agree to such amendments and modifications only if Borrower agrees that the Facility A Loans will be repayable on thirty (30) days notice, that the interest rate payable on the Facility B Loans be increased by one-half of one percent and that the Credit Agreement be further amended Agreement as set forth herein; NOW, THEREFORE, for and in consideration of the foregoing premises, the mutual promises, covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINITIONS. All capitalized terms used herein and not expressly defined herein shall have the same respective meanings given to such terms in the Credit Agreement. 2. AMENDMENTS. Subject to the conditions contained herein, the Credit Agreement is hereby amended as follows: 2.1. NEW DEFINITIONS. Section 1.1 of the Credit Agreement is hereby amended by adding thereto in appropriate alphabetical order the following new definitions: 2 "Fifth Amendment" shall mean that certain Fifth Amendment to Credit Agreement and Waiver, dated as of December ___, 1999, between Borrower and Lender. "Fifth Amendment Effective Date" shall mean that date on which all of the conditions precedent set forth in Section 3 of the Fifth Amendment have been satisfied and the Fifth Amendment has become effective. "Tax Refund" shall mean any and all tax refunds, whether state, federal or otherwise, owing to any of the Credit Parties in respect of Borrower's tax year ending September 30, 1999, including, but not limited to, any refund payable in respect of any prior year payable as a result of the carryback to such prior year of the net operating loss of the Borrower and its Subsidiaries for the tax year ending September 30, 1999. 2.2. EXISTING DEFINITIONS. Section 1.1 of the Credit Agreement is hereby further amended by deleting the definitions of "Facility B Commitment," "Facility B Termination Date" and "Termination Date" and by substituting in lieu thereof the following new definitions of such terms: "Facility B Commitment" means the obligation of the Lender to make Loans to the Borrower pursuant to Section 2.1(b) hereof in an aggregate principal amount at any time outstanding not to exceed $2,299,360. "Facility B Termination Date" means the earliest of (a) May 1, 2000, (b) the date of termination by the Borrower pursuant to Section 2.5(a), (c) the Termination Date; and (d) the date of termination by the Lender pursuant to Section 11.2(a). "Termination Date" means the earliest of (a) April 30, 2001, (b) thirty (30) days after demand for payment is made by Lender pursuant to Section 2.3(a) hereof (c) the date of termination by the Borrower pursuant to Section 2.5(a), and (d) the date of termination by the Lender pursuant to Section 11.2(a). 2.3. REPAYMENT OF LOANS. Section 2.3 of the Credit Agreement is hereby amended by deleting subsections (a) and (b) thereof in their entirety, and substituting in lieu thereof a new subsections (a) and (b) to read as follows: (a) Repayment of Facility A Loans. The Borrower shall repay the outstanding principal amount of all Facility A Loans in full, together with all accrued but unpaid interest thereon, on the earlier to occur of (i) the Termination Date and (ii) that date which is thirty (30) days after Lender delivers to Borrower a demand for payment. 2 3 (b) Repayment of Facility B Loans. The Borrower shall repay the Facility B Loans (i) by the amount of each Tax Refund received by any Credit Party, on the date of the receipt of any such Tax Refund; and (ii) the outstanding principal amount of all Facility B Loans in full, together with all accrued but unpaid interest thereon, on the Facility B Termination Date. 2.4. COMMITMENT REDUCTION. The Credit Agreement is hereby amended by deleting Section 2.5 thereof in its entirety, and substituting in lieu thereof the following new Section 2.5 to read as follows: SECTION 2.5 Permanent Reduction of the Commitment. (a) The Borrower shall have the right at any time and from time to time, upon at least five (5) Business Days prior written notice to the Lender, to permanently reduce, in whole at any time or in part from time to time, without premium or penalty, either the Facility A Commitment or the Facility B Commitment in an aggregate principal amount not less than $100,000 or any whole multiple of $10,000 in excess thereof. (b) The Facility A Commitment shall (i) immediately upon any demand for payment made by Lender pursuant to Section 2.3(a) hereof, reduce to the amount of the outstanding principal balance of the Facility A Loans and (ii) thirty (30) days after such demand for payment, reduce to zero. (c) The Facility B Commitment shall reduce, on any date on which any Credit Party receives a Tax Refund, by an amount equal to such Tax Refund; (d) Each permanent reduction permitted or required pursuant to this Section 2.5 shall be accompanied by a payment of principal sufficient to reduce the sum of the aggregate outstanding Facility A Loans plus the outstanding L/C Obligations after such reduction to the Facility A Commitment as so reduced and/or to reduce the sum of the aggregate outstanding Facility B Loans after such reduction to the Facility B Commitment as so reduced. Any reduction of the Commitment to zero shall be accompanied by payment of all outstanding Obligations (and furnishing of cash collateral satisfactory to the Lender for all L/C Obligations). 2.5. INTEREST RATE. Section 4.1 of the Credit Agreement is hereby amended by deleting subsection (a) thereof in its entirety, and substituting in lieu thereof a new subsection (a) to read as follows: 3 4 (a) Interest Rate. Subject to the provisions of this Section 4.1, (i) the aggregate principal amount of the Facility A Loans or any portion thereof shall bear interest at the LIBOR Market Index Rate plus 2.75%, as that rate may change from day to day in accordance with changes in the LIBOR Market Index Rate and (ii) the aggregate principal amount of the Facility B Loans shall bear interest at the Base Rate plus 2.50%, as that rate may change from day to day in accordance with changes in the Prime Rate or the Federal Funds Rate. 2.6. LETTERS OF CREDIT. Article 3 of the Credit Agreement is hereby amended by adding at the end thereof a new Section 3.7 to read as follows: SECTION 3.7 Cash Collateral Account. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time when either (a) a demand for payment is made pursuant to Section 2.3(b) or (b) the Facility A Commitment is reduced to an amount that is less than the outstanding balance of the L/C Obligations, Borrower shall, not less than 30 days after such demand, in the case of demand for payment pursuant to Section 2.3(b), and at such time, in all other cases, deposit in a cash collateral account opened by the Lender an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. Amounts held in such cash collateral account shall be applied by the Lender to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired, been terminated or been fully drawn upon, if any, shall be applied to repay the other Obligations. After all such Letters of Credit shall have expired, been terminated or been fully drawn upon, the Reimbursement Obligations shall have been satisfied and all other Obligations shall have been paid in full, the balance, if any, in such cash collateral account shall be returned to the Borrower. 2.7. QUARTERLY RENT EXPENSE RATIO. Section 9.6 of the Credit Agreement is hereby amended by deleting such Section in its entirety, and substituting in lieu thereof a new Section 9.6 to read as follows: SECTION 9.6 [Intentionally Omitted]. 3. WAIVERS. Effective on the Fifth Amendment Effective Date, Lender hereby waives Borrower's compliance with the Accounts Payable covenant set forth in Section 9.8 of the Credit Agreement for the months of January, February and March 2000. 4. CONDITIONS PRECEDENT. The amendments and consents contained herein shall not become effective unless and until the Lender shall have received each of the following instruments, documents and agreements: 4 5 (a) this Amendment, duly executed and delivered by the Borrower and each Guarantor; (b) a certificate from the chief executive officer or chief financial officer of the Borrower, in form and substance satisfactory to the Lender, to the effect that all representations and warranties of the Borrower contained in the Credit Agreement, this Amendment and the other Loan Documents are true, correct and complete; that giving effect to this Amendment the Borrower is not in violation of any of the covenants contained in the Credit Agreement and the other Loan Documents; and that, after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing; (c) a certificate of the secretary or assistant secretary of each Credit Party certifying that (i) the certificate or articles of incorporation and by-laws of such Credit Party, or the comparable organizational documents of such Credit Party, have not been amended, modified or supplemented since the Closing Date and (ii) attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such Credit Party authorizing the execution, delivery and performance of this Amendment and the other Amendment Documents to which it is a party, and ratifying the execution and delivery of the Second Amendment; and as to the incumbency and genuineness of the signature of each officer of such Credit Party executing the Amendment Documents to which it is a party; (d) such documentation as may be satisfactory to Lender to perfect Lender's lien on all tax refunds, whether state, federal or otherwise, owing to any of the Credit Parties in respect of Borrower's fiscal year ending September 30, 1999, including, but not limited to, any refund payable in respect of any prior year payable as a result of the carryback to such prior year of the net operating loss of the Borrower and its subsidiaries for the fiscal year ending September 30, 1999; (e) evidence satisfactory to Lender that the Bostic Note has been converted to shares of Class B common stock of Borrower, on the terms and conditions set forth in the Bostic Note or on such other terms and conditions as are satisfactory to Lender; and (f) such other instruments, documents and agreements as the Lender may reasonably request. 5. ACKNOWLEDGMENT AND AGREEMENT OF GUARANTORS. Each of the Guarantors hereby (a) acknowledges receipt of a copy of this Amendment and consents to, and agrees to be bound by, the terms and conditions thereof; (b) acknowledges and agrees that all obligations of the Borrower under the Loan Agreement, as amended hereby, are included in the "Guaranteed Obligations," as such term is defined in the Guaranty, and are guaranteed by the Guaranty; and (c) acknowledges and agrees that the Guaranty, and the other Loan Documents to which it is a party, and its respective obligations thereunder, remain in full force and effect, without release, diminution or impairment, notwithstanding the execution and delivery of this Amendment or of any prior amendment to the Credit Agreement or any other Loan Document. 5 6 6. REFERENCES. All references in the Credit Agreement and the Loan Documents to the Credit Agreement shall hereafter be deemed to be references to the Credit Agreement as amended hereby and as the same may hereafter be amended from time to time. 7. LIMITATION OF AGREEMENT. Except as especially set forth herein, this Amendment shall not be deemed to waive, amend or modify any term or condition of the Credit Agreement, each of which is hereby ratified and reaffirmed and which shall remain in full force and effect, nor to serve as a consent to any matter prohibited by the terms and conditions thereof. 8. COUNTERPARTS. This Amendment may be executed in any number of counterparts, and any party hereto may execute any counterpart, each of which, when executed and delivered, will be deemed to be an original and all of which, taken together will be deemed to be but one and the same agreement. 9. FURTHER ASSURANCES. Borrower agrees to take such further action as the Lender shall reasonably request in connection herewith to evidence the amendments herein contained to the Credit Agreement. 10. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. 11. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Georgia, without regard to principles of conflicts of law. 12. NO CLAIM. Each Credit Party hereby represents, warrants, acknowledges and agrees to and with the Lender that as of the date hereof (a) such Credit Party neither holds nor claims any right of action, claim, cause of action or damages, either at law or in equity, against the Lender, its officers, directors, agents, employees or Affiliates, or any of them, which arises from, may arise from, allegedly arise from, are based upon or are related in any manner whatsoever to the Credit Agreement and the Loan Documents or which are based upon acts or omissions of the Lender, any such officer, director, agent, employee or Affiliate of Lender, or any of them, in connection therewith and (b) the Obligations are absolutely owed to the Lender, without offset, deduction or counterclaim. [Remainder of page intentionally left blank] 6 7 IN WITNESS WHEREOF, the parties hereto have executed this Amendment under seal as of the date first written above. CREDIT PARTIES: BORROWER: EDUTREK INTERNATIONAL, INC. By: S. Bostic ----------------------------------------- R. Steven Bostic Chairman of the Board and Chief Executive Officer Attest: David J. Horn ------------------------------------- Name: David J. Horn Title: CFO [CORPORATE SEAL] GUARANTORS: [CORPORATE SEAL] EDUTREK SYSTEMS, INC. By: S. Bostic ----------------------------------------- R. Steven Bostic Chief Executive Officer [CORPORATE SEAL] AMERICAN INTERCONTINENTAL UNIVERSITY, INC. By: S. Bostic ----------------------------------------- R. Steven Bostic Chief Executive Officer [CORPORATE SEAL] AMERICAN COLLEGE IN LONDON, LTD, U.S. By: S. Bostic ---------------------------------------- R. Steven Bostic Chief Executive Officer [CORPORATE SEAL] AMERICAN EUROPEAN MIDDLE EAST CORPORATION, LLC By: American College in London, Ltd., U.S. By: S. Bostic ---------------------------------- R. Steven Bostic Chief Executive Officer LENDER: FIRST UNION NATIONAL BANK By: ---------------------------------------- Frank Darrow Vice President 7 8 DEPARTMENT OF REVENUE POWER OF ATTORNEY STATE OF GEORGIA COUNTY OF FULTON Know all men by these presents that American Intercontinental University, Inc. 58-1286467 - ------------------------------------------ ---------------------------------- Name Registration or Identification No. 6600 Peachtree Dunwoody Road, 500 Embassy Row, Atlanta, GA 30325 - -------------------------------------------------------------------------------- Address Zip Code Phone Number hereby appoint(s) First Union National Bank -------------------------------------------------------------- Name P.O. Box 740074, Atlanta, GA 30374 (404) 827-7370 - -------------------------------------------------------------------------------- Address Zip Code Phone Number as attorney(s)-in-fact to represent the taxpayer(s) before the State Revenue Department of Georgia for the following tax matters [Specify the type(s) of tax and year(s) or period(s) (date of death if estate tax)]: 1997-1999 Income Tax & Net Worth Tax - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The attorney(s)-in-fact (or either of them) are authorized, subject to revocation, to receive confidential information and to perform on behalf of the taxpayer(s) the following acts for the above tax matters [Strike through any of the following which are not granted]: To receive, but not to endorse and collect, checks in payment of any refund of tax, penalty or interest. To execute waivers (and related documents) of restrictions on assessment or collection of tax deficiencies and waivers of any other rights of taxpayer(s). To execute consents extending the statutory period for assessment, collection or refund of taxes. To receive all notices pertaining to these tax matters. To delegate authority or to substitute another representative. To do all the lawful acts and things whatsoever concerning these tax matters in every respect as taxpayer(s) could do were taxpayer(s) personally present at the doing thereof. Other acts [Specify]: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 9 This power of attorney revokes all earlier powers of attorney and tax information authorizations on file with the State Revenue Department of Georgia for the same matters and years or periods covered herein, except the following [Specify to whom granted, date, and address including zip code or refer to attached copies of earlier powers and authorizations]: None - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- In witness whereof I have hereunto set my hand and seal this 23rd day of December __, 1999. If signed by a corporate officer, partner, or fiduciary on behalf of taxpayer(s), I certify that I have the authority to execute this power of attorney on behalf of taxpayer(s). / / S Bostic Chm - ----------------------------------------------------------------------------- SIGNATURE OF OR FOR TAXPAYER(S) TITLE IF APPLICABLE DATE - ----------------------------------------------------------------------------- SIGNATURE OF OR FOR TAXPAYER(S) TITLE IF APPLICABLE DATE _______________________________________________________________________________ IF THE POWER OF ATTORNEY IS GRANTED TO AN ATTORNEY, CERTIFIED PUBLIC ACCOUNTANT, ENROLLED AGENT OR REGISTERED PUBLIC ACCOUNTANT, THE FOLLOWING DECLARATION MUST BE COMPLETED: [ ] I am a member in good standing of the Bar of the jurisdiction indicated below; or [ ] I am duly qualified to practice as a certified public accountant in the jurisdiction indicated below. [ ] I am enrolled as an agent under the requirements of Treasury Department circular no. 230. [ ] I am a registered public accountant.
- ------------------------------------------------------------------------------------------------------------------------------------ DESIGNATION JURISDICTION SIGNATURE DATE (Attorney, C.P.A. Registered Public Accountant, (State, etc) or Enrolled Agent) - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
IF THE POWER OF ATTORNEY IS GRANTED TO A PERSON OTHER THAN AN ATTORNEY, CPA, ENROLLED AGENT OR A REGISTERED PUBLIC ACCOUNTANT, IT MUST BE WITNESSED OR NOTARIZED BELOW. The person(s) signing as or for the taxpayer(s) [Check and complete one]: [ ] is/are known to and signed in the presence of the two disinterested witnesses whose signatures appear here: - ------------------------------------------------------ ------------------ SIGNATURE OF WITNESS DATE - ------------------------------------------------------ ------------------ SIGNATURE OF WITNESS DATE [X] appeared this day before a notary public and acknowledged this power of attorney as a voluntary act and deed. CYNTHIA GARDERE 12/23/99 - ------------------------------------------------------ ------------------ SIGNATURE OF NOTARY DATE 10 RESOLUTION BY CORPORATION CONFERRING AUTHORITY UPON AN OFFICER TO EXECUTE A POWER OF ATTORNEY FOR THE COLLECTION OF CHECKS DRAWN ON THE TREASURER OF THE UNITED STATES ----------- RESOLVED, That EDUTREK INTERNATIONAL, Inc., does hereby name First Union National Bank, as attorney, with power of substitution, to receive, endorse, and collect for and in behalf of the corporation any check drawn on the Treasurer of the United States and to give full discharge therefor; and further, that Steve Bostic, Chairman & CEO be, and is hereby authorized and empowered to execute, in behalf of said corporation, a power of attorney appointing the said First Union National Bank as such attorney for the purpose above expressed. The said corporation hereby ratifies and confirms all that may lawfully be done by virtue hereof. I HEREBY CERTIFY that the foregoing is a true and correct copy of a resolution passed at a Regular meeting of the Board of Edutrek, the governing body of Edutrek International, Inc., a corporation duly organized and existing under and by virtue of the laws of Georgia, held on the 17th day of December, 1999, at Atlanta, GA. AND I FURTHER CERTIFY that due notice of said meeting was given to each member of said Board; that a quorum was present; and that said resolution has not been amended or repealed. WITNESS my signature and the seal of said corporation, this 23rd day of December, 1999. [IMPRESS CORPORATE SEAL HERE] /s/ S. Bostic ------------------------------ (Official signature of officer) Chairman ------------------------------ (Official title of officer) - ------------------------------------------------------------------------------- IMPORTANT -- Do not execute this instrument without first reading the instructions on the reverse side hereof. Exact compliance with these instructions will avoid complications. 11 INSTRUCTIONS REGARDING SF 235 -- READ CAREFULLY ----------------- 1. This form should be used only when authority is given to an officer of the corporation to execute a power of attorney authorizing a third person to endorse and collect checks drawn on the Treasurer of the United States in the name of the corporation. 2. This resolution should accompany a power of attorney on SF 234, executed by the officer authorized herein to execute such a power. 3. Certification should be made by the secretary or assistant secretary, or such other officer as may be custodian of the corporate seal and records. If the resolution confers power upon the same officer who certifies thereto, another officer not therein authorized should join in the certification. 4. The corporate seal should always be impressed. If the corporation has no seal, a statement to that effect should be inserted in the certificate, and the certificate should be sworn to before a notary public or other officer authorized by law to administer oaths generally, and unless authenticated by the official impression seal of such officer should be accompanied by a certificate from the proper official showing that the officer was in commission on the date of the acknowledgment. The date when the officer's commission expires should appear in any event. If a certificate is furnished, such certificate should show the dates of the beginning and expiration of the officer's commission, and such period of commission should include the date of acknowledgment of the affidavit. Affidavits sworn to before a judge or clerk of court and bearing the seal of the court need not be accompanied by any further certification. 12 EDUTREK INTERNATIONAL, INC. CERTIFICATE AS TO NO DEFAULT AND RELATED MATTERS The undersigned, being the Chairman of the Board and Chief Executive Officer of EduTrek International, Inc., a Georgia corporation ("EduTrek"), hereby gives this certificate pursuant to the terms of that certain Credit Agreement, dated as of March 25, 1999, as amended through and including the date hereof (the "Credit Agreement") among EduTrek and First Union National Bank (the "Lender"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Credit Agreement. The undersigned, in his capacity as Chairman of the Board and Chief Executive Officer of EduTrek, hereby certifies to the Lender that, after giving effect to that certain Fifth Amendment to Credit Agreement and Waiver dated as of the date hereof: 1.2 He is the Chairman of the Board and Chief Executive Officer of EduTrek, and is authorized and empowered to issue this certificate in such capacities, for and on behalf of EduTrek; 2. The representations and warranties set forth in Section 6.1 of the Credit Agreement, the terms of which are incorporated herein by reference, are true and correct in all material respects on and as of the date hereof, except, in the case of the representation set forth in Section 6.1(q) of the Credit Agreement, as reflected in the written financial reports delivered by Borrower to Lender; 3. EduTrek is, on the date hereof, in compliance with all the terms and provisions set forth in the Credit Agreement on its part to be observed and performed, which terms and provisions are incorporated herein by reference, after giving effect to the waivers set forth in Section 3 of that certain Fifth Amendment to Credit Agreement and Waiver dated as of even date herewith among EduTrek, the Guarantors named therein, and the Lender; and 4. On the date hereof, and after giving effect to the transactions contemplated under the Credit Agreement, no Default or Event of Default has occurred or is continuing. IN WITNESS WHEREOF, the undersigned has set his hand and seal as of the 23rd day of December, 1999. EDUTREK INTERNATIONAL, INC. By: /s/ R. Steven Bostic ------------------------- R. Steven Bostic Chairman of the Board and Chief Executive Officer [CORPORATE SEAL] 13 STANDARD FORM 234 April 1961 Super Union Form TUS 4571 Treasury Dept. Clre. No. 21 284-101 POWER OF ATTORNEY BY A CORPORATION FOR THE COLLECTION OF CHECKS DRAWN ON THE TREASURER OF THE UNITED STATES ---------------- KNOW ALL MEN BY THESE PRESENTS: That EDUTREK International, Inc., a corporation duly organized and existing ------------------------------ under and by virtue of the laws of Georgia, with its principal office at 6600 -------- ----- Peachtree Dunwoody Rd., 500 Embassy Row, Atlanta, GA, 30328 does hereby appoint - ------------------------------------------------------------ First Union National Bank, whose post-office address is P.O. Box 740074, - --------------------------- ----------------- Atlanta, GA 30374, as attorney to receive, endorse, and collect checks in its - ------------------- name, drawn on the Treasurer of the United States, and to give full discharge for same. The said corporation hereby ratifies and confirms all that may lawfully be done by virtue hereof. IN WITNESS WHEREOF said corporation has caused this instrument to be executed in its behalf, pursuant to authority of its Board of Directors, by its Chairman of the Board and CEO, and its corporate seal to be hereunto attached, - ------------------------------ (Official title of officer) attested by its secretary or assistant secretary, this day of December , ------ -------------- 1999 -- [IMPRESS SEAL HERE] EDUTREK INTERNATIONAL, INC. -------------------------------, (Name of corporation) Attest: By S. Bostic ------------------------------------ (Official signature of officer) David J. Horn Chm - --------------------------------- ------------------------------------ CFO (Official title of officer) ------------- Personally appeared before me the above-named Steve Bostic known or proved ------------ to me to be the same person who executed the foregoing instrument and to be the Chairman of Edutrek International, Inc. and acknowledged to me that he - ------------------ --------------------------- (title of officer) executed the same as his free act and deed and the free act and deed of said corporation. WITNESS my signature, official designation, and seal. Cynthia Gardere --------------------------------- [IMPRESS SEAL HERE] (Signature of attesting officer) Notary Public --------------------------------- (Official designation) Dated at Atlanta, GA , this 23rd day of December, 1999 ---------------------- ---- ------------- ---- My commission expires 9/11 , 2003 --------------- ---- _______________________________________________________________________________ IMPORTANT.--Do not execute this instrument without first reading the instructions on the reverse side hereof. Exact compliance with these instructions will avoid complications. 14 INSTRUCTIONS REGARDING SF 234 -- READ CAREFULLY ------------------- 1. A general power of attorney on this form may be executed by a corporation to confer authority to endorse and collect checks drawn on the Treasurer of the United States, in payment of principal or interest on public debt obligations or obligations guaranteed by the United States, tax refunds, and payments for goods and services. 2. If it is desired that checks be mailed to the attorney instead of to the payee, formal notice of change in post-office address, identifying the checks affected, should be forwarded to the drawer. 3. This power must be acknowledged by the grantor before a notary public or other officer authorized by law to administer oaths generally. 4. If in a foreign country, the acknowledgment should be made before a United States diplomatic or consular representative. If such an officer is not available, it may be acknowledged before a notary public or other officer authorized to administer oaths, but his official character and jurisdiction must be certified by a United States diplomatic or consular officer, under the seal of his office. 5. Seals of attesting officers must always be impressed; provided, however, that where acknowledgments before a notary public, or other officer authorized by law to administer oaths, are not thus authenticated by the official impression seal of such officer, the power should be accompanied by a certificate from the proper official showing that the officer was in commission on the date of the acknowledgment. The date when the officer's commission expires should appear in any event. If a certificate is furnished, such certificate should show the dates of the beginning and expiration of the officer's commission, and such period of commission should include the date of acknowledgment of the power. 6. This power of attorney may be revoked by notice from the grantor to the parties concerned. Notice of revocation to the Treasury will not ordinarily serve to revoke the power. 7. The authority of the officer of the corporation to act in its behalf should be shown by appropriate resolution of the governing body of the corporation, preferably using the form attached hereto. 8. POWERS OF ATTORNEY NEED NOT BE FILED WITH THE TREASURER OF THE UNITED STATES. EX-10.5.6 3 SIXTH AMENDMENT TO CREDIT AGREEMENT 1 SIXTH AMENDMENT TO CREDIT AGREEMENT THIS SIXTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER (this "Amendment") is made and entered into as of the day of February, 2000, by and between EDUTREK INTERNATIONAL, INC., a Georgia corporation ("Borrower"), the undersigned Guarantors party hereto (the "Guarantors"; Borrower and the Guarantors are individually a "Credit Party" and collectively the "Credit Parties") and FIRST UNION NATIONAL BANK ("Lender"). WITNESSETH: WHEREAS, Borrower and Lender are a party to that certain Credit Agreement, dated as of March 25, 1999, as amended by a First Amendment to Credit Agreement dated May 27, 1999, by a Second Amendment to Credit Agreement and Waiver dated August 16, 1999, by a Third Amendment to Credit Agreement dated August 27, 1999, by a Fourth Amendment to Credit Agreement and Waiver dated November 11, 1999 and by a Fifth Amendment to Credit Agreement and Waiver dated December 23, 1999 (as amended, the "Credit Agreement"), pursuant to which Lender made available to Borrower a $10,000,000 revolving line of credit pursuant to the Facility A Commitment and a line of credit providing a maximum availability of $2,299,360 pursuant to the Facility B Commitment; and WHEREAS, Borrower has requested that the Lender increase the amount of the Facility B Commitment, extend the maturity of the Facility B Loans, and make certain other modifications to the terms and conditions in the Credit Agreement; and WHEREAS, Lender is willing to agree to such amendments and modifications only if Borrower agrees that the Credit Agreement be further amended as set forth herein; NOW, THEREFORE, for and in consideration of the foregoing premises, the mutual promises, covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. DEFINITIONS. All capitalized terms used herein and not expressly defined herein shall have the same respective meanings given to such terms in the Credit Agreement. 2. AMENDMENTS. Subject to the conditions contained herein, the Credit Agreement is hereby amended as follows: 2.1. NEW DEFINITIONS. Section 1.1 of the Credit Agreement is hereby amended by adding thereto in appropriate alphabetical order the following new definitions: 2 "Sixth Amendment" shall mean that certain Sixth Amendment to Credit Agreement, dated as of February , 2000, between Borrower and Lender. "Sixth Amendment Effective Date" shall mean that date on which all of the conditions precedent set forth in Section 4 of the Sixth Amendment have been satisfied and the Sixth Amendment has become effective. 2.2. EXISTING DEFINITIONS. Section 1.1 of the Credit Agreement is hereby further amended by deleting the definitions of "Facility B Commitment," and "Facility B Termination Date" and by substituting in lieu thereof the following new definitions of such terms: "Facility B Commitment" means the obligation of the Lender to make Loans to the Borrower pursuant to Section 2.1(b) hereof in an aggregate principal amount at any time outstanding not to exceed Four Million Three Hundred Fifty Thousand Dollars ($4,350,000) as such amount is reduced pursuant to Section 2.5(c) hereof. "Facility B Termination Date" means the earliest of (a) September 30, 2000, (b) the date of termination by the Borrower pursuant to Section 2.5(a), (c) the Termination Date; and (d) the date of termination by the Lender pursuant to Section 11.2(a). 2.3. COMMITMENT REDUCTION. The Credit Agreement is hereby further amended by deleting Section 2.5 thereof in its entirety, and substituting in lieu thereof the following new Section 2.5 to read as follows: SECTION 2.5 Permanent Reduction of the Commitment. (a) The Borrower shall have the right at any time and from time to time, upon at least five (5) Business Days prior written notice to the Lender, to permanently reduce, in whole at any time or in part from time to time, without premium or penalty, either the Facility A Commitment or the Facility B Commitment in an aggregate principal amount not less than $100,000 or any whole multiple of $10,000 in excess thereof. (b) The Facility A Commitment shall (i) immediately upon any demand for payment made by Lender pursuant to Section 2.3(a) hereof, reduce to the amount of the outstanding principal balance of the Facility A Loans and (ii) thirty (30) days after such demand for payment, reduce to zero. 2 3 (c) The Facility B Commitment shall (i) on July 1, 2000, reduce to $3,500,000 and (ii) on the Facility B Termination Date, reduce to zero. (d) Each permanent reduction permitted or required pursuant to this Section 2.5 shall be accompanied by a payment of principal sufficient to reduce the sum of the aggregate outstanding Facility A Loans plus the outstanding L/C Obligations after such reduction to the Facility A Commitment as so reduced and/or to reduce the sum of the aggregate outstanding Facility B Loans after such reduction to the Facility B Commitment as so reduced. Any reduction of the Commitment to zero shall be accompanied by payment of all outstanding Obligations (and furnishing of cash collateral satisfactory to the Lender for all L/C Obligations). 2.4. FORM OF FACILITY B NOTE. The Credit Agreement is hereby further amended by deleting the Form of Facility B Note attached thereto as Exhibit A-2, and substituting in lieu thereof a new Exhibit A-2 in the form of Exhibit A-2 attached hereto. 2.5. NOTES. The Credit Agreement is hereby further amended by deleting subsection 2.4(b) thereof in its entirety, and substituting in lieu thereof the following new subsection 2.4(b) to read as follows: (b) The Facility B Loans and the obligation of the Borrower to repay the Facility B Loans shall be evidenced by a Facility B Note executed by the Borrower payable to the order of the Lender representing the Borrower's obligation to pay the Facility B Commitment or, if less, the aggregate unpaid principal amount of all Facility B Loans made and to be made to the Borrower hereunder, plus interest and all other fees, charges and other amounts due thereon. The Facility B Note shall be dated the Sixth Amendment Effective Date and shall bear interest on the unpaid principal amount thereof at the applicable interest rate per annum specified in Section 4.1. 3. ARRANGEMENT FEES. In consideration of Lender entering into this Amendment, Borrower hereby agrees to pay the following arrangement fees to Lender in lieu of the fixed arrangement fee set forth in Section 4.1 of the First Amendment and the contingent arrangement fee set forth in Section 5.1 of the Second Amendment: 3.1. FIXED ARRANGEMENT FEE. Borrower agrees to pay a fixed arrangement fee equal to $750,000 payable on the later to occur of (a) the Facility B Termination Date and (b) the Termination Date. Borrower and each Guarantor hereby acknowledges and agrees that such fee has been fully earned by Lender, is non-refundable, and is irrevocably payable on the due date thereof without offset, deduction or counterclaim. 3 4 3.2. CONTINGENT ARRANGEMENT FEE. Borrower also agrees to pay a contingent arrangement fee: (a) equal to $200,000 upon the failure of Borrower to deliver to the Lender by April 15, 2000 a bona fide, letter of intent executed by all parties thereto for the sale of assets or stock of the Borrower that generates sufficient proceeds to pay the Obligations in full; and (b) equal to $200,000 upon the failure of Borrower to deliver to the Lender by June 15, 2000 a bona fide, definitive contract executed by all parties thereto for the sale of assets or stock of the Borrower that generates sufficient proceeds to pay the Obligations in full. 4. CONDITIONS PRECEDENT. The amendments contained herein shall not become effective unless and until the Lender shall have received each of the following instruments, documents and agreements: (a) this Amendment, duly executed and delivered by the Borrower and each Guarantor; (b) the Facility B Note, duly executed and delivered by the Borrower; (c) a certificate from the chief executive officer or chief financial officer of the Borrower, in form and substance satisfactory to the Lender, to the effect that all representations and warranties of the Borrower contained in the Credit Agreement, this Amendment and the other Loan Documents are true, correct and complete; that giving effect to this Amendment the Borrower is not in violation of any of the covenants contained in the Credit Agreement and the other Loan Documents; and that, after giving effect to this Amendment, no Default or Event of Default has occurred and is continuing; (d) a certificate of the secretary or assistant secretary of each Credit Party certifying that (i) the certificate or articles of incorporation and by-laws of such Credit Party, or the comparable organizational documents of such Credit Party, have not been amended, modified or supplemented since the Closing Date and (ii) attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such Credit Party authorizing the execution, delivery and performance of this Amendment and the other instruments, documents and agreements executed and delivered pursuant hereto or in connection herewith to which it is a party (collectively, the "Amendment Documents"), and ratifying the execution and delivery of this Amendment; and as to the incumbency and genuineness of the signature of each officer of such Credit Party executing the Amendment Documents to which it is a party; (e) a legal opinion of counsel to the Borrower in form and substance acceptable to the Lender; and (f) such other instruments, documents and agreements as the Lender may reasonably request. 5. REPRESENTATIONS AND WARRANTIES; NO DEFAULT. Each Credit Party hereby jointly and severally represent and warrant to the Lender that (a) all of Credit Parties' representations and warranties contained in the Credit Agreement, the other Loan Documents and this Amendment are 4 5 true and correct on and as of the date of this Amendment (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date) except, in the case of the representation set forth in Section 6.1(q) of the Credit Agreement, as reflected in the Borrower's interim financial statements for the period ending November 30, 1999; (b) no Default or Event of Default has occurred and is continuing as of such date under any Loan Document; (c) each Credit Party has the power and authority to enter into this Amendment and the other Amendment Documents to which it is a party and to perform all of its obligations hereunder and thereunder; (d) the execution, delivery and performance of this Amendment and the Amendment Documents have been duly authorized by all necessary corporate or partnership action on the part of each Credit Party; (e) this Amendment and the Amendment Documents are the legal, valid and binding obligations of the Credit Parties party thereto, enforceable in accordance with their respective terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, moratorium or similar state or federal debtor relief laws from time to time in effect which affect the enforcement of creditors' rights in general and the availability of equitable remedies; and (f) the execution and delivery of this Amendment and the Amendment Documents and performance thereof by the Credit Parties do not and will not violate the Certificate or Articles of Incorporation, By-laws or other organizational documents of any Credit Party and do not and will not violate or conflict with any law, order, writ, injunction, or decree of any court, administrative agency or other governmental authority applicable to any Credit Party or its properties. 6. REAFFIRMATION OF LOAN DOCUMENTS. (a) Each Credit Party other than American European acknowledges and agrees that the portion of the Obligations of Borrower arising under Facility B or under this Amendment, including, but not limited to, the Facility B Loans: (i) are included in the "Guaranteed Obligations," as such term is defined in the Guaranty, and are guaranteed by the Guaranty; (ii) are included in the "Secured Obligations," as such term is defined in the Security Agreement, and are secured by the Security Agreement; (iii) are included in the "Secured Obligations," as such term is defined in the Pledge Agreement, and are secured by the Pledge Agreement; (b) Lender, American European and the other Credit Parties agree that the obligations of American European under the Guaranty, Security Agreement and Pledge Agreement are limited to that portion of the Obligations arising under Facility A or otherwise arising out of the Credit Agreement and the Loan Documents but not arising out of the Facility B. (c) Each Credit Party hereby reaffirms its obligations under the Loan Documents, and acknowledges and agrees that each of the Loan Documents to which such Credit Party is a party, and the obligations of such Credit Party thereunder, remain in full force and effect, without release, diminution or impairment, notwithstanding the 5 6 execution and delivery of this Amendment or of any prior amendment to the Credit Agreement or any other Loan Document. 7. REFERENCES. All references in the Credit Agreement and the Loan Documents to the Credit Agreement shall hereafter be deemed to be references to the Credit Agreement as amended hereby and as the same may hereafter be amended from time to time. 8. LIMITATION OF AGREEMENT. Except as especially set forth herein, this Amendment shall not be deemed to waive, amend or modify any term or condition of the Credit Agreement, each of which is hereby ratified and reaffirmed and which shall remain in full force and effect, nor to serve as a consent to any matter prohibited by the terms and conditions thereof. 9. COUNTERPARTS. This Amendment may be executed in any number of counterparts, and any party hereto may execute any counterpart, each of which, when executed and delivered, will be deemed to be an original and all of which, taken together will be deemed to be but one and the same agreement. 10. FURTHER ASSURANCES. Borrower agrees to take such further action as the Lender shall reasonably request in connection herewith to evidence the amendments herein contained to the Credit Agreement. 11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. 12. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Georgia, without regard to principles of conflicts of law. 13. NO CLAIM. Each Credit Party hereby represents, warrants, acknowledges and agrees to and with the Lender that as of the date hereof (a) such Credit Party neither holds nor claims any right of action, claim, cause of action or damages, either at law or in equity, against the Lender, its officers, directors, agents, employees or Affiliates, or any of them, which arises from, may arise from, allegedly arise from, are based upon or are related in any manner whatsoever to the Credit Agreement and the Loan Documents or which are based upon acts or omissions of the Lender, any such officer, director, agent, employee or Affiliate of Lender, or any of them, in connection therewith and (b) the Obligations are absolutely owed to the Lender, without offset, deduction or counterclaim. [Remainder of page intentionally left blank] 6 7 IN WITNESS WHEREOF, the parties hereto have executed this Amendment under seal as of the date first written above. CREDIT PARTIES: BORROWER: EDUTREK INTERNATIONAL, INC. By: S. Bostic ---------------------------------------- R. Steven Bostic Chairman of the Board and Chief Executive Officer Attest: David J. Horn ------------------------------------ David J. Horn Secretary and Chief Financial Officer [CORPORATE SEAL] GUARANTORS: [CORPORATE SEAL] EDUTREK SYSTEMS, INC. By: S. Bostic ---------------------------------------- R. Steven Bostic Chief Executive Officer [CORPORATE SEAL] AMERICAN INTERCONTINENTAL UNIVERSITY, INC. By: S. Bostic ---------------------------------------- R. Steven Bostic Chief Executive Officer [CORPORATE SEAL] AMERICAN COLLEGE IN LONDON, LTD, U.S. By: S. Bostic ---------------------------------------- R. Steven Bostic Chief Executive Officer [CORPORATE SEAL] AMERICAN EUROPEAN MIDDLE EAST CORPORATION, LLC By: American College in London, Ltd., U.S. By: S. Bostic ------------------------------- R. Steven Bostic Chief Executive Officer LENDER: FIRST UNION NATIONAL BANK By: Frank Darrow ---------------------------------------- Frank Darrow Vice President 7 8 EXHIBIT A-2 TO SIXTH AMENDMENT TO CREDIT AGREEMENT FORM OF FACILITY B REVOLVING CREDIT NOTE $4,350,000 Atlanta, Georgia 9th day of February, 2000 FOR VALUE RECEIVED, the undersigned (the "Borrower") HEREBY PROMISES TO PAY to the order of FIRST UNION NATIONAL BANK (the "Lender"), the principal amount of Four Million Three Hundred Fifty Thousand Dollars ($4,350,000), or, if less, the aggregate unpaid principal amount of all "Facility B Loans" disbursed to the Borrower by the Lender under, and as such term is defined in, the Credit Agreement referred to below. The Borrower promise to pay interest on the unpaid principal amount hereof until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Nothing in this Note shall be deemed to establish or require the payment of a rate of interest in excess of the maximum rate permitted by any Applicable Law. In the event that any rate of interest required to be paid hereunder exceeds the maximum rate permitted by Applicable Law, the provisions of the Credit Agreement relating to the payment of interest under such circumstances shall control. Both principal and interest are payable in lawful money of the United States of America to First Union National Bank in federal or other immediately available funds. This Note is the Facility B Note referred to in, and is entitled to the benefits of, the Credit Agreement dated as of March 25, 1999 (together with all amendments and other modifications from time to time made thereto, the "Credit Agreement"), among the Borrower and First Union National Bank, as amended through and including the date hereof. Capitalized terms not defined herein are to have the meanings provided to them in the Credit Agreement. The Credit Agreement contains, among other things, provisions for the time, place and manner of payment of this Note, the determination of the interest rate borne by and fees payable in respect of this Note, acceleration of the payment of this Note upon the happening of certain stated events and the mandatory repayment of this Note under certain circumstances. The Borrower hereby agrees to pay on demand all reasonable costs and expenses actually incurred by the Lender in collecting the Borrower's obligations hereunder or in enforcing or attempting to enforce any of the Lender's rights hereunder, including, but not limited to, reasonable attorneys' fees and expenses actually incurred by the Lender if collected by or through an attorney, whether or not suit is filed. 9 EXHIBIT A-2 TO SIXTH AMENDMENT TO CREDIT AGREEMENT Presentment for payment, notice of dishonor, protest and notice of protest are hereby waived. THIS NOTE IS MADE AND DELIVERED IN THE STATE OF GEORGIA AND SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA WITHOUT REFERENCE TO THE CONFLICTS OR CHOICE OF LAW PRINCIPLES THEREOF. IN WITNESS WHEREOF, the Borrower has caused this Note to be executed under seal by a duly authorized officer as of the day and year first above written. [CORPORATE SEAL] EDUTREK INTERNATIONAL, INC. ATTEST: By: By: -------------------------------------- --------------------------- David J. Horn R. Steven Bostic Secretary and Chief Financial Officer Chairman of the Board and Chief Executive Officer 2 EX-23.1 4 INDEPENDENT AUDITORS CONSENT 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 333-41543 and No. 333-46655 of EduTrek International, Inc. on Form S-8 of our report dated March 10, 2000 (March 30, 2000 as to Note 15), (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the uncertainty of the Company's ability to continue as a going concern) appearing in the Annual Report on Form 10-K of EduTrek International, Inc. for the fiscal year ended December 31, 1999. DELOITTE & TOUCHE LLP Atlanta, Georgia March 30, 2000 EX-24.1 5 POWER OF ATTORNEY OF PAUL D. BECKHAM 1 EXHIBIT 24.1 Power of Attorney of Paul D. Beckham STATE OF GEORGIA COUNTY OF FULTON POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, Paul D. Beckham, a Director of EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint Steve Bostic and David J. Horn, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution and resubstitution, for me in any and all capacities, to sign the Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for the fiscal year ended December 31, 1999, pursuant to the requirements of the Securities Exchange Act of 1934, and to file such document with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 6th day of March 2000. /s/ Paul D. Beckham --------------------------- Paul D. Beckham ACKNOWLEDGMENT BEFORE me this 6th day of March 2000, came Paul D. Beckham, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Cynthia Gardere --------------------------- NOTARY PUBLIC State of Georgia My Commission Expires: September 11, 2003 EX-24.2 6 POWER OF ATTORNEY OF FRED C. DAVISON 1 EXHIBIT 24.2 Power of Attorney of Fred C. Davison STATE OF GEORGIA COUNTY OF FULTON POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, Fred C. Davison, a Director of EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint Steve Bostic and David J. Horn, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution and resubstitution, for me in any and all capacities, to sign the Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for the fiscal year ended December 31, 1999, pursuant to the requirements of the Securities Exchange Act of 1934, and to file such document with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 3rd day of March 2000. /s/ Fred C. Davison -------------------------- Fred C. Davison ACKNOWLEDGMENT BEFORE me this 3rd day of March 2000, came Fred C. Davison, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Cynthia Gardere -------------------------- NOTARY PUBLIC State of Georgia My Commission Expires: September 11, 2003 EX-24.3 7 POWER OF ATTORNEY OF RONALD P. HOGAN 1 EXHIBIT 24.3 Power of Attorney of Ronald P. Hogan STATE OF GEORGIA COUNTY OF FAYETTE POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, Ronald P. Hogan, a Director of EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint Steve Bostic and David J. Horn, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution and resubstitution, for me in any and all capacities, to sign the Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for the fiscal year ended December 31, 1999, pursuant to the requirements of the Securities Exchange Act of 1934, and to file such document with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 2nd day of March 2000. /s/ Ronald P. Hogan -------------------------- Ronald P. Hogan ACKNOWLEDGMENT BEFORE me this 2nd day of March 2000, came Ronald P. Hogan, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Janice Wallace -------------------------- NOTARY PUBLIC State of Georgia My Commission Expires: May 29, 2000 EX-24.4 8 POWER OF ATTORNEY OF GAYLEN D. KEMP 1 EXHIBIT 24.4 Power of Attorney of Gaylen D. Kemp STATE OF GEORGIA COUNTY OF FULTON POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, Gaylen D. Kemp, a Director of EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint Steve Bostic and David J. Horn, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution and resubstitution, for me in any and all capacities, to sign the Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for the fiscal year ended December 31, 1999, pursuant to the requirements of the Securities Exchange Act of 1934, and to file such document with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 4th day of March 2000. /s/ Gaylen D. Kemp -------------------------- Gaylen D. Kemp ACKNOWLEDGMENT BEFORE me this 4th day of March 2000, came Gaylen D. Kemp, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Cynthia Gardere -------------------------- NOTARY PUBLIC State of Georgia My Commission Expires: September 11, 2003 EX-24.5 9 POWER OF ATTORNEY OF GERALD TELLEFSEN 1 EXHIBIT 24.5 Power of Attorney of Gerald Tellefsen STATE OF GEORGIA COUNTY OF FULTON POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, Gerald Tellefsen, Director of EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint Steve Bostic and David J. Horn, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution and resubstitution, for me in any and all capacities, to sign the Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for the fiscal year ended December 31, 1999, pursuant to the requirements of the Securities Exchange Act of 1934, and to file such document with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 6th day of March 2000. /s/ Gerald Tellefsen -------------------------- Gerald Tellefsen ACKNOWLEDGMENT BEFORE me this 6th day of March 2000, came Gerald Tellefsen, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Cynthia Gardere -------------------------- NOTARY PUBLIC State of Georgia My Commission Expires: September 11, 2003 EX-24.6 10 POWER OF ATTORNEY OF J. ROBERT FITZGERALD 1 EXHIBIT 24.6 Power of Attorney of J. Robert Fitzgerald STATE OF GEORGIA COUNTY OF FULTON POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I, J. Robert Fitzgerald, Director of EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint Steve Bostic and David J. Horn, jointly and severally, my true and lawful attorneys-in-fact, each with full power of substitution and resubstitution, for me in any and all capacities, to sign the Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for the fiscal year ended December 31, 1999, pursuant to the requirements of the Securities Exchange Act of 1934, and to file such document with the Securities and Exchange Commission, together with all exhibits thereto and other documents in connection therewith, and to sign on my behalf and in my stead, in any and all capacities, any amendments to said Annual Report, incorporating such changes as any of the said attorneys-in-fact deems appropriate, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 6th day of March 2000. /s/ J. Robert Fitzgerald -------------------------- J. Robert Fitzgerald ACKNOWLEDGMENT BEFORE me this 6th day of March 2000, came J. Robert Fitzgerald, personally known to me, who in my presence did sign and seal the above and foregoing Power of Attorney and acknowledged the same as his true act and deed. /s/ Cynthia Gardere -------------------------- NOTARY PUBLIC State of Georgia My Commission Expires: September 11, 2003 EX-27.1 11 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 3,061 0 4,429 1,985 0 8,345 23,997 4,583 66,908 34,365 0 0 0 41,710 (20,095) 66,908 61,656 61,656 75,544 75,544 21 0 1,526 (15,393) 944 (16,337) 0 0 0 (18,215) (1.68) (1.68)
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