-----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, F1kKLmo1POl6GbnKn/E3Q7XciFluU+odnxaSM6HvrzGQR4ootd7zlK2kkNRMUFio efj4s+ZoMaffyjUH65+jiw== 0001047469-98-033270.txt : 19980901 0001047469-98-033270.hdr.sgml : 19980901 ACCESSION NUMBER: 0001047469-98-033270 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980531 FILED AS OF DATE: 19980831 SROS: NASD 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: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23021 FILM NUMBER: 98701811 BUSINESS ADDRESS: STREET 1: 3340 PEACHTREE RD STREET 2: STE 2000 CITY: ATLANTA STATE: GA ZIP: 30326 BUSINESS PHONE: 4048128200 MAIL ADDRESS: STREET 1: EDUTREK INT INC STREET 2: 3340 PEACHTREE RD STE 2000 CITY: ATLANTA STATE: GA ZIP: 30326 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 MAY 31, 1998 COMMISSION FILE NUMBER: 0-23021 ------------------------ EDUTREK INTERNATIONAL, INC. A GEORGIA CORPORATION 3340 PEACHTREE ROAD, SUITE 2000 58-2255472 ATLANTA, GEORGIA 30326 (IRS Employer Identification No.) 404-812-8200 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./X/ The aggregate market value of the Class A Common Stock of the registrant held by nonaffiliates of the registrant (4,268,688) on July 31, 1998 was $105,116,442. 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 July 31, 1998: 4,337,095 Class A and 6,293,000 Class B. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be held in 1998 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EDUTREK INTERNATIONAL, INC. FORM 10-K INDEX
PAGE ----- PART I Item 1. Business.................................................................................. 1 Item 2. Properties................................................................................ 20 Item 3. Legal Proceedings......................................................................... 21 Item 4. Submission of Matters to a Vote of Security Holders....................................... 21 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 22 Item 6. Selected Consolidated Financial Data...................................................... 23 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 25 Item 7A. Quantitative and Qualititative Disclosures About Market Risk.............................. 32 Item 8. Financial Statements and Supplementary Data............................................... 32 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...... 50 PART III Item 10. Directors and Executive Officers of the Registrant........................................ 50 Item 11. Executive Compensation.................................................................... 50 Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 50 Item 13. Certain Relationships and Related Transactions............................................ 50 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 50 SIGNATURES............................................................................................. 53 EXHIBIT INDEX.......................................................................................... 55
i PART I ITEM 1. BUSINESS THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A SAFE HARBOR TO ENCOURAGE COMPANIES TO PROVIDE PROSPECTIVE INFORMATION SO LONG AS IT IS IDENTIFIED AS FORWARD-LOOKING AND ACCOMPANIED BY MEANINGFUL CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED. FORWARD-LOOKING STATEMENTS ARE RELATED TO THE PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ECONOMIC PERFORMANCE, OF PROJECTIONS OF REVENUES, INCOME, EARNINGS PER SHARE, CAPITAL EXPENDITURES, DIVIDENDS, CAPITAL STRUCTURE, OR OTHER FINANCIAL ITEMS. IN THE FOLLOWING DISCUSSION AND ELSEWHERE IN THE REPORT, STATEMENTS CONTAINING WORDS SUCH AS "INTEND," "EXPECT," "ANTICIPATE," "BELIEVE," "GOAL," "OBJECTIVE," OR SIMILAR WORDS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS, AND IT WISHES TO IDENTIFY IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION AND ELSEWHERE IN THE REPORT. THE RISKS AND UNCERTAINTIES THAT MAY AFFECT THE OPERATIONS, PERFORMANCE, DEVELOPMENT, AND RESULTS OF THE COMPANY'S BUSINESS INCLUDE BUT ARE NOT LIMITED TO THE FOLLOWING: (1) HEIGHTENED COMPETITION; (2) GENERAL ECONOMIC AND BUSINESS CONDITIONS WHICH ARE LESS FAVORABLE THAN EXPECTED; (3) CONTINUED DIFFICULTIES IN THE ECONOMIES OF ASIAN AND OTHER COUNTRIES THAT ARE A SOURCE OF STUDENTS FOR THE COMPANY; AND (4) OTHER RISKS DETAILED HEREIN AND FROM TIME TO TIME IN THE COMPANY'S OTHER REPORTS. OVERVIEW EduTrek International, Inc. ("EduTrek" or the "Company"), through American InterContinental University ("AIU"), is a leading provider of global, career-oriented higher education programs. AIU offers accredited associate's, bachelor's, and master's degree programs in information technology ("IT"), international business, multimedia communication, and design to over 3,000 students from over 100 countries. AIU maintains five campuses located in Atlanta, Los Angeles, 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. AIU's education programs are designed to help graduates prepare for careers. AIU offers an authentic international education environment; over half of its students are from outside the United States. Through its Study Abroad program, AIU enrolled nearly 640 students from U.S. universities in fiscal 1998 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, low-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 three new campuses since fall 1995. The number of students attending AIU has increased 54.5% to 2,920 students at May 31, 1998 from 1,890 students at May 31, 1994. The Company intends to continue expanding by opening new campuses (including two new campuses in the remainder of calendar 1998). Each 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 will offer four new business and information technology programs designed to equip students with skills that are in strong demand by employers: Master of Information Technology ("MIT"), Bachelor of Information Technology ("BIT"), and Master of Business Administration ("MBA") and Bachelor of Business Administration ("BBA") in International Business. Each program will be 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. In July 1997, the Company licensed the core IT curriculum from ITI Education Corporation ("ITI"), a quality provider of career-oriented postgraduate IT diploma programs to university graduates, with five campuses in Canada. The Company enriched and expanded this curriculum to develop the MIT degree, which was approved by SACS. AIU launched the MIT degree program in Atlanta in December 1997. AIU 1 currently has enrolled 300 MIT students at a program tuition of $24,950. The retention rate for these students is in excess of 90%. On December 11, 1997, EduTrek and ITI entered into an agreement through which the Company would acquire ITI. On March 30, 1998, the two companies terminated these plans in favor of an expanded licensing agreement. Under the new agreement, EduTrek acquired rights to license ITI's information technology education system for 11 major markets in the U.S. and internationally. AIU has centralized at its Atlanta headquarters the administrative functions of the various campuses, including marketing, accounting, recruiting, human resources, program and curriculum development, information systems, financial aid, and regulatory compliance. A campus president, supported by a team of human resources, academic, marketing, and administrative staff members, manages local campuses. AIU is in the process of implementing an integrated campus management information system to assist in planning and controlling the opening of new campuses. 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. MARKET 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 primarily in the higher education segment. The Company expects that the international demand for postsecondary education will continue to increase over the next several years as a result of certain projected demographic, economic, and social trends including: (1) 43% projected growth in the number of students enrolled in institutions of higher education internationally from approximately 56 million in 1995 to approximately 80 million in 2005, according to UNESCO; (2) estimated 346,000 current vacancies in computer programmer and system analyst jobs in companies with more than 100 employees, representing one out of ten of all information technology jobs, projected to increase to one million vacancies by the year 2005, according to the Commerce Department's Office of Technology Policy; (3) 24% projected growth in the number of new high school graduates from approximately 2.5 million in 1994 to approximately 3.1 million in 2004, according to the United States Department of Education ("DOE"); (4) the relatively small percentage of adults over the age of 25 who possess a bachelors degree (approximately 23% in 1995), according to the DOE; (5) an increasing number of high school graduates attending postsecondary institutions (65% in 1996 versus 53% in 1983), according to the DOE; (6) increasing international student enrollment at U.S. colleges and universities, reaching a record high of 454,000 in the 1995-1996 academic year, according to the Institute of International Education ("IIE"); (7) 75% increase in the number of U.S. students studying abroad from approximately 48,000 in the 1985-1986 academic year to approximately 89,000 in the 1995-96 academic year, according to the IIE; and (8) heightened recognition of the importance of postsecondary education to an individual's career progress and income potential. 2 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 life-long learning skills to compete successfully for employment opportunities. In AIU's new programs in business and information technology, students solve real-world problems in a collaborative, team-based environment, which simulates the work environment. In addition, the new program curriculum maximizes contact hours with faculty to accelerate the student learning process. Students can earn a degree at AIU much more rapidly than at a traditional university and begin his or her career sooner. By reducing the opportunity cost of foregone income while in school, AIU graduates can increase the return on their educational investment. BETTER QUALITY LEARNING ENVIRONMENT. AIU's new campuses are equipped with state-of-the-art technologies to enhance and accelerate student learning. They are "plug-and-play" environments, with thousands 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 at convenient times, can be completed at a fast 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 Abroad program recruits students at other U.S. universities to study at AIU's London and Dubai campuses. The Study in America program recruits international students to attend AIU's U.S. 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, low cost producer 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. OPEN NEW CAMPUSES EduTrek plans to add campuses in high-growth markets throughout the United States and worldwide. New locations are selected based on an analysis of a variety of factors: the number of IT employers and their educational reimbursement policies, the number of and projected growth in IT jobs, the number of university graduates, the population of working adults, the availability of similar programs offered by other institutions, and the timing of securing state licenses to do business in the area. Campuses consist of classrooms, team rooms and administrative facilities with full student and administrative services. EduTrek has opened or plans to open five new campuses in fiscal 1999: Dunwoody, north of Atlanta (opened in July 1998), Washington, D.C. (opened in July 1998), Miami, Los Angeles (new campus located in Playa del Rey), and a fifth site to be determined. In fiscal 2000, EduTrek plans to open an additional campus each quarter. To the extent possible, EduTrek will open campuses in markets where the Company currently has campuses in order to enhance operating efficiencies. DEVELOP OR ACQUIRE ADDITIONAL DEGREE PROGRAMS EduTrek plans to introduce programs in additional fields of study and at different degree levels. In fiscal 1998, AIU introduced two new programs, including the MIT (day and evening) and the BBA for 3 working adults, which had a total of 420 students enrolled on July 31, 1998. The average annual tuition revenue per student for these new programs is $16,800, as compared to $10,700 for students enrolled in AIU's traditional programs in Atlanta. The retention rate for students in new programs is in excess of 90%. EduTrek believes that the development and introduction of high quality new programs will result in higher retention rates and higher revenues and operating profits per student. EduTrek intends to launch three additional new programs for both full-time and working adult students in fiscal 1999 in five campus locations: BIT and BBA and MBA in International Business. INCREASING ENROLLMENT AT EXISTING CAMPUSES EduTrek plans to continue to implement an integrated marketing program which utilizes direct mail, print and radio advertising, direct contact with high school counselors and other referral sources and a public relations program to build enrollment of students from local markets. Management believes that the existing campuses will also benefit from greater brand awareness resulting from increased advertising for AIU's new programs. In addition, EduTrek plans to market to students from countries outside of Asia. In the Atlanta market, where this plan was first initiated, students from the state of Georgia increased 92% from 185 students to 355 students during the Summer II 1998 term. EduTrek will institute this program at all existing campuses in fiscal 1999. 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.
ACADEMIC DISCIPLINE DEGREE PROGRAMS (FALL 1997 ENROLLMENT, EXCEPT WHERE NOTED) DEGREE OFFERED (FALL 1997 ENROLLMENT, EXCEPT WHERE NOTED) - ------------------------------------------------ -------------- ------------------------------------------------ International Business (1,125 students) A.A., B.S. International Business (947) M.B.A. International Business* (48) B.B.A.** International Business (120) International Design (1,097 students) A.A., B.A. Fashion Design (173) Fashion Marketing (254) Fashion Design & Marketing (245) Interior Design (425) Multimedia Communication (586 students) A.A., B.A. Visual Communications (400) Video Production*** (186) Information Technology (300 students) M.I.T.**** Information Technology (300)
- ------------------------ * Offered only in London and Dubai ** On July 31, 1998; offered only in Dunwoody and Atlanta *** Offered only in Atlanta and London **** On July 31, 1998; offered only in Dunwoody SACS accredits all of AIU's degree programs. AIU's interior design program at the Atlanta and Los Angeles campuses is accredited by the Foundation for Interior Design Education Research ("FIDER"). INFORMATION TECHNOLOGY. AIU offers the MIT program for both full-time students during the day and working adults during 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-Registered Trademark-, Oracle-Registered Trademark-, Visual Basic-Registered Trademark-, JAVA-TM- plus network administration for Windows 95-TM-, Windows NT-TM-, network and 4 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 plans to introduce an undergraduate BIT program for full-time students and working adults in fiscal 1999. 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 a 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 plans to introduce the master's degree program in international business for working adults in fiscal 1999. 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. INTERNATIONAL DESIGN. The international design program educates students in the fields of fashion design and marketing and commercial and residential interior design. 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 retail and wholesale fashion industry and related businesses. The interior design programs provide students with a thorough understanding of the fundamentals and advanced principles of interior design. MULTIMEDIA COMMUNICATION. The field of multimedia communication includes advertising art, graphic design, photography, illustration, and video production. Taught by working professionals, the programs offer a balance of practical experience and theoretical concepts, providing a firm grounding in the business aspects of the multimedia communication industry. AMENDED ITI LICENSING AGREEMENT On March 30, 1998, EduTrek and ITI terminated their planned merger in favor of a revised licensing arrangement ("Second Agreement"), which expanded the original licensing agreement ("Georgia Agreement") previously entered into by the two companies on July 26, 1997. Under the Georgia Agreement, ITI licensed its Applied Information Technology ("AIT") program to EduTrek for use in the State of Georgia. The Georgia Agreement expires on July 31, 2007 and is renewable for one ten-year term. The AIT program is an intensive nine month postgraduate diploma program that trains students in the growing field of information technology management. The AIT program is specifically designed to convert university graduates from a broad range of disciplines with little or no background in information technology to become IT professionals. Under the Georgia Agreement, EduTrek paid a one-time initial license fee and continuing royalties of a percentage of net revenues derived from AIU's use of the AIT program curriculum. The Georgia Agreement stipulates that EduTrek is required, among other things, to: (i) pay ITI royalties based upon the higher of tuition levels charged to students enrolled in the program or minimum tuition levels specified in the Georgia Agreement; (ii) expend a percentage of revenues derived from the operation of the programs to market the AIT program; (iii) purchase from ITI certain courseware, equipment and other materials 5 and; (iv) make capital investments and expenditures necessary to upgrade the AIT program. The Georgia Agreement further grants EduTrek the right to utilize the AIT program in the cities of Los Angeles, London, and Dubai upon the payment of an additional license fee for each location and the execution of an additional license agreement substantially in the form of the Georgia Agreement for each such territory. ITI also agreed to negotiate exclusively with EduTrek for additional territories for a certain time period. ITI granted EduTrek a right of first refusal in the event that ITI receives an offer to license its AIT program in any such territories during the 24-month period beginning July 26, 1998. The Second Agreement granted EduTrek the right until July 26, 1999 to utilize the AIT program in the following additional territories upon the payment of a one-time license fee: San Francisco-Oakland-San Jose, CA CMSA; San Diego, CA MSA; Miami-Ft. Lauderdale FL, CMSA; Tampa-Saint Petersburg-Clearwater, FL MSA; Dallas-Ft. Worth, TX CMSA; Houston-Galveston-Brazoria, TX CMSA; Washington, D.C.-Baltimore, MD-VA-WV CMSA; and the United Arab Emirates (in addition to Dubai). In addition, ITI granted EduTrek a right of first refusal in the event that ITI receives an offer to license its AIT program in any of the above territories during the 24-month period beginning July 26, 1999. EduTrek was also granted the right to terminate the agreement without penalty under the following conditions: (i) in the event of a direct or indirect acquisition of 50.1% of more of ITI, (ii) upon 12 months written notice to ITI and payment to ITI of a termination fee of $500,000; or (iii) upon 24 months prior written notice to ITI. STUDY ABROAD PROGRAM The Study Abroad Program provides students from U.S. universities with the opportunity to earn academic credits toward their degree from their home university by studying at AIU's international campuses. The program was established through a marketing program combining direct contact with selected university professors and study abroad advisors with telemarketing support. AIU's study abroad personnel ensure that students enjoy a seamless transition to international college life, from selecting the appropriate courses to understanding and appreciating cultural differences. Since the program's inception in fall 1989, nearly 300 U.S. universities have "outsourced" international education to AIU. The U.S. institutions sending the highest number of students to AIU's London and Dubai campuses in the 1997 fall term were the following: Ohio State University University of Wisconsin Indiana University Ohio University Washington State University Philadelphia College of Textiles and Design University of Rhode Island University of Georgia Furman University State University of New York University of Iowa University of Massachusetts University of Arizona Student participation has increased approximately 30% annually since 1994. During fiscal 1998, nearly 640 students enrolled in AIU's Study Abroad program. TUITION AND FEES AIU's undergraduate tuition is priced between the tuition levels of non-profit private universities and comparatively lower tuition charged to resident students at public universities. The tuition is comparable to the tuition of public universities of non-resident and international students. The tuition ranges between $3,625 and $4,425 per academic term, or $10,875 and $13,275 for the full academic year, depending upon campus location. The tuition for AIU's MIT program is $24,950; all textbooks, registration fees, lab fees, Internet account, use of notebook computer, and use of electronic library resources are included in the tuition. The annual tuition for the BBA program for working adults is approximately $8,650. 6 AIU offers a number of institutional scholarships for selected students who meet specific eligibility requirements and range from $500 to full tuition scholarships. In fiscal 1998, institutional scholarships had a value of approximately $843,000, or 2.0% of EduTrek's net revenues. AIU bills students for tuition and instruction fees by term of instruction. AIU's refund policies meet the requirements of the DOE, SACS, and the state or country where the campus is located. Generally, if a student drops out during the first 60% of the term, AIU will refund a pro-rated portion of the tuition. After a student has attended 60% of the term, AIU is not obligated to refund and will retain 100% of tuition and fees. Historically, AIU has increased tuition and fees without consumer resistance. AIU increased tuition and fees by approximately 5% for the 1997-98 academic year and did the same in the 1998-99 academic year. EduTrek anticipates that tuition increases will 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 teaching excellence, academic background, prior education, and 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 also 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, faculty are trained in collaborative learning techniques so that student learning in the team environment is optimized. AIU faculty members are typically working professionals who are experts in their fields, rather than professional educators. For this reason, management believes that AIU faculty provide students with a practical education that can be applied directly to their chosen careers. Most faculty members are employed on a contractual basis and are compensated based on the number of courses taught. All IT faculty members are employed on a full-time basis. Low student-teacher ratios (approximately 14:1, 15:1, 14:1, and 18:1 in fall 1997 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 MIT program, students rotate from classroom instruction with 24 students to team problem-solving sessions with six students. Students and administrative staff evaluate faculty members each academic term on the basis of teaching abilities and demonstrated technical knowledge. STUDENT RECRUITMENT To generate interest in AIU's academic programs, EduTrek engages in a broad range of 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 on the Internet World Wide Web (http//:www.edutrek.com, http://www.aiuniv.edu) that allow electronic access to company and program information. These Web sites are accessible from major online networks and Internet service providers. AIU advertising is controlled centrally and is targeted at local markets where the campuses are located, at U.S. universities (for the Study Abroad program), and at 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 improve AIU's marketing efforts continually. 7 EduTrek employs over 40 admissions representatives who make visits and presentations at various organizations and who follow up on leads generated by EduTrek's advertising 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, determine their suitability for specific programs, and administer any required tests. Recruiting policies and processes are established centrally but implemented at the campus level through a director of admissions. AIU also employs recruiting personnel who recruit students at high schools, community colleges, universities, embassies, college fairs, and corporations. ADMISSIONS REQUIREMENTS To gain admission to AIU's undergraduate programs, students must generally have a high school diploma or General Equivalency Diploma ("G.E.D."), demonstrate a satisfactory level of English language competence, satisfy certain minimum grade point average requirements, and submit two letters of reference. Prospective students are interviewed to assess their qualifications, their interest in the degree programs, and their commitment to education. To gain admission to AIU's graduate programs, students generally must have an undergraduate degree from a regionally accredited college or university and satisfy minimum grade point average, work experience, and employment requirements. 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. Tutoring is also encouraged for those students experiencing academic difficulties. 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. Based on the information received from recent alumni and employers, 83% of U.S. AIU graduates in 1997, excluding those who continued their education, obtained employment within approximately six months of graduation, as compared to 71% in 1996. The approximate average starting salary of 1997 AIU bachelor's degree graduates was $27,900, as compared to $24,000 in 1996. To increase placement rates and starting salaries, AIU increased its placement staff in fiscal 1998. The placement personnel assist students in developing individualized career plans, selecting classes to further these plans, obtaining internships and forming job search strategies. Students also receive instruction during their program of study on basic job search skills. COMPETITION The higher education market is highly fragmented and competitive with no private or public institution enjoying a significant market share. In the U.S. and London, EduTrek competes primarily with four-year and two-year degree granting public and private regionally accredited colleges and universities. Many of these institutions have greater financial resources than EduTrek. The American University 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 in the United Kingdom and The Persian Gulf region are government sponsored and charge a lower tuition than AIU. 8 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 required 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 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 certification 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. The accreditation of AIU provides significant advantages over most other for-profit educational institutions. 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 DOE 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 DOE standards are recognized as the arbiters of the 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 DOE. In addition, AIU's interior design programs in Atlanta 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 DOE 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 three 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 have been placed on reporting status by their respective accrediting agencies. 9 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. Less than 1% of the international students enrolled at AIU receive funding from their home government. 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 DOE, and (iii) certified as an eligible institution by the DOE. 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. NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION While the 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. PELL. The Federal Pell Grant ("Pell") program is the principle means by which the DOE 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 $2,700 per year. Amounts received by students enrolled in AIU in fiscal 1998 under the Pell program equaled approximately $800,000 or 1.9% 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 maximum amount of FSEOG grants may be increased to as much as $4,400 for a student participating in a program of study abroad that is approved for credit by the student's home educational institution. The availability of FSEOG awards, however, 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 10 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. In fiscal 1998, the Company's institutional match was approximately $18,000. Amounts received by students enrolled in AIU under the FSEOG program in fiscal 1998 equaled approximately $111,000 or 0.3% of the Company's net revenues. FEDERAL FAMILY EDUCATION LOANS AND FEDERAL DIRECT STUDENT LOANS. The 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 the participation in both programs is permitted by the DOE), 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 Stafford Loan, the interest accruing on the loans must be paid by the student. In addition, independent students may qualify for an additional $4,000 to $10,000 a year in unsubsidized Stafford loans. In fiscal 1998, AIU participated in both the FFEL and Direct Loan programs. FFEL and Direct Stafford loans amounted to approximately $2.6 million and $6.4 million, respectively, or approximately 6.2% and 15.3%, respectively, of the Company's net revenues in fiscal 1998. 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. FFEL PLUS loans and Direct PLUS loans amounted to approximately $762,000 and $590,000, respectively, or approximately 1.8% and 1.4%, respectively, of the Company's net revenues in fiscal 1998. 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 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. In fiscal 1998, FWS funds amounted to approximately $54,000 or 0.1% of the Company's net revenues. 11 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 a participant in the Direct Loan program, students are able to obtain loans directly from the federal government. The DOE currently guarantees over 85% of all federally guaranteed student loans made to students enrolled at AIU. The Company believes that other guaranty agencies would be willing to guarantee loans to AIU's students if the DOE ceased guaranteeing those loans or reduced the volume of those loans guaranteed. FOREIGN SOURCES OF FINANCIAL AID In fiscal 1998, 78 international students, or less than 1% of total enrollment, received financial assistance from their respective foreign governments in the form of either loans or grants. The foreign government providing loans to AIU's students was Sweden and the foreign governments awarding grants to AIU's students were Bahrain, Botswana, Libya, Qatar, Saudi Arabia, Sweden, Zimbabwe, and the United Arab Emirates. OTHER FINANCIAL ASSISTANCE SOURCES Students at AIU participate in state grant programs, including most recently Georgia's HOPE Scholarship and Tuition Equalization Grant programs. In fiscal 1998, approximately $409,000 or 1.0% 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 DOE (vocational rehabilitation funding). In fiscal 1998, 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. In fiscal 1998, institutional scholarships had a value equal to approximately $843,000 or 2.0% 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 DOE 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 DOE as an "eligible institution" to participate in Title IV Programs. Certification as an "eligible institution" 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 DOE. 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 four years. A school must apply for a renewal of its 12 certification prior to its expiration, and must demonstrate compliance with the eligibility requirements in its application. Under certain circumstances, the DOE 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 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 DOE may impose such further conditions on a provisionally certified institution's eligibility to continue participating in the Title IV Programs as the DOE deems necessary. In connection with the Company's acquisition of American European in October 1996 which resulted in a change of control of AIU, the Company has been provisionally certified to participate in Title IV Programs. 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 DOE 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 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 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 DOE determines that such institution has lost its eligibility and for the two subsequent federal fiscal years. In addition, an institution whose FFEL 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 cohort default rates involves the collection of data from many non-governmental agencies (i.e., lenders and private guarantors), as well as the DOE, the HEA provides a formal process for the review and appeal of the accuracy of FFEL cohort default rates before the DOE takes any action against an institution based on its FFEL cohort default rates. An institution may continue to participate in the FFEL and Direct Loan programs during the pendency of the appeal process. AIU has had FFEL cohort default rates of less than 25% for three consecutive federal fiscal years. AIU had a published 1995 FFEL cohort default rate and a 1994 rate below 25%. For federal fiscal 1993 and 1994, the FFEL cohort default rate for all borrowers at AIU was 14.3% and 14.0%, respectively. The average FFEL cohort default rate for all proprietary institutions for federal fiscal 1993 and 1994 was 26.5% and 21.1%, respectively. For federal fiscal year 1995, the preliminary FFEL cohort default rate for all borrowers at AIU was 18.5%. Preliminary cohort default rates are subject to revision by the DOE based on information that schools and guaranty agencies identify and submit to the DOE for review, in order to correct errors. Any such adjustment will be made by the DOE at the time that final rates are officially published. In connection with AIU's preliminary default rate issued for the federal fiscal year 1995, AIU received a preliminary default rate of 18.5%. However, after submitting corrections, AIU's default rate was adjusted to a final rate of 16.7%. Accordingly, AIU has submitted such corrections for its 1996 preliminary cohort default rate and anticipates that the DOE will reduce AIU's cohort default rate from a preliminary 13 rate of 14.1% to a final rate of 13.7%, although there can be no assurance that the DOE will agree with the corrections submitted by AIU with regard to its 1996 preliminary cohort default rate. The Company understands that the DOE anticipates issuing official 1996 FFEL cohort default rates in October 1998, and the Company expects preliminary 1997 FFEL cohort default rates to be issued in early calendar year 1999. If an institution's FFEL 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 four 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 DOE and may be subject to summary adverse action if it commits violations of Title IV Program requirements. To the Company's knowledge, the DOE reviews an institution's compliance with the cohort default rate thresholds only when that school is otherwise subject to a DOE certification review. AIU has not had a FFEL 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, the DOE has not requested any future funding for SPREs, and the United States House of Representatives has passed legislation repealing SPRE authority. Part two of the Program Integrity Triad 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 examinations in such areas as financial responsibility and timeliness of student refunds. The Program Integrity Triad provisions also require each accrediting agency recognized by the DOE 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 DOE for a period of more than five years. SACS, AIU's primary accrediting agency, has been reviewed by the DOE under the Program Integrity Triad provisions and reapproved for continued recognition by the DOE. Part three of the Program Integrity Triad tightened the standards to be applied by the DOE in evaluating the financial responsibility and administrative capability of institutions participating in Title IV Programs, and mandated that the DOE periodically review the eligibility and certification to participate in Title IV Programs of every such eligible institution. By law, all institutions are required to undergo such a recertification review by the DOE by 1997 and every four years thereafter. Under these standards, AIU would be evaluated by the DOE 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 DOE's quadrennial recertification process and also annually as each institution submits its audited financial statements to the DOE. In November 1997, the DOE published new regulations regarding financial responsibility, which are effective on July 1, 1998. The new regulations take effect for audited financial statements submitted to the DOE on or after July 1, 1998 and will apply to the Company'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 14 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 DOE 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 (3) years, subject to more rigorous financial aid disbursement and financial monitoring requirements by the DOE. Based on the Company's interpretation of the application of these new standards to the Company's financial statements for the fiscal year ended May 31, 1998, the Company's calculations result in a composite score of 1.5 on a consolidated basis. An institution that is determined by the DOE 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 DOE 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 DOE has interpreted this surety condition to require the posting of an irrevocable letter of credit in favor of the DOE. 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 DOE equal to 25% of the Title IV Program refunds that the institution was required to make for the previous year. During the past three years AIU has made all Title IV Program refunds on a timely basis. 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 DOE to determine that the school lacks the requisite administrative capability and may subject the school to provisional certification 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 DOE 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 15 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." Pending recertification, the DOE suspends 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. The Company's expansion plans are 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 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 would 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 DOE 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 DOE has granted AIU provisional certification to participate in Title IV Programs which provisional certification will expire in December 1999. Because the acquisition of American European was found to be an excluded transaction under the Regulations, however, AIU's Title IV Program funding was not suspended during the DOE'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 DOE'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. THE "85/15 RULE." Under a provision of the HEA commonly referred to as the "85/15 Rule," a proprietary institution, such as AIU, would cease being eligible to participate in Title IV Programs if, on a cash accounting basis, more than 85% of its revenues for the prior fiscal year was derived from Title IV Programs. Any school that violates the 85/15 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 27% of its revenues from Title IV Programs for any fiscal year, and during fiscal 1998, approximately 27% of AIU's revenues were derived from Title IV 16 Programs. The Company regularly monitors compliance with this requirement in order to minimize the risk that AIU would derive more than 85% of its revenues from Title IV Programs for any fiscal year. If AIU appears likely to approach the 85% 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 DOE 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"). The DOE has not provided specific regulations with respect to this requirement. If the DOE 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. In addition, because AIU's campuses located in London and Dubai are operated under 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 DOE. The Company believes that AIU's campuses in Atlanta, Los Angeles, London, Dubai, and the District of Columbia are in substantial compliance with state authorizing and licensure laws. CALIFORNIA. In January 1991, the State of California adopted legislation that requires private, postsecondary educational institutions to meet certain fiscal tests in order to continue operating in the state. These fiscal 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. For the year ended May 31, 1998, the AIU's Los Angeles campus had satisfied each of these tests. The California Council also has discretion under this statute to allow an educational institution to continue operating if it does not satisfy the fiscal 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-described tests, the Company has the opportunity to demonstrate to the California Council its financial strength and ability to continue to operate. In connection with granting authority for 17 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 Council conducted a visit to AIU's campus in Los Angeles in June 1996 and recently issued its report, granting approval for continued degree-granting operation for the maximum four-year period. GEORGIA. Until May 1, 1997 AIU's campus in Atlanta was exempt from the regulatory oversight of the State of Georgia. For fiscal 1998, AIU agreed, however, to 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, for-profit institutions such as AIU are reviewed by the Georgia Nonpublic Postsecondary Education Commission ("NPEC"). 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 recently determined that AIU satisfied its requirements and issued a certificate of authorization for the period of May 1, 1997 through April 30, 1998. The Company must seek renewal of this authorization on a yearly basis and is in the process of submitting its annual report for such authorization. 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 will conduct a visit to AIU's campus in the District of Columbia in the Fall of 1999. 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 Florida 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 is currently in the process of establishing its Florida location and working toward achievement of the next approval stage. AIU is presently authorized to advertised, admit students, and operate an institution of higher education in Florida. 18 EXECUTIVE OFFICERS The following table sets forth information concerning the Company's executive officers.
NAME AGE POSITION - ---------------------------------------------- --- ------------------------------------------------------------ Steve Bostic.................................. 55 Chairman of the Board and Chief Executive Officer Stephen G. Franklin, Sr....................... 51 President, Chief Academic Officer and Director Donald J. Blankers............................ 59 Chief Financial Officer Barbara S. Butterfield........................ 58 Senior Vice President, Human Resources Douglas C. Chait.............................. 34 Vice President, Corporate Development and Secretary Eric R. Fliegel............................... 36 Chief Information Officer
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. and, 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. Mr. Bostic has more than ten years of experience in the educational arena. STEPHEN G. FRANKLIN, SR. has served as the President of the Company since July 1997, Chief Academic Officer since April 1997 and as a member of the Board of Directors of the Company since June 1997. Prior to his appointment as President, Dr. Franklin served as Executive Vice President of the Company from April to July 1997. Since October 1996, Franklin has also served on the AIU's Governing Board. Prior to joining the Company, Dr. Franklin served as the Associate Dean of Executive Education at the Goizueta Business School of Emory University from 1995 to 1997 where he developed and delivered executive education programs for companies. Prior to serving as Associate Dean, Dr. Franklin was a tenured professor of Business Administration of the Goizueta Business School of Emory University from 1978 to 1984. At Emory, Dr. Franklin focused his academic research on change management, team-based anticipating learning strategies, and entrepreneurship in organizations and has co-authored two management textbooks. Dr. Franklin established and, from March 1988 to 1995, owned Global Access Learning, Inc., an international executive education and management development firm specializing in developing custom management programs for global companies. Prior to that time, from 1984 to 1988, Dr. Franklin was the Executive Vice President and principal shareholder in Financial Service Corporation, an independent financial planning broker-dealer. DONALD J. BLANKERS has served as the Chief Financial Officer of the Company since September 1996 and is a member of the American Institute of Certified Public Accountants and Financial Executives Institute. Prior to joining the Company, from 1995 to 1996, Mr. Blankers served as Acting Chief Financial Officer for Alcott Staff Leasing, Inc. From 1994 to 1995, Mr. Blankers was a consultant for CFO Consulting and, from 1993 to 1994, Mr. Blankers served as Vice President and Chief Financial Office for Cryolife, Inc. From 1991 to 1993, Mr. Blankers served as an independent consultant and, from 1983 to 1991, Mr. Blankers served in various capacities with National Data Corporation, including Senior Vice President and Chief Financial Officer from 1987 to 1991 and Vice President, Controller, and Treasurer from 1983 to 1987. BARBARA S. BUTTERFIELD is the Senior Vice President of Human Resources, a position she has held since March 1997. Prior to joining the Company, from 1991 to 1997, Dr. Butterfield was the Vice President of Human Resources and Vice President of Faculty and Staff Services at Stanford University, Palo Alto, 19 California where she provided long-range planning, analysis and strategies in such areas as risk management, environmental health and safety, faculty/staff housing, and human resources. Prior to Stanford University, Dr. Butterfield was the Vice President of Human Resources at the University of Pennsylvania from 1987 to 1991. From 1986 to 1987, Dr. Butterfield was the Director of Human Resources Administration at Duke University and from 1983 to 1986, was the Director of Personnel Administration at Michigan State University. DOUGLAS C. CHAIT has served as the Vice President, Corporate Development, and Secretary since October 1996. Prior to joining the Company, Mr. Chait was the Director of Corporate Development for EduTrek Systems, Inc. from May 1994 to October 1996 where he was responsible for identifying and pursuing joint venture and acquisition opportunities in the corporate training and education industries. From September 1992 to May 1994, Mr. Chait attended the Goizueta Business School of Emory University where he graduated with an M.B.A. in finance and strategy. ERIC R. FLIEGEL has served as the Chief Information Officer since April 1997. Prior to joining the Company, from 1995 to 1997, Mr. Fliegel served as the Executive Director of Information Services for Emory Healthcare where he was responsible for providing information services to such Emory Healthcare entities as Emory University Hospital, Crawford Long Hospital, and the Emory Clinic. From 1988 to 1995, Mr. Fliegel served as the Assistant Dean of Information Services for the Goizueta Business School of Emory University where he managed the school's information systems, and from January 1981 to April 1988, Mr. Fliegel was the Associate Director of Computing for the William E. Simon Graduate School of Business Administration. 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 and printers and the latest software available, including programs for computer-aided design. The Library Resource Center on each campus includes audio visual 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 May 31, 1998:
APPROXIMATE LOCATION SQUARE FOOTAGE EXPIRATION - ----------------------------------------------------------------------- --------------- ------------------------ Atlanta, GA AIU.................................................................. 60,800 January 31, 2009 AIU.................................................................. 10,400 December 31, 1998 Headquarters......................................................... 18,400 December 31, 1999 Corporate Education.................................................. 2,200 March 31, 2001 Los Angeles, California............................................ 32,900 From September 30, 1998 to May 31, 1999 London, England.................................................... 46,000 November 27, 2005 Dubai, United Arab Emirates........................................ 34,300 Leased by MEC
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 zero to five year renewal options. The Company also leases facilities for student parking and housing. 20 The Company entered into a 138-month lease to begin in July of 1998 for a 75,700 square foot building in the North Atlanta area for its Dunwoody campus. The Company also entered into a 127-month lease to begin July of 1998 for a 32,600 square foot space in the District of Columbia for a new campus. 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. The Company believes that it can acquire additional capacity on acceptable terms. 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 May 31, 1998. 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Class A Common Stock began trading on the Nasdaq National Market ("Nasdaq") under the symbol "EDUT" during the second quarter of fiscal year 1998 on September 24, 1997. Prior to that time, the Company's Class A Common Stock was not listed or traded on any organized market. The Company's Class B Common Stock, which does not trade on any market and which is held entirely by the Company's 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 sale prices of the Company's Class A Common Stock, as reported by Nasdaq:
YEAR ENDED MAY 31, 1998 -------------------- HIGH LOW --------- --------- Second Quarter (September 24, 1997 through November 30, 1997).......................... 28.75 18.00 Third Quarter ended February 28, 1998.................................................. 26.00 20.75 Fourth Quarter ended May 31, 1998...................................................... 28.25 18.50
STOCKHOLDERS According to the records of the Company's transfer agent, the Company had 47 and 3 holders of record of Class A and Class B Common Stock, respectively, at July 31, 1998. The Company believes that a substantially larger number of beneficial owners hold such shares in depository or nominee form. DIVIDENDS AND DISTRIBUTIONS 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 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. SALES OF UNREGISTERED SECURITIES On June 17, 1997, September 24, 1997, and December 3, 1997, following the exercise of warrants to purchase shares of Class A Common Stock by three holders, the Company issued 257,110, 444,318, and 177,723 shares, respectively, of Class A Common Stock for purchase prices of $359.95, $622.05, and $248.81, respectively. The issuances of the securities described above were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended, as a transaction by an issuer not involving a public offering. The securities were acquired by the purchasers for investment and with no view toward the resale or distribution thereof. The purchasers had a preexisting relationship with the Company or its founder, the offers and sales were made without any public solicitation, and the stock certificates bear restrictive legends. No underwriter was involved in the transaction and no commissions were paid. 22 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, PERCENTAGE, AND ENROLLMENT DATA)
THE COMPANY(1) --------------------- THE PREDECESSOR(1)(2) ------------------------------------------------ FISCAL YEAR ENDED MAY PERIOD FROM 31, JUNE 1, 1996 FISCAL YEAR ENDED MAY 31, --------------------- THROUGH ------------------------------- 1998 1997 OCTOBER 8, 1996 1996 1995 1994 --------- ---------- --------------- --------- --------- --------- STATEMENT OF OPERATIONS DATA(3): Net revenues............................. $ 41,914 $ 23,590 $ 6,189 $ 26,493 $ 23,696 $ 20,654 Cost of education and facilities....... 16,927 9,014 3,256 11,144 10,051 8,611 Selling and promotional expenses....... 6,321 2,428 1,335 3,614 3,083 3,165 General and administrative expenses.... 10,516 5,468 2,739 6,677 6,115 6,264 Acquisition costs...................... 487 -- -- -- -- -- Rents paid to majority shareholder..... -- -- 49 150 145 146 Amortization of goodwill............... 1,008 696 -- -- -- -- --------- ---------- ------- --------- --------- --------- Total costs and expenses............... 35,259 17,606 7,379 21,585 19,394 18,186 --------- ---------- ------- --------- --------- --------- Income (loss) from campus operations..... 6,655 5,984 (1,190) 4,908 4,302 2,468 Income (loss) from management agreement.............................. 23 479 (21) 127 -- -- --------- ---------- ------- --------- --------- --------- Income (loss) from operations............ 6,678 6,463 (1,211) 5,035 4,302 2,468 Interest expense......................... 1,328 2,499 258 730 607 440 Interest income--shareholder notes....... -- -- 98 361 153 183 Other income--net........................ 1,539 20 66 72 25 483 --------- ---------- ------- --------- --------- --------- Income (loss) before income taxes, minority interest, and extraordinary item................................... 6,889 3,984 (1,305) 4,738 3,873 2,694 Provision for income taxes(4)............ (2,581) (1,981) -- (107) (124) (148) --------- ---------- ------- --------- --------- --------- Income (loss) before minority interest and extraordinary item................. 4,308 2,003 (1,305) 4,631 3,749 2,546 Minority interest in earnings of American University in Dubai.................... (1,445) -- -- -- -- -- --------- ---------- ------- --------- --------- --------- Income (loss) before extraordinary item................................... 2,863 2,003 (1,305) 4,631 3,749 2,546 Extraordinary loss less applicable income taxes.................................. (960) -- -- -- -- -- --------- ---------- ------- --------- --------- --------- Net income............................... $ 1,903 $ 2,003 $ (1,305) $ 4,631 $ 3,749 $ 2,546 --------- ---------- ------- --------- --------- --------- --------- ---------- ------- --------- --------- ---------
23
THE COMPANY(1) --------------------- THE PREDECESSOR(1)(2) ------------------------------------------------ FISCAL YEAR ENDED MAY PERIOD FROM 31, JUNE 1, 1996 FISCAL YEAR ENDED MAY 31, --------------------- THROUGH ------------------------------- 1998 1997 OCTOBER 8, 1996 1996 1995 1994 --------- ---------- --------------- --------- --------- --------- Basic income per share before extraordinary item(5).................. $ 0.30 $ 0.29 Basic income per share(5)................ $ 0.20 $ 0.29 Diluted income per share before extraordinary item(5).................. $ 0.28 $ 0.26 Diluted income per share(5).............. $ 0.19 $ 0.26 Average shares outstanding............... 9,527 7,000 Dilutive effect of stock options and warrants............................... 681 569 --------- ---------- Average shares outstanding assuming dilution............................... 10,208 7,569 PRO FORMA DATA: Income before income taxes, as reported............................... $ (1,305) $ 4,738 $ 3,873 $ 2,694 Pro forma provision for income taxes(6)............................... 509 1,848 1,510 1,051 ------- --------- --------- --------- Pro forma net income..................... $ (796) $ 2,890 $ 2,363 $ 1,643 ------- --------- --------- --------- ------- --------- --------- --------- SELECTED OPERATING DATA: Net cash provided by operating activities............................. 2,686 1,356 1,413 5,798 5,522 4,375 Net cash provided by (used in) investing activities............................. (2,045) (31,428) (288) (2,662) (1,507) 725 Net cash provided by (used in) financing activities............................. 4,510 30,780 (1,197) (3,442) (3,916) (5,030) AIU fall term enrollment(7).............. 3,045 2,822 2,822 2,441 2,200 2,000 BALANCE SHEET DATA: Working capital deficiency............... (281) (9,772) (8,696) (8,355) (8,467) Total assets............................. 58,285 47,671 7,253 6,682 7,190 Long-term debt, including current portion................................ 1,241 30,075 4,756 2,874 2,333 Shareholders' equity..................... 44,294 7,877 (7,287) (6,166) (4,877)
- ------------------------ (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, since its formation in 1992, EduTrek Systems has 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 24 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. (3) The Company's results of operations are affected by AIU's level of enrollment which ranges from the highest level during the Fall term (October-December) to the lowest level during the Summer terms (June-September). See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality." (4) As a result of its election to be treated as an S Corporation for income tax purposes, the Predecessor has not been 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. (5) 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. (6) As a result of its election to be treated as an S Corporation for income tax purposes, the Predecessor has not been 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. (7) 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 and Predecessor should be read in conjunction with the "Selected Consolidated Financial Data" and the Company's and Predecessor's Consolidated Financial Statements and Notes thereto. Unless otherwise specified, any reference to a "fiscal year" is to a fiscal year ended May 31. OVERVIEW EduTrek acquired AIU (formerly The American College) through its acquisition of the American European Corporation (the "Predecessor") on October 8, 1996. EduTrek's revenues have increased 102% to $41.9 million for the fiscal year 1998 from $20.7 million for the fiscal year 1994. The number of students attending AIU has increased 54.5% to 2,920 students at May 31, 1998 from 1,890 students at May 31, 1994. 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 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 with respect to their contribution to net revenues. The average term 25 enrollment levels for Winter, Spring and Summer terms are approximately 95%, 90% and 85%, respectively, of the Fall benchmark. The following table correlates EduTrek's fiscal quarters to AIU's academic terms:
FISCAL QUARTERS ACADEMIC TERMS - ----------------------------------- -------------------------------------------------- First (June-August) Summer I and one-half of Summer II Second (September-November) Last half of Summer II and two-thirds of Fall Third (December-February) Last third of Fall and four-fifths of Winter Fourth (March-May) Last fifth of Winter and all of Spring
AIU's MIT program has four enrollment periods per year: January, April, July and October. The full-time day program is divided into four 10-week terms, and the evening program is divided into seven 10-week terms. Enrollment periods for AIU's BBA evening program occur approximately once per month. Net revenues from this program 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, and historically over 80% of funds are received in advance of the term's start date. Of the balance, approximately 40% is collected through financial aid; the remainder is collected under payment schedules established on a student by student basis. Uncollectible receivables are written off once a year and have not exceeded 0.75% of annual net revenues during each of the fiscal years in the three-year period ending May 31, 1998. Each of AIU's campuses is 100% controlled by EduTrek except the campus in Dubai, which is 50.1% 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 49.9% of net operating cash flow from that campus. In exchange for its management services, EduTrek receives 50.1% of the net operating cash flow. As tuition is received, it is recorded as deferred tuition income, a current liability. During the term, the applicable portion of deferred tuition income is recognized as revenue each month based on the aggregate number of credit hours taken by students during the term. Deferred tuition income historically has been at its highest level at the end of September before the start of the academic year and Fall term for two reasons: (1) the Fall term represents the highest level of enrollment 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 consist of cost of education and facilities, selling and promotional expenses, general and administrative expenses and, effective with the acquisition of the Predecessor in October 1996, 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 and their related costs. The costs of advertising and the production of marketing materials are also included. General and administrative expenses include salaries of personnel engaged in general administration, accounting, financial aid, personnel and compliance at the campus level, all corporate personnel and their related expenses and the net costs of EduTrek's airplane, which was sold in the fourth quarter of fiscal 1998. These expenses also include depreciation and amortization of related fixed assets and deferred costs as well as benefits relating to personnel at the campus and corporate levels. 26 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 state income taxes. Accordingly, the provision for income taxes for the Predecessor includes income taxes only for those jurisdictions that do not recognize S corporation status. Since its inception in July 1996, EduTrek has been a C corporation for income tax purposes. EduTrek's income tax provision is provided at rates approximating statutory federal and state rates (approximately 40%). 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 -------------------- THE PREDECESSOR ---------------------------------- FISCAL YEAR ENDED FISCAL YEAR PERIOD FROM JUNE MAY 31, ENDED MAY 31, 1, 1996 THROUGH -------------------- 1996 OCTOBER 8, 1996 1997 1998 --------------- ----------------- --------- --------- STATEMENT OF OPERATIONS DATA: Net revenues.................................................... 100.0% 100.0% 100.0% 100.0% Cost of education and facilities................................ 42.1 52.6 38.2 40.4 Selling and promotional expenses................................ 13.6 21.6 10.3 15.1 General and administrative expenses............................. 25.2 44.3 23.2 25.1 Acquisition costs............................................... 0.0 0.0 0.0 1.2 Rents paid to majority shareholder.............................. 0.6 0.8 0.0 0.0 Amortization of goodwill........................................ 0.0 0.0 2.9 2.4 ----- ----- --------- --------- Income (loss) from campus operations............................ 18.5 (19.3) 25.3 15.8 Income (loss) from management agreement......................... 0.5 (0.3) 2.0 0.1 ----- ----- --------- --------- Income (loss) from operations................................... 19.0 (19.6) 27.3 15.9 Interest expense................................................ 2.8 4.2 10.6 3.2 Interest income--shareholder notes.............................. 1.4 1.6 0.0 0.0 Other income--net............................................... 0.3 1.1 0.1 3.7 ----- ----- --------- --------- Income (loss) before income taxes, minority interest, and extraordinary item............................................ 17.9 (21.1) 16.8 16.4 Provision for income taxes...................................... (0.4) 0.0 (8.4) (6.2) Income (loss) before minority interest and extraordinary item... 17.5 (21.1) (8.4) 10.2 Minority interest in earnings of American University in Dubai... 0 0 0 (3.4) Income (loss) before extraordinary item......................... 17.5 (21.1) 8.4 6.8 Extraordinary loss less applicable income Taxes................. 0.0 0.0 0.0 (2.3) ----- ----- --------- --------- Net income (loss)............................................... 17.5% (21.1)% 8.4% 4.5% ----- ----- --------- --------- ----- ----- --------- ---------
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. 27 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 the American University in Dubai ("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 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 Masters in Information Technology and the Bachelors 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 28 $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 and 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. YEAR ENDED MAY 31, 1997 (COMPANY) COMPARED TO EIGHT MONTHS ENDED MAY 31, 1996 (UNAUDITED) (PREDECESSOR) The Company was organized on July 1, 1996 for the purpose of acquiring the Predecessor and all of the capital stock of EduTrek Systems. 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 eleven month period from July 1, 1996 through May 31, 1997 to the Predecessor's results for the eight month period from October 8, 1995 through May 31, 1996 which, because the operations of the Company were de minimis prior to October 1996, essentially presents a comparison of the operations of the Company for the eight month period ended May 31, 1997 to the comparable eight months of the prior year. The results of the Company during the period from July 1996 through October 1996 related primarily to the Company's acquisition activities, were non-operational in nature and immaterial in amount. The period from October through May is comprised of AIU's Fall, Winter, and Spring terms. NET REVENUES. Net revenues increased approximately $2.7 million or 13.0% from $20.9 million for the eight months ended May 31, 1996 (the "1996 period") to $23.6 million for the eleven months ended May 31, 1997 (the "1997 period"). Of this 13.0% increase, 6.2% or approximately $1.3 million was due to an increase in student enrollment and 6.8% or approximately $1.4 million was the result of an effective price increase. COST OF EDUCATION AND FACILITIES. Cost of education and facilities increased approximately $1.4 million or 18.1% from $7.6 million in the 1996 period to $9.0 million in the 1997 period. Education costs increased approximately $946,000 or 21.2% from $4.5 million in the 1996 period to $5.4 million in the 1997 period due to salary and other cost increases. Facility costs increased approximately $433,000 or 13.6% from $3.2 million in the 1996 period to $3.6 million in the 1997 period due to rent increases and an increase in the number of housing students. Cost of education and facilities increased as a percentage of net revenues from 36.6% in the 1996 period to 38.2% in the 1997 period. SELLING AND PROMOTIONAL EXPENSES. Selling and promotional expenses remained constant at approximately $2.4 million in the 1997 period. Decreases in advertising of approximately $267,000 were offset by increases in salary and other selling and promotional expenses. As a percentage of net revenues, selling and promotional expenses decreased from 11.4% in the 1996 period to 10.3% in the 1997 period. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased approximately $881,000 or 19.2% from $4.6 million in the 1996 period to $5.5 million in the 1997 period. The increase was due to costs incurred prior to the acquisition of the Predecessor and to additions of personnel at the home office after the acquisition, which expenses were offset in part by a reduction in costs relating to assets purchased by one of the selling shareholders in connection with the acquisition of The American College. As a percentage of net revenues, general and administrative expenses increased from 22.0% in the 1996 period to 23.2% in the 1997 period. 29 AMORTIZATION OF GOODWILL. Amortization expenses, principally goodwill expenses, of 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 increased approximately $393,000 or 457.0% from its start-up level of approximately $86,000 in the 1996 period to approximately $479,000 in the 1997 period. INTEREST EXPENSE. Interest expense increased approximately $2.2 million or 753.4% from approximately $292,000 in the 1996 period to $2.5 million in the 1997 period due to an increase in borrowing associated with the acquisition of the Predecessor in October 1996. OTHER INCOME--NET. Other income decreased approximately $198,000 or 91.2% from approximately $217,000 in the 1996 period to approximately $19,000 in the 1997 period due to a decrease in interest income. QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited quarterly financial data for each of the eight fiscal quarters in the two years ended May 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. The operating results for any quarter are not necessarily indicative of the results for any future period. QUARTERLY DATA (IN THOUSANDS EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED MAY 31, 1997 FISCAL YEAR ENDED MAY 31, 1998 -------------------------------------------------- -------------------------------------------- 1ST QTR(1) 2ND QTR(1) 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR ----------- ----------- ----------- ----------- --------- ----------- --------- --------- Net revenues..................... $ 4,842 $ 6,718 $ 8,803 $ 9,416 $ 6,228 $ 9,312 $ 12,701 $ 13,673 Income (loss) from operations.... (284) 371 2,699 2,466 (526) 768 3,115 3,321 Income (loss) before extraordinary item............. (333) (714) 935 810 (962) 214 1,778 1,833 Net income (loss)................ $ (333) $ (714) $ 935 $ 810 $ (962) $ (746) $ 1,778 $ 1,833 Basic income (loss) per share before extraordinary item(2)... $ 0.13 $ 0.12 $ (0.13) $ 0.02 $ 0.17 $ 0.17 Basic income (loss) per share(2)....................... $ 0.13 $ 0.12 $ (0.13) $ (0.08) $ 0.17 $ 0.17 Diluted income (loss) per share before extraordinary item(2)... $ 0.12 $ 0.10 N/A $ 0.02 $ 0.16 $ 0.17 Diluted income (loss) per share(2)....................... $ 0.12 $ 0.10 N/A $ (0.07) $ 0.16 $ 0.17
- ------------------------ (1) Includes financial data of the Predecessor from June 1, 1996 through October 8, 1996, the date the Company acquired the Predecessor. (2) Income per share information is not presented for first and second quarter 1997 as the amounts are not considered meaningful due to the minimal number of outstanding shares and the S Corporation election of the Predecessor. 30 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, the Company's first and second fiscal quarter enrollments and related revenues generally are lower than the third and fourth fiscal quarters due to traditionally lower student enrollment levels in the summer terms (the first fiscal quarter is comprised of the Summer I term and one-half of the Summer II term; the second fiscal quarter is comprised of one-half of the Summer II term and two-thirds of the Fall term). First and second fiscal quarter costs and expenses historically are 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. LIQUIDITY AND CAPITAL RESOURCES EduTrek finances its operating activities and capital requirements, including debt repayments, principally from cash provided by operating activities, borrowings under the NationsBank Credit Agreement (the "Credit Agreement"), and cash proceeds from the initial public offering. The Credit Agreement provides that, beginning on October 1, 1997, the maximum permitted borrowings is $1.75 million and on October 1, 1998, the maximum permitted borrowings is to be reduced to $1.0 million. Amounts outstanding bear interest at 9.5%. EduTrek has generated positive cash flow from operations over the last three fiscal years. Cash flow from operations was $1.4 million and $2.7 million for fiscal 1997 and 1998, respectively. Fiscal 1997 includes the operations of AIU from October 8, 1996. EduTrek's principal sources of funds as of May 31, 1998 were cash and equivalents of $5.8 million and available borrowings of $1.75 million under the Credit Agreement. At May 31, 1998, EduTrek had no outstanding borrowings under the Credit Agreement. The Credit Agreement is renewable annually and any amounts borrowed are payable upon its termination in October 1, 1999. Historically, EduTrek's investing activity has primarily consisted of capital asset purchases. Capital expenditures, excluding capital leases, totaled approximately $1.4 million, $681,000 and $4.1 million for fiscal 1996, 1997 and 1998. The increase in capital expenditures was principally due to the increase in the number of locations and to curriculum licensing costs associated with this expansion. Total purchases of property, plant and equipment for the year ended May 31, 1999 are expected to range from $4.5 million to $5.5 million. The increase from 1998 is due to: (1) the opening of several new campuses; (2) hardware and software costs related to the installation of a new management information system; (3) improvements to EduTrek's computer facilities and telecommunications equipment at the corporate level; (4) investments in computer technology to support AIU's information technology curriculum; and (5) increases in normal recurring capital expenditures due to the overall increases in student and employment levels resulting from the growth of the business. In addition, curriculum development costs are not expected to exceed $5.5 million for the year ended May 31, 1999, including a $900,000 per-site license fee payable to ITI and additional staff dedicated to curriculum development. Start-up costs are expected to be no greater than $1.0 million for fiscal 1999, as compared to $240,000 for fiscal 1998, due to recent and planned campus expansion. EduTrek expects to fund these capital expenditures for new campuses through cash from operations and a proposed amendment to the Credit Agreement, which is currently under negotiation and will increase the Company's borrowing capacity. The DOE 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 EduTrek through electronic funds transfer programs are held in a separate, cash account until certain conditions are satisfied. As of May 31, 1998, EduTrek had approximately $220,000 in these separate accounts to comply with these requirements. These 31 funds generally remain in these separate accounts for an average of 60 to 75 days from the date of collection. These restrictions on cash have not affected EduTrek's ability to fund daily operations. On September 29, 1997, EduTrek completed its initial public offering. Net proceeds from the offering were approximately $34.6 million. A large portion of the proceeds were used to repay in full the outstanding principal and interest under the Term Loan, Subordinate Debt and Revolving Loan incurred with the acquisition of the American European Corporation. YEAR 2000 COMPLIANCE Some of the Company's computer information systems are not currently configured to recognize the year 2000 in the two digit date field used by such system. The Company is currently implementing a new centralized information system to integrate its operations and financial data including admissions, financial aid, student services, placement services, and default management. The new system is designed to properly recognize the year 2000 in the two digit date field. The Company anticipates that the information system will be fully operational by the end of fiscal 1999 and that it will require a total of approximately $2 million in fiscal 1998 and fiscal 1999 to develop and implement this integrated information system although there can be no assurance that the new system will be implemented on a timely basis or the total expenditures will not exceed $2 million. Management does not anticipate that the expenditure of such funds to implement the new computer system will have a material impact on the Company's results of operations, liquidity, or capital resources. In the event this information system is not implemented in a timely fashion, management will evaluate other available options to revise its computer programs, as necessary, for the effect of the year 2000 problem including, without limitation, relying on manual record keeping until full compliance is achieved. EFFECT OF INFLATION The Company does not believe its operations have been materially affected by inflation. ACCOUNTING PRONOUNCEMENTS In 1997 the Financial Accounting Standards Board issued SFAS 130, "Reporting Comprehensive Income," and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." These statements, which are effective for fiscal years beginning after December 15, 1997, expand or modify disclosures and will have no impact on the Company's consolidated financial position, results of operations, or cash flows. The Company adopted SFAS 128, "Earnings per Share," during fiscal year 1998. In accordance with SFAS 128, the Company has presented both basic and diluted per share amounts in the 1998 and 1997 statements of operations presented. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. No response is required to this item. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ----- Independent Auditors' Report............................................................................... 33 Consolidated Balance Sheets................................................................................ 34 Consolidated Statements of Operations...................................................................... 35 Consolidated Statements of Changes in Shareholders' Equity................................................. 36 Consolidated Statements of Cash Flows...................................................................... 37 Notes to Consolidated Financial Statements................................................................. 38
32 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 May 31, 1998 and 1997 and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for 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 and for the year ended May 31, 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 May 31, 1998 and 1997 and the results of their operations and their cash flows for the year ended May 31, 1998 and for the period from July 1, 1996 (date of formation) to May 31, 1997 and the results of operations and cash flows of the Predecessor for the period from June 1, 1996 to October 8, 1996 and for the year ended May 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Atlanta, Georgia August 7, 1998 33 EDUTREK INTERNATIONAL, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MAY 31, -------------------- 1998 1997 --------- --------- ASSETS CURRENT ASSETS Cash and cash equivalents................................................................. $ 5,843 $ 678 Accounts receivable--net of allowance of $190 and $33, respectively....................... 5,402 272 Deferred income taxes..................................................................... 130 95 Other..................................................................................... 759 224 --------- --------- Total current assets........................................................................ 12,134 1,269 Property, plant, and equipment--net of accumulated depreciation............................. 5,729 4,737 Goodwill--net of accumulated amortization of $1,704 and $696, respectively.................. 38,957 39,965 Deferred financing costs--net of accumulated amortization of $165........................... -- 1,156 Other....................................................................................... 1,465 544 --------- --------- $ 58,285 $ 47,671 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable.......................................................................... $ 2,508 $ 1,501 Accrued expenses.......................................................................... 721 1,167 Value-added tax payable................................................................... 157 606 Unearned revenues......................................................................... 6,839 3,997 Income taxes payable...................................................................... 1,616 1,756 Current maturities--long-term debt........................................................ 574 2,014 --------- --------- Total current liabilities................................................................... 12,415 11,041 Long-term debt--less current maturities..................................................... 667 27,649 Due to affiliates........................................................................... -- 412 Deferred rent............................................................................... 849 692 Other liabilities........................................................................... 60 -- Commitments and contingencies SHAREHOLDERS' EQUITY Common stock, Class A voting, one vote per share, without par value, 40,000,000 shares authorized, 4,335,401 and 665,000, issued and outstanding, respectively................... 36,564 1,287 Common stock, Class B voting, ten votes per share, without par value, 10,000,000 shares authorized, 6,293,000 and 6,335,000 issued and outstanding, respectively.................. 3,973 4,000 Common stock warrants....................................................................... -- 677 Foreign currency translation................................................................ 88 147 Retained earnings........................................................................... 3,669 1,766 --------- --------- Total shareholders' equity.................................................................. 44,294 7,877 --------- --------- $ 58,285 $ 47,671 --------- --------- --------- ---------
See notes to consolidated financial statements. 34 EDUTREK INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THE COMPANY THE PREDECESSOR ---------------------------------- ------------------------------ PERIOD FROM JULY 1, PERIOD FROM 1996 JUNE 1, 1996 YEAR ENDED (DATE OF FORMATION) THROUGH YEAR ENDED MAY 31, 1998 TO MAY 31, 1997 OCTOBER 8, 1996 MAY 31, 1996 ------------- ------------------- --------------- ------------- Net revenues.................................... $ 41,914 $ 23,590 $ 6,189 $ 26,493 Costs and expenses: Cost of education and facilities.............. 16,927 9,014 3,256 11,144 Selling and promotional expenses.............. 6,321 2,428 1,335 3,614 General and administrative expenses........... 10,516 5,468 2,739 6,677 Acquisition costs............................. 487 -- -- -- Amortization of goodwill...................... 1,008 696 -- -- Rents paid to majority stockholders........... -- -- 49 150 ------------- ------- ------- ------------- Total costs and expenses.................... 35,259 17,606 7,379 21,585 ------------- ------- ------- ------------- Income (loss) from campus operations............ 6,655 5,984 (1,190) 4,908 Income (loss) from management agreement......... 23 479 (21) 127 ------------- ------- ------- ------------- Income (loss) from operations................... 6,678 6,463 (1,211) 5,035 Interest expense................................ 1,328 2,499 258 730 Other income--net............................... 1,539 20 164 433 ------------- ------- ------- ------------- Income (loss) before income taxes, minority interest, and extraordinary item.............. 6,889 3,984 (1,305) 4,738 Provision for income taxes...................... (2,581) (1,981) -- (107) ------------- ------- ------- ------------- Income (loss) before minority interest and extraordinary item............................ 4,308 2,003 (1,305) 4,631 Minority interest in earnings of American University in Dubai........................... (1,445) -- -- -- ------------- ------- ------- ------------- Income (loss) before extraordinary item......... 2,863 2,003 (1,305) 4,631 Extraordinary loss less applicable income taxes......................................... (960) -- -- -- ------------- ------- ------- ------------- Net income (loss)............................... $ 1,903 $ 2,003 $ (1,305) $ 4,631 ------------- ------- ------- ------------- ------------- ------- ------- ------------- Earnings Per Share: Basic income per share before extraordinary item.......................................... $ 0.30 $ 0.29 Basic net income per share...................... $ 0.20 $ 0.29 Diluted income per share before extraordinary item.......................................... $ 0.28 $ 0.26 Diluted net income per share.................... $ 0.19 $ 0.26 Average shares outstanding...................... 9,527 7,000 Dilutive effect: Warrants...................................... 240 569 Options....................................... 441 -- ------------- ------- 681 569 ------------- ------- Average shares outstanding assuming dilution.... 10,208 7,569 ------------- ------- ------------- -------
See notes to consolidated financial statements. 35 EDUTREK INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
FOREIGN CURRENCY COMMON PAID-IN STOCKHOLDERS' TRANSLATION ACCUMULATED PREDECESSOR STOCK CAPITAL NOTES ADJUSTMENT DEFICIT - ------------------------------------------------------ ----------- ----------- ------------- --------------- ------------- Balance--May 31, 1995................................. $ 1 $ 434 $ (3,229) $ 67 $ (3,440) Distribution to shareholders.......................... (4,500) Capital contributed by stockholder.................... 43 Net income............................................ 4,631 Foreign currency translation.......................... 35 Notes receivable and advances from shareholders....... (1,330) ----- ----- ------------- --- ------------- Balance--May 31, 1996................................. 1 477 (4,559) 102 (3,309) Distribution to shareholders.......................... (1,890) Capital contributed by stockholder.................... 1,239 Net loss.............................................. (1,305) Foreign currency translation.......................... (18) Notes receivable and advances from shareholders....... (1,016) ----- ----- ------------- --- ------------- Balance--October 8, 1996.............................. $ 1 $ 477 $ (5,575) $ 84 $ (5,265) ----- ----- ------------- --- ------------- ----- ----- ------------- --- ------------- PREDECESSOR TOTAL - ------------------------------------------------------ --------- Balance--May 31, 1995................................. $ (6,167) Distribution to shareholders.......................... (4,500) Capital contributed by stockholder.................... 43 Net income............................................ 4,631 Foreign currency translation.......................... 35 Notes receivable and advances from shareholders....... (1,330) --------- Balance--May 31, 1996................................. (7,288) Distribution to shareholders.......................... (1,890) Capital contributed by stockholder.................... 1,239 Net loss.............................................. (1,305) Foreign currency translation.......................... (18) Notes receivable and advances from shareholders....... (1,016) --------- Balance--October 8, 1996.............................. $ (10,278) --------- ---------
COMMON STOCK-- FOREIGN NUMBER OF SHARES COMMON STOCK COMPANY CURRENCY ------------------------ ------------------------ STOCK TRANSLATION COMPANY CLASS A CLASS B CLASS A CLASS B WARRANTS ADJUSTMENT - --------------------------------------------- ----------- ----------- ----------- ----------- ----------- --------------- Issuance of common stock--July 1, 1996....... 2,240 $ 1,000 Issuance of common stock in connection with the acquisition of EduTrek Systems, Inc.... 105 1,995 Sale of common stock in connection with acquisition of Predecessor................. 2,100 3,000 Issuance of common stock in exchange for certain fees............................... 350 $ 500 Issuance of warrants in connection with acquisition of Predecessor................. $ 677 Issuance of common stock in exchange for stock of Predecessor 210 787 Foreign currency translation................. $ 147 Net income................................... ----------- ----------- ----------- ----------- ----- ----- Balance--May 31, 1997........................ 665 6,335 1,287 4,000 677 147 Issuance of common stock net of initial public offering costs--September 29, 1997....................................... 2,733 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 Foreign currency translation................. (59) Net income................................... ----------- ----------- ----------- ----------- ----- ----- Balance--May 31, 1998........................ 4,335 6,293 $ 36,564 $ 3,973 $ -- $ 88 ----------- ----------- ----------- ----------- ----- ----- ----------- ----------- ----------- ----------- ----- ----- RETAINED COMPANY EARNINGS TOTAL - --------------------------------------------- ----------- --------- Issuance of common stock--July 1, 1996....... $ 1,000 Issuance of common stock in connection with the acquisition of EduTrek Systems, Inc.... $ (237) (237) Sale of common stock in connection with acquisition of Predecessor................. 3,000 Issuance of common stock in exchange for certain fees............................... 500 Issuance of warrants in connection with acquisition of Predecessor................. 677 Issuance of common stock in exchange for stock of Predecessor 787 Foreign currency translation................. 147 Net income................................... 2,003 2,003 ----------- --------- Balance--May 31, 1997........................ 1,766 7,877 Issuance of common stock net of initial public offering costs--September 29, 1997....................................... 34,560 Conversion of warrants to common stock....... -- Conversion of Class B Common Stock to Class A Common Stock............................... -- Issuance of common stock under stock option plan....................................... 13 Foreign currency translation................. (59) Net income................................... 1,903 1,903 ----------- --------- Balance--May 31, 1998........................ $ 3,669 $ 44,294 ----------- --------- ----------- ---------
See notes to consolidated financial statements. 36 EDUTREK INTERNATIONAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THE COMPANY THE PREDECESSOR ---------------------------------- ------------------------------ PERIOD FROM JULY 1, PERIOD FROM 1996 (DATE OF JUNE 1, 1996 YEAR ENDED FORMATION) TO MAY THROUGH OCTOBER YEAR ENDED MAY 31, 1998 31, 1997 8, 1996 MAY 31, 1996 ------------- ------------------- --------------- ------------- OPERATING ACTIVITIES Net income (loss)....................................... $ 1,903 $ 2,003 $ (1,305) $ 4,631 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary loss...................................... 1,600 -- -- -- Gain on sale of aircraft................................ (991) -- -- -- Depreciation and amortization........................... 2,718 1,626 392 1,087 Bad debt expense........................................ 307 126 69 168 Amortization of loan discount........................... 22 146 -- -- Decrease (increase) in accounts receivable.............. (5,437) 1,334 (192) (199) Increase (decrease) in accounts payable and accrued liabilities........................................... 561 796 (461) 391 Increase (decrease) in unearned revenues................ 2,842 (6,508) 3,135 30 Increase (decrease) in value-added taxes payable........ (449) (323) 190 13 Increase (decrease) in income taxes payable............. (140) 1,537 -- (58) Other................................................... (250) 619 (415) (265) ------------- ------- ------- ------------- Net cash provided by operating activities............... 2,686 1,356 1,413 5,798 INVESTING ACTIVITIES Additions to pre-opening and curriculum development costs................................................. (1,440) -- -- -- Purchases of property, plant, and equipment............. (2,681) (681) (118) (1,434) Sale of property, plant, and equipment.................. 2,076 Acquisition of Predecessor.............................. -- (30,747) -- -- Net increase in note receivable from related parties and former stockholders................................... -- -- (170) (1,228) ------------- ------- ------- ------------- Net cash used in investing activities................... (2,045) (31,428) (288) (2,662) FINANCING ACTIVITIES Proceeds from issuance of common stock.................. 34,560 4,000 -- -- Proceeds from long-term borrowings...................... 4,043 29,117 750 2,058 Principal repayments on long-term debt.................. (33,347) (26) (234) (893) Principal payments under capital lease obligations...... (346) (52) (94) (148) Other................................................... (400) -- 120 -- Net receipts (payments)--line-of-credit................. -- (938) 151 (2) Distributions to stockholders........................... -- -- (1,890) (4,500) Capital contribution from stockholder................... -- -- -- 43 Increase in deferred loan costs......................... -- (1,321) -- -- ------------- ------- ------- ------------- Net cash provided by (used in) financing activities..... 4,510 30,780 (1,197) (3,442) Effect of exchange rate changes on cash................. 14 (30) (12) 8 ------------- ------- ------- ------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 5,165 678 (84) (298) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......... 678 -- 453 751 ------------- ------- ------- ------------- CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 5,843 $ 678 $ 369 $ 453 ------------- ------- ------- ------------- ------------- ------- ------- ------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest................................................ $ 1,567 $ 1,690 $ 295 $ 730 Income taxes............................................ 2,047 45 -- 107
See notes to consolidated financial statements. 37 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMPANY--AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND FOR THE YEAR ENDED MAY 31, 1996 NOTE 1--ORGANIZATION AND BUSINESS ORGANIZATION--EduTrek International, Inc. (the "Company"), through American InterContinental University ("AIU"), is a leading provider of career-oriented, internationally focused higher education programs. The Company operates campuses in Atlanta, Los Angeles, 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), American Intercontinental University, Inc. ("AIU, Inc."), 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, Inc. 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
38 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMPANY--AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND FOR THE YEAR ENDED MAY 31, 1996 NOTE 1--ORGANIZATION AND BUSINESS (CONTINUED) 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, 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 being used for general corporate purposes, including increased working capital requirements of the Company resulting from its growth. OTHER--The Company effected a 7 for 1 stock split in June 1997. All share and per share data information in the accompanying 1998 and 1997 consolidated financial statements have been restated to reflect the stock split as if such had occurred as of the earliest period presented. 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 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 Standard ("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, Inc., the American College in London Ltd. U.S., AEMEC, MEC, and the American College in London, Ltd., a registered 39 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMPANY--AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND FOR THE YEAR ENDED MAY 31, 1996 NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 May 31, 1998 and 1997 includes approximately $218,000 and $442,000, 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. Prior to its sale, the aircraft was depreciated over 10 years on the double declining balance method (see note 4). Depreciation for all other property and equipment is calculated on a straight-line basis over the estimated useful lives of the assets. 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 three year period beginning in the month the courses are placed into service. PRE-OPENING COSTS--The Company's policy is to capitalize all pre-opening costs, except those costs related to advertising, prior to the commencement of a new educational program. Pre-opening costs are 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) will require 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 June 1999. LICENSES--The Company capitalizes license fees and then 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. The amortization period is 10 years, the life of the agreement. Also during fiscal year 1998, the Company entered into a 10-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 is $900,000 per location and will be amortized over 10 years. 40 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMPANY--AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND FOR THE YEAR ENDED MAY 31, 1996 NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS--All long-lived assets are evaluated for impairment in accordance with SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under this method, the Company is required to review 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. 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--In 1997 the Financial Accounting Standards Board issued SFAS 130, "Reporting Comprehensive Income," and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." These statements, which are effective for fiscal years beginning after December 15, 1997, expand or modify disclosures and will have no impact on the Company's consolidated financial position, results of operations, or cash flows. The Company adopted SFAS 128, "Earnings per Share," during fiscal year 1998. In accordance with SFAS 128, the Company has presented both basic and diluted per share amounts in the 1998 and 1997 statements of operations presented. SFAS 128 is effective for annual financial statements for periods ending after December 15, 1997 and requires the Company to change the method previously used to compute earnings per share and to restate all prior periods. As such, the Company has conformed the 1998 and 1997 reported amounts to the provisions of SFAS 128. 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. FAIR VALUE OF FINANCIAL INSTRUMENTS--Management has reviewed the various assets and liabilities of the Company in accordance with SFAS 107, "Disclosures About Fair Values of Financial Instruments," and has 41 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) COMPANY--AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND FOR THE YEAR ENDED MAY 31, 1996 NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 with current year presentation. NOTE 3--OTHER CURRENT ASSETS Other current assets at May 31, 1998 and 1997 consist of the following:
1998 1997 ------------- ------------- Prepaid expenses............................................... $ 511,191 $ 89,638 Pre-opening costs.............................................. 212,120 -- Other.......................................................... 36,058 134,186 ------------- ------------- $ 759,369 $ 223,824 ------------- ------------- ------------- -------------
NOTE 4--PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at May 31, 1998 and 1997 is summarized as follows:
1998 1997 ------------- ------------- Furniture, fixtures, and equipment............................. $ 4,396,024 $ 2,325,359 Leasehold improvements......................................... 1,895,681 1,061,304 Library and textbooks.......................................... 550,931 605,808 Aircraft....................................................... -- 1,510,455 Other.......................................................... 256,615 -- ------------- ------------- 7,099,251 5,502,926 Less accumulated depreciation and amortization................. 1,370,437 765,715 ------------- ------------- $ 5,728,814 $ 4,737,211 ------------- ------------- ------------- -------------
A subsidary of the Company sold the aircraft during the year ended May 31, 1998. The gain on the sale of approximately $991,000 is included in other income Depreciation expense for property, plant, and equipment was $1,275,179, $765,715, $1,224,711, and $390,983 for the year ended May 31, 1998, the period from July 1, 1996 to May 31, 1997, the year ended May 31, 1996, and the period from June 1, 1996 to October 8, 1996, respectively. 42 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND THE YEAR ENDED MAY 31, 1996 NOTE 5--LONG-TERM DEBT Long-term debt at May 31, 1998 and 1997 is summarized as follows:
1998 1997 ------------- ------------- Senior Credit Agreement--Term Loan (net of debt discount of $154,263).................................................... -- $ 20,845,737 Subordinate Loan (net of debt discount of $376,822)............ -- 6,623,178 Loan Secured by Aircraft....................................... -- 1,565,000 Capital Lease Obligations...................................... $ 955,502 603,762 Directors and Officers Insurance and other..................... 285,817 25,682 ------------- ------------- 1,241,319 29,663,359 Less current portion........................................... 573,954 2,014,120 ------------- ------------- $ 667,365 $ 27,649,239 ------------- ------------- ------------- -------------
At May 31, 1998 and 1997, the Company had no amounts borrowed against its $3.0 and $2.5 million lines of credit, respectively. Future maturities of long-term debt excluding capital lease obligations for years ending May 31 are as follows: 1999.............................................. $ 238,128 2000.............................................. 47,689 --------- $ 285,817 --------- ---------
The extraordinary loss of $960,000 net of taxes ($1,600,000 less the related income tax effect of $640,000) is from the retirement of the Company's term loan with NationsBank, N.A. and its subordinate debt with Stratford Capital Partners, L.P. and GMM Investors SBIC, L.P. The funds used to retire the debt represent a portion of the proceeds from the sale of 2,990,000 shares of the Company's Class A Common Stock. 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 $77,000, $51,000, and $44,000 for the year ended May 31, 1998, the period from July 1, 1996 to May 31, 1997, and the year ended May 31, 1996, 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 2009. Many of the lease agreements contain renewal clauses with various terms; however, none of the leases contain any significant restrictions. 43 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND THE YEAR ENDED MAY 31, 1996 NOTE 7--LEASES (CONTINUED) Several of the 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 May 31, 1998 and 1997 was as follows:
1998 1997 ------------- ------------- Furniture, fixtures, and equipment............................. $ 1,453,924 $ 895,076 Less accumulated amortization.................................. 291,354 52,226 ------------- ------------- $ 1,162,570 $ 842,850 ------------- ------------- ------------- -------------
For the years ending May 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 LEASES LEASES ------------ ------------- Year ending May 31, 1999......................................... $ 418,175 $ 3,722,046 2000............................................................. 311,341 4,153,135 2001............................................................. 158,944 3,833,748 2002............................................................. 103,246 3,819,331 2003............................................................. 102,911 3,683,804 Thereafter....................................................... 51,239 21,002,529 ------------ ------------- Total minimum lease payments................................... 1,145,856 $ 40,214,593 ------------- ------------- Less amount representing interest................................ 190,354 ------------ Present value of net minimum lease payments.................... $ 955,502 ------------ ------------
Rent expense incurred for the year ended May 31, 1998, the period from July 1, 1996 to May 31, 1997, the period from June 1, 1996 to October 8, 1996, and the year ended May 31, 1996 under all operating leases was approximately $5,444,000, $3,101,000, $1,337,000, and $3,997,800, respectively. NOTE 8--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. The Company also entered into an employment agreement with an officer of the Company. For the years ended May 31, 1998 and 1997, such payments, which were charged to operations, totaled $716,000 and 44 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND THE YEAR ENDED MAY 31, 1996 NOTE 8--CONSULTING AND EMPLOYMENT AGREEMENTS (CONTINUED) $705,000, respectively. Future payments under these agreements for the years ending May 31 are as follows: 1999.............................................. $ 642,000 2000.............................................. 593,000 2001.............................................. 525,000 2002.............................................. 258,000
Of the above amounts, approximately $633,000 of future payments relate to a continuing officer of the Company. Amounts paid to such officer totaled approximately $165,000 and $27,500 for the years ended May 31, 1998 and 1997, respectively. NOTE 9--INCOME TAXES Income tax expense for the year ended May 31, 1998 and for the period from July 1, 1996 to May 31, 1997 consists of (in thousands):
1998 1997 --------- --------- Current: Federal.................................................................. $ 2,238 $ 1,423 State.................................................................... 480 333 --------- --------- Total current provision................................................ 2,718 1,756 Deferred: Federal.................................................................. (117) 194 State.................................................................... (20) 31 --------- --------- Total deferred provision............................................... (137) 225 --------- --------- Total provision........................................................ $ 2,581 $ 1,981 --------- --------- --------- ---------
The following is a reconciliation of the statutory tax rate to the Company's effective tax rate for the year ended May 31, 1998 and for the period from July 1, 1996 to May 31, 1997:
1998 1997 --------- --------- Statutory rate........................................................... 34.00% 34.00% State income taxes (net of federal benefit).............................. 4.40% 6.03% Permanent differences: Nondeductible goodwill................................................. 4.97% 9.69% Nontaxable foreign earnings of minority interest....................... (5.90%) --------- --------- Effective rate....................................................... 37.47% 49.72% --------- --------- --------- ---------
45 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND THE YEAR ENDED MAY 31, 1996 NOTE 9--INCOME TAXES (CONTINUED) The effects of temporary differences which gave rise to the deferred tax asset and liability at May 31, 1998 and 1997, respectively, are as follows (in thousands):
1998 1997 -------------------------- -------------------------- CURRENT LONG-TERM CURRENT LONG-TERM ----------- ------------- ----------- ------------- Deferred tax assets arising from: Unearned revenue................................ $ 94 $ 112 Deferred rent................................... $ 376 $ 339 Other........................................... 73 121 13 56 Deferred tax liabilities arising from: Other........................................... (37) (30) ----- ----- ----- ----- $ 130 $ 497 $ 95 $ 395 ----- ----- ----- ----- ----- ----- ----- -----
As a result of its election to be treated as an S Corporation for income tax purposes, the Predecessor has not been 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. Distributions in the form of cash dividends have been made principally to assist the shareholders with their income tax obligations arising from the Predecessor's S Corporation status. Such distributions amounted to $1,889,694 and $4,500,000 for the period from June 1, 1996 through October 8, 1996 and for the year ended May 31, 1996, respectively. Significant components of the provision for income taxes for the period from June 1, 1996 to October 8, 1996 and the year ended May 31, 1996 are as follows (in thousands):
PERIOD FROM JUNE 1, YEAR ENDED MAY 1996 TO OCTOBER 8, 1996 31, 1996 ----------------------- --------------- Domestic............................................... $ -- $ 23 Foreign................................................ -- 84 ------ ----- $ -- $ 107 ------ ----- ------ -----
NOTE 10--U.S. AND FOREIGN OPERATIONS 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 from September 1, 1997 through May 31, 1998 (see Note 2 on Consolidation). Net revenues and income (loss) from operations by geographic area for fiscal year 1998 and for the period from October 8, 1996 (date of acquisition of the Predecessor) to 46 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND THE YEAR ENDED MAY 31, 1996 NOTE 10--U.S. AND FOREIGN OPERATIONS (CONTINUED) May 31, 1997 and for the year ended May 31, 1996 and identifiable assets by geographic area at May 31, 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996 --------- --------- --------- Net revenues: United States.............................................. $ 22,453 $ 13,437 $ 14,630 United Kingdom............................................. 14,595 10,153 11,863 Dubai, UAE................................................. 4,866 -- -- Home Office................................................ -- -- -- --------- --------- --------- Total.................................................... $ 41,914 $ 23,590 $ 26,493 --------- --------- --------- --------- --------- --------- Income (loss) from operations: United States.............................................. $ 8,089 $ 10,533 $ 5,986 United Kingdom............................................. 5,873 4,385 4,888 Dubai, UAE................................................. 2,257 479 127 Home Office................................................ (9,541) (8,934) (5,966) --------- --------- --------- Total.................................................... $ 6,678 $ 6,463 $ 5,035 --------- --------- --------- --------- --------- --------- Identifiable assets: United States.............................................. $ 55,241 $ 46,141 $ 5,690 United Kingdom............................................. 2,216 1,530 1,563 Dubai, UAE................................................. 828 -- -- Home Office................................................ -- -- -- --------- --------- --------- Total.................................................... $ 58,285 $ 47,671 $ 7,253 --------- --------- --------- --------- --------- ---------
NOTE 11--STOCK OPTION PLANS 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 Class A Common Stock which can be issued through awards granted under the Plan is 829,388. 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 fiscal year 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 $17.07 per share which was the fair market value at the grant date. Generally, these options vest over a five-year period beginning on the first anniversary of the date of grant. In March 1997, incentive stock options to purchase an aggregate of 415,877 shares of Class A Common Stock were granted to certain officers and employees of the Company, exercisable at $.77 per 47 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND THE YEAR ENDED MAY 31, 1996 NOTE 11--STOCK OPTION PLANS (CONTINUED) share which was the fair market value at the grant date. Generally, these options vest over a five-year period beginning on the first anniversary of the date of grant. Of these options, 35,000 vest contingent on the Company meeting certain financial goals (the "performance options"). The estimated weighted average fair value of options granted during 1998 and 1997 was $7.82 and $1.07, respectively. The Company applies Accounting Principles Board Opinion 25 and related interpretations in accounting for the Plan. Accordingly, no compensation cost has been recognized for 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 123, additional compensation expense of $730,000 and $22,000 would have been recorded for the year ended May 31, 1998 and for the period from July 1, 1996 to May 31, 1997, respectively. Accordingly, the Company's net income and earnings per share for the year ended May 31, 1998 and for the period from July 1, 1996 to May 31, 1997 would have been reduced to the pro forma amounts indicated below:
1998 1997 ------------ ------------ Net income: As reported..................................................... $ 1,903,000 $ 2,002,690 Pro forma....................................................... $ 1,173,000 $ 1,980,690 Basic net income per share: As reported..................................................... $ 0.20 $ 0.29 Pro forma....................................................... $ 0.12 $ 0.28 Diluted net income per share: As reported..................................................... $ 0.19 $ 0.26 Pro forma....................................................... $ 0.11 $ 0.26
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 1998 and 1997, respectively: expected volatility of 52.62% and 0%, risk-free interest rate of 5.76% and 6.16% for fixed options and 6.03% for the 1997 performance options, dividend yield of 0% for both years, and expected lives of 3.97 and 3.91 years for fixed options and 3.08 years for the 1997 performance options. Annual forfeiture rates of 3% for both years were utilized, and the likelihood of the 1997 performance options vesting was estimated to be 100%. 48 EDUTREK INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, 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, AND THE YEAR ENDED MAY 31, 1996 NOTE 11--STOCK OPTION PLANS (CONTINUED) The following table sets forth activity in the Company's Plan:
1998 1997 --------------------------- --------------------------- 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 $ 17.065 Exercised............................................ (16,360) $ 0.7714 Canceled............................................. (1,400) $ 0.7714 --------- --------- Outstanding May 31, 1998............................... 299,644 $ 17.065 398,117 $ 0.7714 --------- --------- --------- --------- Exercisable May 31, 1998............................... 2,000 $ 18.500 97,335 $ 0.7714 Weighted average fair value of options granted: 1998................................................. $ 7.82 --------- --------- 1997................................................. $ 1.07 --------- ---------
Exercise price for options outstanding as of May 31, 1998 ranged from $.7714 to $27.75. The weighted average remaining contractual life of those options is 9.2 years. NOTE 12--SUBSEQUENT EVENTS In June 1998, the Company entered into a 127-month lease for a 32,632 square foot building in the District of Columbia. The Company began its occupancy in July 1998 and will incur rent payments of approximately $500,000 for fiscal year 1999 and approximately $800,000 to $900,000 each fiscal year thereafter. In July 1998, the Company entered into a 129-month lease for a 88,144 square foot building in Los Angeles. The Company is to begin its occupancy in October 1998 and will incur rent payments of approximately $400,000 for fiscal year 1999 and approximately $2 to 3 million each fiscal year thereafter. 49 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 1998 Annual Meeting of Shareholders (the "Proxy Statement"). The Company will, within 120 days of the end of its fiscal year, file with the Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A. 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. 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.............................................................................. 33 Consolidated Balance Sheets............................................................................... 34 Consolidated Statements of Operations..................................................................... 35 Consolidated Statements of Changes in Shareholders' Equity................................................ 36 Consolidated Statements of Cash Flows..................................................................... 37 Notes to Consolidated Financial Statements................................................................ 38
50 (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 August 31, 1997 (the "8/31/97 10-Q"); or (iii) the Company's Quarterly Report on Form 10-Q for the quarter ended February 28, 1998 (the "2/28/98 10-Q"). Unless otherwise indicated, the exhibit number corresponds to the exhibit number in the referenced document.
EXHIBIT NUMBER DESCRIPTION PAGE - --------------- ------------------------------------------------------------------------------ ----- * 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 1997 Incentive Plan (S-1) *10.2 Amendment No. 1 to 1997 Incentive Plan (S-1) *10.2.1 Amendment No. 2 to 1997 Incentive Plan (8/31/98) *10.3 Form of Incentive Stock Option Agreement (S-1) *10.4 Form of Non-qualified Stock Option Agreement (S-1) *10.7 Employment Agreement, dated March 21, 1997, by and between E Holdings, Inc. and Stephen G. Franklin, Sr. (S-1) *10.8 Employment Agreement, dated October 8, 1996 by and between American European Corporation and Phillip J. Markert (S-1) *10.9 Consulting Agreement, dated October 8, 1996, by and between the Company and The Phillip J. Markert Consulting Group, Inc. (S-1) *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 *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)
51
EXHIBIT NUMBER DESCRIPTION PAGE - --------------- ------------------------------------------------------------------------------ ----- *10.13 Registration and Anti-Dilution Rights Agreement, dated October 8, 1996, by and between E Holdings, Inc. and The Robinson-Humphrey Company, Inc. (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. *21.1 Subsidiaries of the Registrant (S-1) 23.1 Consent of Deloitte & Touche LLP 24.1 Power of Attorney of Stephen G. Franklin, Sr. 24.2 Power of Attorney of Paul D. Beckham 24.3 Power of Attorney of Fred C. Davison 24.4 Power of Attorney of Ronald P. Hogan 24.5 Power of Attorney of Gaylen D. Kemp 24.6 Power of Attorney of Gerald Tellefsen 27.1 Financial Data Schedule (SEC only) 27.2 Financial Data Schedule (SEC only) 27.3 Financial Data Schedule (SEC only)
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the fourth quarter ended May 31, 1998. 52 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: August 31, 1998 By: /s/ STEVE BOSTIC ----------------------------------------- Steve Bostic, CHAIRMAN AND CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) Date: August 31, 1998 By: /s/ DONALD J. BLANKERS ----------------------------------------- Donald J. Blankers, 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 - ------------------------------ -------------------------- ------------------- /s/ STEVE BOSTIC - ------------------------------ Chairman and Chief August 31, 1998 Steve Bostic Executive Officer /s/ DONALD J. BLANKERS - ------------------------------ Chief Financial Officer August 31, 1998 Donald J. Blankers * - ------------------------------ President, Chief Academic August 31, 1998 Stephen G. Franklin, Sr. Officer and Director * - ------------------------------ Director August 31, 1998 Paul D. Beckham * - ------------------------------ Director August 31, 1998 Fred C. Davison * - ------------------------------ Director August 31, 1998 Ronald P. Hogan
53
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- * - ------------------------------ Director August 31, 1998 Gaylen D. Kemp * - ------------------------------ Director August 31, 1998 Gerald Tellefsen
*By: /s/ DONALD J. BLANKERS ------------------------- Donald J. Blankers, AS ATTORNEY IN FACT PURSUANT TO POWERS OF ATTORNEY FILED AS EXHIBITS TO THIS REPORT
54 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------------- ------------------------------------------------------------------------------------------------- 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 10.18 Lease Agreement dated June 30, 1998 between 1770 G Street Limited Partnership and American Intercontinental University, Inc. 23.1 Independent Auditors' Consent 24.1 Power of Attorney of Stephen G. Franklin, Sr. 24.2 Power of Attorney of Paul D. Beckham 24.3 Power of Attorney of Fred C. Davison 24.4 Power of Attorney of Ronald P. Hogan 24.5 Power of Attorney of Gaylen D. Kemp 24.6 Power of Attorney of Gerald Tellefsen 27.1 Financial Data Schedule (SEC only) 27.2 Financial Data Schedule (SEC only) 27.3 Financial Data Schedule (SEC only)
55 EX-10.10-1 2 EX-10.10.1 Exhibit 10.10.1 THIS ARRANGEMENT is made and entered into as of the 1st day of September 1997 between (1) American European Middle East Corporation LLC (hereinafter referred to as "AEMEC" a limited liability company in the state of Georgia, United States of America, headquartered in Dubai, UAE; and (2) Middle East Colleges LTD (hereinafter referred to as "MEC"), a BVI company headquartered in Dubai, UAE. (3) The terms of this arrangement shall terminate May 31, 1998 unless extended by the mutual express written consent of both parties. WHEREAS (1) The parties hereto had entered into agreements dated October 1st 1995 & January 24th 1996 (hereinafter known as the "Original Agreements") governing the relationship between themselves in the opening and operation of a branch campus of the American College now known as The American Intercontinental University, located in Dubai, UAE. (2) At the request of AEMEC, the parties hereto wish to enter into an agreement to modify temporarily their fee and compensation entitlements thereunder. NOW THEREFORE, the parties hereto agree upon the following: 1. MEC for the purpose of this arrangement only, agrees to rearrange the distribution of profits for Fiscal 1998 only (June 1, 1997 - May 31, 1998), such that the profit entitlements thereunder shall be distributed to the parties as follows: MEC 49.9% AEMEC 50.1% 2. In consideration for such arrangement AEMEC agrees to MEC being compensated in lieu of the above by way of the American University in Dubai (AUD) reimbursing MEC for its capital contribution and services rendered, in quarterly installments based upon the attached Exhibit A. 3. This Arrangement shall expires at the end of June 1998 but can be renegotiated annually by the mutual express written consent of both parties taking into consideration the capital Contribution and the resources and services contributed by MEC. 4. In the event that MEC and AEMEC cannot reach a mutual agreed upon reimbursement Arrangement in writing, then the agreement for the following years will automatically revert to the previously agreed upon formula (65% MEC and 35% AEMEC). 5. This temporarily Arrangement shall in no way, whether explicitly or implicitly change or modify any other terms and conditions of the original agreement which shall remain in full force and effect , nor shall this Arrangement be construed to be a permanent amendment to the original agreements nor to confer upon either party any rights, power privileges which is otherwise not contained in the original agreements. IN WITNESS WHEREOF, the parties hereto have signed this Arrangement on the date and place above mentioned in two (2) copies, one of which shall be retained by each signatory. AMERICAN EUROPEAN MIDDLE EAST CORPORATION, LLC By: /s/ Steve Bostic ------------------ Steve Bostic Its: President MIDDLE EAST COLLEGE, LTD.; By: /s/ Elias Bou Saab -------------------- Elias Bou Saab Its: Director EXHIBIT A
FISCAL 1998 BUDGET NEW OLD ---------- ---------- REVENUES 5,723 5,723 REIMBURSEMENT FOR SERVICES TO MEC 807 - EXPENSES 3,046 3,046 ----- ----- TOTAL EXPENSES 3,853 3,046 ----- ----- CONTRIBUTION 1,870 2,677 ----- ----- ----- ----- DISTRIBUTION TO OWNERS MEC 933 1,740 --- AEMEC ----- AEC 796 796 MARK BARNETTE 141 141 ----- ----- TOTAL 937 937
EX-10.18 3 EX-10.18 Exhibit 10.18 Lease: 1770 G Street Between American Intercontinental University, Inc., a Georgia Corporation (Tenant) and a District of Columbia limited partnership (Landlord) ------------------------------------- ------------------------------------- LEASE AGREEMENT between THE 1770 G STREET LIMITED PARTNERSHIP as Landlord and AMERICAN INTERCONTINENTAL UNIVERSITY, INC. as Tenant June 30, 1998 ----------- ------------------------------------- -------------------------------------
TABLE OF CONTENTS ----------------- Page ---- ARTICLE 1 THE PREMISES................................................................................................1 SECTION 1.1 Premises.............................................................................1 SECTION 1.2 Use of Common Areas..................................................................2 SECTION 1.3 Satellite Dishes.....................................................................2 ARTICLE 2 LEASE TERM..................................................................................................4 SECTION 2.1 Term.................................................................................4 SECTION 2.2 Lease Commencement Date..............................................................4 SECTION 2.3 Renewal..............................................................................5 ARTICLE 3 RENT........................................................................................................6 SECTION 3.1 Fixed Rent...........................................................................6 SECTION 3.2 Late Payment; Interest Charge........................................................7 SECTION 3.3 Rent Generally.......................................................................8 ARTICLE 4 ADDITIONAL RENT.............................................................................................8 SECTION 4.1 Increases in Annual Operating Charges and Increases in Real Estate Taxes..............................................................................................8 SECTION 4.2 Annual Operating Charges Defined and Real Estate Taxes Defined.......................9 SECTION 4.3 Statement of Annual Operating Charges and Real Estate Taxes.........................13 SECTION 4.4 Installment Payments; Proration.....................................................13 SECTION 4.5 Additional Taxes or Governmental Charges............................................15 SECTION 4.6 Change In or Contest of Real Estate Taxes...........................................15 ARTICLE 5 SECURITY DEPOSIT...........................................................................................16 SECTION 5.1 Amount..............................................................................16 SECTION 5.2 Application.........................................................................16 SECTION 5.3 Third Parties.......................................................................17 SECTION 5.4 Letter of Credit....................................................................17 ARTICLE 6 USE........................................................................................................18 SECTION 6.1 Use.................................................................................18 SECTION 6.2 Compliance with Laws................................................................18 SECTION 6.3 Trash Sorting.......................................................................19 SECTION 6.4 Environmental Laws..................................................................19
i Table of Contents (continued)
Page ---- ARTICLE 7 PARKING....................................................................................................20 ARTICLE 8 ASSIGNMENT AND SUBLETTING..................................................................................20 SECTION 8.1 Landlord's Consent Required.........................................................20 SECTION 8.2 Transfers of Interests in Tenant....................................................22 ARTICLE 9 MAINTENANCE AND REPAIRS....................................................................................22 SECTION 9.1 Maintenance and Repairs.............................................................22 SECTION 9.2 Landlord's Maintenance and Repairs..................................................23 SECTION 9.3 Damage Caused by Tenant.............................................................23 ARTICLE 10 ALTERATIONS................................................................................................23 SECTION 10.1 As-Is Condition of Premises.........................................................23 SECTION 10.2 Tenant's Improvements...............................................................23 SECTION 10.3 Indemnification for Improvements....................................................25 ARTICLE 11 SIGNS......................................................................................................25 ARTICLE 12 TENANT'S EQUIPMENT.........................................................................................26 SECTION 12.1 Electrical Capacity.................................................................26 SECTION 12.2 Other Infrastructure................................................................26 ARTICLE 13 INSPECTIONS BY LANDLORD...................................................................................26 ARTICLE 14 INSURANCE..................................................................................................27 SECTION 14.1 Insurance To be Carried.............................................................27 SECTION 14.2 Indemnity ..........................................................................28 SECTION 14.3 Increases in Insurance Rates........................................................29 SECTION 14.4 Notice of Accidents.................................................................29 SECTION 14.5 Waiver of Subrogation...............................................................30
ii Table of Contents (continued)
Page ---- ARTICLE 15 SERVICES AND UTILITIES.....................................................................................30 SECTION 15.1 Services and Utilities..............................................................30 SECTION 15.2 Interruption of Services and Utilities..............................................32 SECTION 15.3 Conservation Controls...............................................................32 ARTICLE 16 LIABILITY OF LANDLORD......................................................................................33 SECTION 16.1 No Liability of Landlord............................................................33 SECTION 16.2 Transfer by Landlord................................................................33 SECTION 16.3 Disputed Payments...................................................................33 SECTION 16.4 Extent of Landlord's Liability......................................................34 ARTICLE 17 RULES AND REGULATIONS......................................................................................34 ARTICLE 18 DAMAGE OR DESTRUCTION......................................................................................35 SECTION 18.1 Casualty............................................................................35 SECTION 18.2 Limitations on Landlord's Obligations...............................................36 SECTION 18.3 Right to Terminate..................................................................36 ARTICLE 19 CONDEMNATION...............................................................................................36 SECTION 19.1 Termination for Condemnation........................................................36 SECTION 19.2 Award...............................................................................36 ARTICLE 20 DEFAULT ...................................................................................................37 SECTION 20.1 Defaults by Tenant..................................................................37 SECTION 20.2 Landlord's Rights...................................................................38 SECTION 20.3 Liquidated Damages..................................................................38 SECTION 20.4 Landlord's Rights Cumulative........................................................39 SECTION 20.5 No Waiver By Landlord...............................................................39 SECTION 20.6 Landlord's Right to Cure............................................................40 SECTION 20.7 Default by Landlord.................................................................40 SECTION 20.8 Attorney's Fees.....................................................................41 ARTICLE 21 SUBORDINATION AND ATTORNMENT...............................................................................41 SECTION 21.1 Subordination.......................................................................41 SECTION 21.2 Attornment..........................................................................42
iii Table of Contents (continued) -----------------------------
Page ---- ARTICLE 22 DELIVERY AT END OF LEASE TERM..............................................................................42 SECTION 22.1 Surrender of Premises...............................................................42 SECTION 22.2 Holding Over........................................................................42 ARTICLE 23 COVENANTS OF LANDLORD AND RESERVATION OF RIGHTS............................................................43 SECTION 23.1 Covenants of Landlord...............................................................43 SECTION 23.2 Landlord's Reservation of Rights....................................................43 ARTICLE 24 GENERAL PROVISIONS.........................................................................................44 SECTION 24.1 Representations by Landlord.........................................................44 SECTION 24.2 No Partnership......................................................................45 SECTION 24.3 Brokers.............................................................................45 SECTION 24.4 Tenant Estoppel Certificates........................................................45 SECTION 24.5 Waiver of Jury Trial................................................................46 SECTION 24.6 Notices.............................................................................46 SECTION 24.7 Partial Invalidity..................................................................47 SECTION 24.8 Pronouns............................................................................47 SECTION 24.9 Successors and Assigns..............................................................47 SECTION 24.10 Entire Agreement....................................................................47 SECTION 24.11 Governing Law.......................................................................47 SECTION 24.12 Section Headings....................................................................48 SECTION 24.13 No Offer............................................................................48 SECTION 24.14 Multiple Counterparts...............................................................48 SECTION 24.15 Time of Essence.....................................................................48 SECTION 24.16 Conflict............................................................................48 SECTION 24.17 [Intentionally Omitted].............................................................48 SECTION 24.18 Joint and Several Liability.........................................................48 SECTION 24.19 Force Majeure.......................................................................48 SECTION 24.20 No Construction of Lease Against Drafter............................................49 EXHIBITS A-1 - The Phase I Premises A-2 - The Permanent Premises B - Certificate of Lease Commencement Date C - Building Rules and Regulations D - Janitorial Services
iv E - Contractor Rules and Regulations F - Work Agreement G - Form of Letter of Credit H - Sample Form of Subordination, Nondisturbance and Attornment Agreement
v LEASE AGREEMENT --------------- THIS LEASE AGREEMENT (the "Lease") is made as of the ____ day of ______________, 1998, by and between THE 1770 G STREET LIMITED PARTNERSHIP, a District of Columbia limited partnership ("Landlord"), and AMERICAN INTERCONTINENTAL UNIVERSITY, INC., a Georgia corporation ("Tenant"). RECITALS: --------- A. Landlord is the owner of an office and retail building (the "Building"), located at 1776 G Street, N.W., Washington, D.C. The land on which the Building is located is known as Lot 70, Square 169 in the District of Columbia ("Land"). The Land, the Building and all other improvements thereon and the common areas and appurtenances thereto are collectively referred to herein as the "Property". B. Tenant desires to hire and lease space in the Building and Landlord is willing to demise and lease space in the Building to Tenant, upon the terms, conditions, covenants and agreements set forth herein. NOW, THEREFORE, in consideration of the foregoing, One Dollar ($1.00), the covenants and agreements herein set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending legally to be bound, hereby covenant and agree as set forth below. ARTICLE 1 THE PREMISES ------------ SECTION 1.1 Premises (a) Landlord hereby demises and leases to Tenant and Tenant hereby hires and leases from Landlord, for the term and upon the terms, conditions, covenants and agreements herein provided, space located on the lower level of the Building as follows: (i) Approximately 13,758 rentable square feet, measured in accordance with the 1995 GWCAR Standard Method of Measurement, as shown on Exhibit A-1 attached hereto (the "Phase I Premises"). (ii) Approximately 32,632 rentable square feet (which includes the Phase I Premises), measured in accordance with the 1995 GWCAR Standard Method of Measurement, as shown on Exhibit A-2 attached hereto (the "Permanent Premises"). (The portion of the Permanent Premises that is not part of the Phase I Premises is the "Phase II Premises"). Whichever of the Phase I Premises or the Permanent Premises is then leased by Tenant is hereinafter sometimes referred to as the "Premises". (The number of rentable square feet of area in the Premises shall be subject to Tenant's right to make a written request for a final measurement of the Premises before this Lease is executed. If Tenant request a final measurement, such measurement shall be conducted jointly by Landlord's architect and Tenant's architect or design specialist before this Lease is executed and such measurement shall be based upon the 1995 GWCAR Standard Method of Measurement.) (b) Tenant shall not commence making Improvements in, or otherwise use or occupy, the Phase II Premises until December 1, 1998; from and after December 1, 1998, all obligations thereafter arising under this Lease relating to the Premises shall apply to both the Phase I Premises and the Phase II Premises, and Tenant's rent obligations shall apply to both the Phase I Premises and the Phase II Premises (subject to any abatement period applicable to the latter). Such rent obligations include the obligation to pay additional rent under Article 4 below on both the Phase I Premises and the Phase II Premises. SECTION 1.2 Use of Common Areas The lease of the Premises includes the right, together with other tenants of the Building and members of the public, to use the common public areas of the Property but includes no other rights not specifically set forth herein. SECTION 1.3 Satellite Dishes (a) Subject to the terms of this Section, Tenant may install, or request Landlord to install at Tenant's expense and risk, one or more antenna(e) or satellite communications dishes and appurtenant equipment (each, a "Satellite Dish") on the roof of the Building. A Satellite Dish may be installed by Tenant only for purposes incident to Tenant's use of the Premises, and not as a separate business or for use by third parties other than permitted subtenants. (b) Tenant shall bear all of the cost and expense of designing, purchasing, installing, operating, maintaining, repairing, removing and replacing any Satellite Dish, and for repairing and restoring any damage to the Property or to Landlord's or any other tenant's property arising therefrom. No Satellite Dish shall be permitted if its installation will void or adversely affect any warranty of the roof or if its installation and/or operation would otherwise materially adversely affect the Building. Landlord may require that any Satellite Dish be installed at Tenant's expense by Landlord's contractors, or that Tenant utilize contractors approved by Landlord for such purpose. Provided that Landlord's personnel are available to escort Tenant and its contractors (except in an emergency, when no escort shall be required), Tenant and its contractors shall have access to the roof of the Building, subject to Article 17 below and Exhibit C hereof, for the foregoing purposes. (c) Tenant shall be responsible for obtaining any and all governmental permits, approvals, licenses and certificates necessary for the installation and operation of a Satellite Dish, and shall comply with all laws, statutes, ordinances, codes, rules and regulations, and insurance requirements relating thereto, including (without limitation) building and zoning codes. Without 2 limiting Tenant's obligations under the preceding sentence, Tenant acknowledges that the permission of the United States Commission on Fine Arts is required for the installation of a Satellite Dish on the Building. Landlord shall cooperate with Tenant in such efforts. All expenses shall be borne by Tenant. (d) No Satellite Dish shall be permitted if it interferes with transmissions to or from any other satellite communications dish, antenna, other transmitting equipment, telecommunications system, or other computer or electronic equipment then on, in or near the Building. Tenant shall be afforded a reasonable opportunity to avoid, ameliorate or cure any such interference problem, but shall be solely liable for any damage incurred by a third party as a result of interference from any Satellite Dish. Landlord shall use reasonable efforts, at Tenant's expense, to prevent any third party who installs a Satellite Dish after Tenant has done so from interfering with transmissions to or from any previously-installed Satellite Dish used by Tenant. (e) Each Satellite Dish shall be installed in a manner reasonably acceptable to Landlord. In addition to other factors set forth elsewhere in this Section, Landlord may consider the quality of the proposed physical installation and its safety, and the size, shape and appearance of each Satellite Dish and its effect on the Building's appearance. (f) Tenant shall pay Landlord, as additional rent, the sum of One Thousand Five Hundred Dollars ($1,500) per month per Satellite Dish, such amount to be increased at the commencement of each Lease Year by the rate of increase between the last CPI published before the date of this Lease and the last CPI published before the start of the then-applicable Lease Year. As used herein, "CPI" means the Consumer Price Index for Washington, D.C.-Maryland-Virginia-West Virginia (November 1996 = 100) as published from time to time by the United States Bureau of Labor Statistics or, if such index is discontinued, a comparable index selected by Landlord in its reasonable discretion and an appropriate conversion factor shall be used to accommodate the transition between the two indices. (g) Notwithstanding any provision of this Lease to the contrary, in the event Tenant breaches any of the provisions of this Section beyond the expiration of any applicable notice and/or cure periods under Section 20.1 below, then, as an additional remedy, Landlord may require Tenant to remove the offending Satellite Dish and, if Tenant does not promptly do so, Landlord may do so at Tenant's expense as additional rent. (h) Notwithstanding any provision of this Lease to the contrary, unless agreed to by Landlord and Tenant at the time Tenant receives permission to install a Satellite Dish, all Satellite Dishes shall remain the property of Tenant during and after installation and shall be removed by Tenant at its expense at the expiration or earlier termination of the Lease Term as if Section 22.1 below applied thereto. If Tenant does not promptly do so, Landlord may do so at Tenant's expense as additional rent. (i) Tenant's rights under this Section are non-exclusive. 3 ARTICLE 2 LEASE TERM ---------- SECTION 2.1 Term The term of this Lease ("Lease Term") shall commence on the Lease Commencement Date (hereinafter defined) as determined pursuant to Section 2.2 hereof, and shall end on (a) the day preceding the one hundred twenty-seventh (127th) monthly anniversary of the Lease Commencement Date, if the Lease Commencement Date occurs on the first day of a month, or (b) the last day of the month which includes the one hundred twenty-seventh (127th) monthly anniversary of the Lease Commencement Date, if the Lease Commencement Date occurs on a day which is other than on the first day of a month, unless the Lease Term is terminated earlier in accordance with the provisions of this Lease. Except as may otherwise be specified, if there is any renewal or extension of the Lease Term, then the defined term "Lease Term" shall include any renewal or extension term. SECTION 2.2 Lease Commencement Date (a) The Lease Commencement Date shall be July 1, 1998 or such later date on which Landlord delivers possession of the Phase I Premises to Tenant ("Lease Commencement Date"). (b) It is presently anticipated that the Phase I Premises will be made available to Tenant for occupancy on July 1, 1998 and the Phase II Premises will be made available on December 1, 1998; provided, however, if Landlord is unable for any reason to deliver possession of the Premises by such dates, Landlord shall not have any liability whatsoever to Tenant on account of Landlord's inability to deliver possession of the Premises to Tenant and this Lease shall not be rendered void or voidable as a result of such delay except as provided below. If Landlord fails, for any reason, to deliver exclusive possession of the Phase I Premises to Tenant on or before October 31, 1998, then in addition to any other remedies available to Tenant at law or in equity, Tenant may elect to cancel this Lease by written notice to Landlord delivered at any time prior to Landlord's delivery of exclusive possession of the Phase I Premises. If Landlord fails, for any reason, to deliver exclusive possession of the Phase II Premises to Tenant on or before March 31, 1999, then, in addition to any other remedies available to Tenant at law or in equity, Tenant may elect to cancel this Lease by written notice to Landlord delivered at any time prior to the first to occur of April 30, 1999 or Landlord's delivery of exclusive possession of the Phase II Premises. Landlord agrees to use diligent efforts to obtain possession of the Phase I and Phase II Premises from the current tenant. Any Lease provision which excuses delays for events of force majeure shall have no applicability to this paragraph. (c) Promptly after the Lease Commencement Date, Landlord and Tenant, upon the request of either, shall execute a certificate in the form attached hereto as Exhibit B setting forth the Lease Commencement Date and the date on which the Lease Term shall expire. 4 SECTION 2.3 Renewal (a) Provided (i) no default under this Lease exists at the time notice is given or at the expiration of the initial Lease Term and (ii) that Tenant or an assignee permitted pursuant to Article 8 hereof is in occupancy of at least seventy-five percent (75%) of the Premises at the expiration of the initial Lease Term, Tenant shall have the right and option, exercisable by giving written notice thereof at least twelve (12) months but not more than fifteen (15) months prior to the expiration of the initial Lease Term, to extend the Lease Term for one (1) period of five (5) years, and, upon the giving of such notice, this Lease shall automatically be extended for such five (5) year period and no instrument of extension need be executed. In the event that Tenant fails to give such notice to Landlord as herein provided, this Lease shall automatically terminate at the end of the initial Lease Term and Tenant shall have no further right or option to extend this Lease. (b) The extended Lease Term shall be upon the same covenants, agreements, provisions, terms and conditions as the original Lease Term, except that Tenant shall have no further options to renew or extend the Lease Term and that fixed annual rent during the extended Lease Term shall equal the fair market rental value of the Premises as of the commencement date of the extended Lease Term. The fair market rental value shall be determined by comparison to transactions involving other renewal, not new, tenants. If the parties cannot agree on the fair market rental value within thirty (30) days after Tenant gives notice of extension, the fair market rental value shall be determined by the Three Broker Method (as defined below); provided, however, that if the fair market rental is determined pursuant to the Three Broker Method, then upon the rendering of such decision, Tenant shall be entitled to rescind its exercise of its extension option provided such rescission is exercised by an irrevocable written notice given to Landlord not more than ten (10) days after the fair market rental has been determined and the parties have been notified thereof. No such rescission shall be effective unless Tenant pays Landlord's reasonable out-of-pocket expenses incurred in connection with such option, including, without limitation, all costs incurred with respect to the determination of fair market rental. (c) The "Three Broker Method" used to determine fair market rental value shall be applied as follows. Either Landlord or Tenant (the "First Party") may initiate a determination of the fair market rental value by delivering written notice to the other (the "Second Party") of the name of a real estate broker or salesman who has at least ten (10) years of experience as a broker or salesman for the leasing of office space in downtown Washington, D.C. Within ten (10) days after receipt of such notice, the Second Party shall name a real estate broker or salesman who meets the same criteria by written notice to the First Party. If the Second Party fails to name such a broker or salesman within such period, then the fair market rental value established by the broker or salesman named by the First Party shall be the rental. If the Second Party does name such a broker or salesman, then within fifteen (15) days the two brokers or salesmen shall together appoint a third broker or salesman who meets the same criteria and within an additional fifteen (15) days the three brokers or salesmen shall jointly determine the fair market rental value, which shall be the rental. Each broker or salesman shall consider all components of this Lease. Fair market rental value shall be determined with reference to the average or normal value being achieved by landlords in lease renewals entered into with private sector tenants for comparable space in comparable buildings in equally desirable locations within downtown 5 Washington, D.C. assuming operating expense and real estate tax pass-throughs and consumer price index or fixed increases corresponding to those contained in this Lease (if any). If the three brokers or salesmen cannot agree to a fair market rental value, the average of the determinations of the brokers or salesmen who are closest to each other shall be binding and conclusive (or, if the middle broker or salesman is exactly midway between the other two, the middle determination shall be binding and conclusive). Each party shall pay all costs, fees and expenses of the broker or salesman selected by it and the parties shall equally share the costs, fees and expenses of the third broker or salesman. ARTICLE 3 RENT ---- SECTION 3.1 Fixed Rent Tenant shall pay to Landlord as "fixed annual rent" for each Lease Year for the Premises, without notice, set-off, counterclaim, deduction or demand except as specifically provided for in this Lease, the following amounts:
Lease Year Fixed Annual Rent Per Rentable Square Foot ---------- ------------------------------------------ 1 $23.25 2 23.72 3 24.19 4 24.67 5 25.17 6 27.42 7 27.96 8 28.52 9 29.09 10 29.68 11 30.27 (partial Lease Year)
The foregoing amounts are subject to increase under Section 15.1(d) below. Fixed annual rent shall be payable in equal monthly installments beginning on the Lease Commencement Date and thereafter monthly, in advance, on the first day of each month during the Lease Term (each such monthly installment being referred to herein as "fixed monthly rent"); provided, however, that fixed monthly rent shall be abated as follows: 6
Fixed Monthly Rent Is Abated/Payable ------------------------------------ Month* Phase I Premises Phase II Premises - ------ ---------------- ----------------- July 1998 payable n/a August 1998 payable n/a September 1998 abated n/a October 1998 abated n/a November 1998 abated n/a December 1998 abated abated January 1999 payable abated February 1999 payable abated March 1999 payable abated April 1999 payable abated May 1999 payable abated
*These dates assume a Lease Commencement Date of July 1, 1998 and delivery of the Phase II Premises to Tenant on December 1, 1998. If the foregoing assumption(s) proves to be incorrect, then the abatement shall be appropriately adjusted to provide Tenant with the same economic benefit. Commencing June 1, 1999 (or such later date as shall be applicable if the above schedule is revised as set forth above), fixed monthly rent shall be due and payable on the entire Premises. If rent should abate pursuant to the terms of the Lease (for any reason other than foregoing "free rent" periods) at any time when Tenant is intended to receive the economic benefits of "free rent," then such abatement shall be continued for so long as is necessary for Tenant to receive the economic benefits of the foregoing "free rent" period. Concurrently with the signing of this Lease, Tenant shall pay to Landlord a sum equal to one (1) month's fixed monthly rent for the Permanent Premises, forty-one percent (41%) of which sum shall be credited by Landlord against the fixed monthly rent due for the first full calendar month of the Lease Term, and fifty-nine percent (59%) of which shall be credited by Landlord against the fixed monthly rent due for the month of June 1999 (or such later date as shall be applicable if the above schedule is revised as set forth above). If the Lease Commencement Date is a date other than the first day of a month, rent from such date until the first day of the following month shall be prorated at the rate of one-thirtieth (1/30th) of the fixed monthly rent for each day. As used herein, the first "Lease Year" shall mean the period commencing on the Lease Commencement Date and continuing for any partial calendar month in which the Lease Commencement Date occurs and for twelve (12) full calendar months thereafter. Each successive twelve (12) month period thereafter during the Term shall constitute a subsequent "Lease Year", except that the last Lease Year shall end on the expiration of this Lease. SECTION 3.2 Late Payment; Interest Charge If Tenant fails to make any payment of rent within ten (10) days after the date such payment is due and payable, as evidenced, with respect to fixed annual rent, by a schedule to be provided by Landlord to Tenant (such schedule to be subject to revision from time to time 7 including, without limitation, if the Lease Commencement Date is other than July 1, 1998 and/or if the Phase II Premises are delivered to Tenant on a date after December 1, 1998), Tenant shall pay to Landlord a late charge of five percent (5%) of the amount of such payment, together with interest on said overdue amount from the due date until paid at the Default Rate (as defined below). Such late charges and interest shall constitute additional rent due hereunder, shall be paid within five (5) days after demand therefor by Landlord and shall be in addition to all other rights and remedies provided to Landlord in this Lease. Past due amounts owed by Landlord to Tenant shall also accrue interest at the Default Rate. For purposes of this Lease, the "Default Rate" shall mean the "prime rate" published from time to time by The Wall Street Journal in its "money rates" section plus two percentage points, but in no event at a rate which is higher than the legal limit. The provisions of this Section are separate from, and Landlord's rights and remedies are in addition to, the provisions of Article 20 below. SECTION 3.3 Rent Generally As used in this Lease, "rent" includes all fixed annual rent, fixed monthly rent, all sums payable under Article 4 below, all additional rent and all other sums due to Landlord under this Lease, however called. All rent payable by Tenant shall be paid to Landlord in lawful money of the United States of America at the office of Landlord or to such other party or to such other address as Landlord may designate from time to time by written notice to Tenant. Unless specifically stated otherwise in this Lease, all rent payable under this Lease shall be paid in full by Tenant, in advance, without notice or demand and without set-off, deduction, recoupment, abatement, counterclaim or adjustment of any kind; additional rent for which no due date is otherwise specified in this Lease is due and payable as aforesaid but within ten (10) days after demand is made (instead of in advance). Tenant's covenant to pay rent is an independent covenant. If Landlord shall at any time or times accept rent to which Landlord is entitled hereunder after the same shall become due and payable, such acceptance shall not excuse a delay upon subsequent occasions, or constitute, or be construed as, a waiver of any or all of Landlord's rights hereunder. Tenant's obligation for the payment of rent shall survive the expiration or sooner termination of this Lease. ARTICLE 4 ADDITIONAL RENT --------------- SECTION 4.1 Increases in Annual Operating Charges and Increases in Real Estate Taxes (a) From and after January 1, 2000, Tenant shall pay to Landlord Tenant's proportionate share of the amount by which the Annual Operating Charges (as hereinafter defined) incurred by Landlord in the operation of the Property during each operating year falling entirely or partly within the Lease Term exceed the Annual Operating Charges incurred by Landlord in the operation of the Property during calendar year 1999 ("Operating Charges Base Year"). For purposes of this Section 4.1(a), Tenant's proportionate share of such increase shall be a percentage equal to the rentable square footage of the Premises divided by the rentable square footage of the Building, excluding any retail space and storage space. As used in this 8 Lease, an "operating year" is the period beginning on January 1 and ending on the next December 31, both dates inclusive, or any portion of such period. (b) From and after January 1, 2000, Tenant shall pay to Landlord Tenant's proportionate share of the amount by which the Real Estate Taxes (as hereinafter defined) actually paid by Landlord during each operating year falling entirely or partly within the Lease Term exceed the Real Estate Taxes actually paid by Landlord during calendar year 1999 ("Real Estate Taxes Base Year"). For purposes of this Section 4.1(b), Tenant's proportionate share of such increase shall be a percentage equal to the rentable square footage of the Premises divided by the rentable square footage of the Building, excluding storage space. SECTION 4.2 Annual Operating Charges Defined and Real Estate Taxes Defined (a) The "Annual Operating Charges" are defined as the sum of all costs and expenses incurred by or on behalf of Landlord in operating, owning, managing, insuring, securing and maintaining the Property or any part thereof, including, without limitation, all costs and expenses of: operating, equipping, maintaining, repairing, replacing, policing, painting and cleaning, lighting, heating, ventilating and air-conditioning equipment, signage and access control for or of the Property; salaries, fringe benefits and other compensation, however denominated, of all personnel engaged in operating and maintenance of the Property (including, but not limited to, health, accident and group life insurance and the cost of uniforms, equipment and employment taxes); alarm systems; elevators and escalators; all insurance whatsoever, including, without limitation, liability insurance for personal injury, death and property damage (including, without limitation, to Landlord's personal property), insurance against fire, extended coverage, theft or other casualties, worker's compensation insurance covering personnel, fidelity bonds for personnel, insurance against liability for defamation and claims of false arrest occurring in the Building, or on and about the Property, rent loss insurance, sprinkler leakage insurance, and plate glass insurance for glass serving the common areas of the Property; all supplies and materials; maintenance, repair and replacement of all exterior glass; storage, removal and other costs associated with debris; the costs of any capital improvements or other costs (i) which are intended as a labor-saving device or to effect other economies in the operation or maintenance of the Property, or (ii) incurred after the date hereof that are required under any governmental law or regulation enacted after the date hereof (provided, however, that if any such costs described in (i) or (ii) above is a capital expenditure, such costs shall be amortized [including interest on the unamortized costs] over its useful life as Landlord shall reasonably determine); coordination and use of any loading dock serving the Building; repair or replacement of awnings, paving, curbs, walkways, interior and exterior landscaping, drainage, pipes, ducts, conduits and similar items, lighting facilities and the roof; the rental of music program services and loudspeaker systems, and the maintenance and repair of such equipment; all costs and expenses associated with Landlord's management office, Landlord's storage areas and other management facilities in the Building and the equipment therein; lobby attendant (if any) and concierge (if any); energy management services, maintenance contracts, window cleaning, snow removal, elevator maintenance, char and janitorial service and trash removal; personal property taxes on equipment and supplies used in connection with the Property; costs of continuing education and professional and trade association dues for Building management staff; recycling expenses; the costs of any additional services not provided to the Property at the Lease 9 Commencement Date but thereafter provided by Landlord; cost of water and sewer services; parcel pick-up and delivery services; any costs and expenses of compliance with legal requirements; legal fees not recovered from other parties; accounting fees; management fees and costs paid to the management company managing the Property; fulfillment of Landlord's obligations under one or more vault space or public space agreements with the District of Columbia and under easements, covenants and cost-sharing agreements; and any costs, charges and expenses, in addition to those set forth in this definition, which according to generally accepted accounting principles and practice would be regarded as costs to operate, own, manage, insure, secure or maintain the Property. (b) If the Building is less than ninety-five percent (95%) occupied during any operating year (including the Operating Charges Base Year) or part thereof, Annual Operating Charges shall include all additional costs and expenses of operation, management, insuring, securing and maintenance of the Property which Landlord reasonably determines that it would have paid or incurred during such operating year if the Building had been ninety-five percent (95%) occupied. (c) Annual Operating Charges shall not include the following: (A) The cost of the original construction or any capital addition made to the Building, including the cost to prepare space for occupancy by a new tenant, except as specifically set forth above. (B) Repairs or other work occasioned by fire, windstorm or other insured casualty or hazard to the extent that Landlord receives proceeds of such insurance to be used for such purpose. (C) Leasing commissions, marketing and advertising expenses and other costs incurred in leasing or procuring renewal or new tenants, including (without limitation) attorney's fees and space planning costs. (D) Repairs or rebuilding necessitated by condemnation to the extent that Landlord receives an award. (E) Depreciation and amortization of the Building and its equipment. (F) Any ground or underlying lease rental. (G) Debt expenses and interest, principal, points and fees on debts, or amortization on any mortgage or other debt instrument encumbering the Building or the Land. (H) Rentals for items (except when needed in connection with normal repairs and maintenance of permanent systems) which if purchased, rather than 10 rented, would constitute a capital improvement which is not specifically included in Annual Operating Charges. (I) Advertising and promotional expenditures, and costs of signs in or on the Building identifying the owner of the Building or other tenants' signs. (J) Costs, including permit, license and inspection costs, incurred with respect to the installation of improvements made for tenants or other occupants in the Building or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Building. (K) Expenses in connection with services or other benefits which are not offered to Tenant or for which Tenant is charged directly but which are provided to another tenant or occupant of the Building without charge. (L) Costs incurred by Landlord due to the violation by Landlord or any tenant of the terms and conditions of any lease of space in the Building. (M) The amount of the management fee paid or charged by Landlord in connection with the management of the Building to the extent such management fee is in excess of the management fee customarily paid or charged by landlords of first-class buildings in downtown Washington, D.C. (N) Salaries and other benefits paid to the employees of Landlord to the extent customarily included in or covered by a management fee paid or charged by landlords of first-class buildings in downtown Washington, D.C. in connection with the management of such properties, provided that in no event shall Annual Operating Charges include salaries and/or benefits attributable to personnel above the level of Building manager. (O) The amount of rent for any office space occupied by Building management personnel to the extent the size or fair market rental value of such office space exceeds the size or fair market rental value of office space occupied by management personnel of first-class buildings in downtown Washington, D.C. (If any such office space is used to manage more than one building, then the rent charged hereunder shall be equitably apportioned.) (P) Amounts paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or services in the Building to the extent the same exceeds the costs of such goods and/or services rendered by unaffiliated third parties on a competitive basis. (Q) Landlord's general corporate overhead and general and administrative expenses. 11 (R) Any compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord unless made a part of Tenant's base. (S) Costs incurred in connection with upgrading the Building's Common Areas to comply with laws, rules, regulations and codes in effect and applicable to the Building's Common Areas prior to the date hereof, including (without limitation) the Americans With Disabilities Act. (T) Tax penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments and/or to file any income tax or informational returns when due. (U) Costs arising from Landlord's charitable or political contributions. (V) Costs arising from earthquake insurance unless landlords of first-class buildings in downtown Washington, D.C. also carry it. (W) Costs arising from latent defects in the base Building. (X) Costs (including in connection therewith all attorneys' fees and costs of settlement, judgments and payments in lieu thereof) arising from claims, disputes, litigation or arbitration pertaining to Landlord. (Y) Costs associated with the operation of the business of the partnership or entity which constitutes Landlord as the same are distinguished from the costs of operation of the Building, including partnership accounting and legal matters, costs of defending any lawsuits with any mortgagee (except as the actions of Tenant may be in issue), and costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the Building. (Z) Any costs expressly excluded from Annual Operating Charges elsewhere in this Lease. (AA) Any Real Estate Taxes and any costs or taxes expressly excluded from Real Estate Taxes in this Lease. (BB) Any other costs not customarily included in Annual Operating Charges (or the definitional equivalents) for other first-class office buildings in downtown Washington, D.C. (d) "Real Estate Taxes" means the total of all real estate taxes, business improvement district assessments, ad valorem taxes, transit taxes and other assessments and charges (including payments in lieu of taxes), general and special, ordinary and extraordinary, foreseen or unforeseen, assessed, levied, or imposed upon the Building or the Land which are 12 actually paid during the operating year in question; provided, however, if any assessment is payable in installments, Real Estate Taxes for any operating year shall include only the installments payable in such operating year. Real Estate Taxes shall also include legal costs and other costs and expenses incurred in any appeal of the tax assessment upon which such Real Estate Taxes are based, whether or not such appeal is successful. Such costs and expenses shall be included in Real Estate Taxes for the operating year for which appeal is made without regard to the date such costs are actually incurred. Real Estate Taxes shall not include (i) franchise taxes, gift taxes, capital stock taxes, inheritance taxes, estate taxes, federal and state net income taxes, and other taxes attributable to Landlord's net income (as opposed to rents, receipts or income attributable to the Building or Property), (ii) any items accounted for in Annual Operating Expenses, (iii) any taxes paid directly to the taxing authority by Tenant, and (iv) penalties, interest or late fees levied if Landlord fails to timely pay its Real Estate Taxes if Tenant has paid its proportionate share thereof. SECTION 4.3 Statement of Annual Operating Charges and Real Estate Taxes Except as provided in Section 4.4 below, Landlord shall submit to Tenant each year a statement in reasonable detail setting forth the respective amounts payable by Tenant pursuant to this Article for the preceding operating year for increases in Annual Operating Charges and for increases in Real Estate Taxes. Within thirty (30) days after receipt of such statement, Tenant shall pay to Landlord the amount shown thereon. For all purposes under this Article, Tenant's liability for increases in Annual Operating Charges and Tenant's liability for increases in Real Estate Taxes shall each be calculated separately. SECTION 4.4 Installment Payments; Proration (a) In lieu of accepting from Tenant one annual payment for Tenant's proportionate share of the increase in the Annual Operating Charges and one annual payment for Tenant's proportionate share of the increase in Real Estate Taxes, Landlord shall have the right, from time to time, to require Tenant to make estimated monthly payments on account of the respective amounts Tenant will be obligated to pay pursuant to this Article for each operating year falling entirely or partly within the Lease Term. If Landlord exercises such right, Landlord shall submit to Tenant a statement setting forth Landlord's reasonable estimate of each of the respective amounts Tenant will be obligated to pay pursuant to this Article for the operating year in question, which estimates may be revised by Landlord from time to time during the operating year, and Tenant shall pay to Landlord on the first (1st) day of each month following receipt of such statement during such operating year an amount (separately calculated and payable for each of the estimated increase in Annual Operating Charges and the estimated increase in Real Estate Taxes) equal to such respective estimated amount multiplied by a fraction, the numerator of which is 1 and denominator of which is the number of months during such operating year which fall within the Lease Term and follow the date of the foregoing statement. After the expiration of such operating year, Landlord shall submit to Tenant a statement showing Tenant's proportionate share of the increase in the Annual Operating Charges incurred during such operating year and Tenant's proportionate share of the increase in Real Estate Taxes for such operating year, and the respective aggregate amount of the estimated payments made by Tenant on account of each of the increase in Annual Operating Charges and the increase in Real Estate Taxes. 13 If the aggregate amount of such estimated payments paid by Tenant for the increase in Annual Operating Charges exceeds Tenant's actual liability for such increase, Landlord shall credit such excess to Tenant's account, subject to Section 4.4(d) below. If Tenant's actual liability for such increase in the Annual Operating Charges exceeds the estimated payments made by Tenant on account thereof, then Tenant shall pay to Landlord the total amount of such deficiency within thirty (30) days after demand. If the aggregate amount of such estimated payments paid by Tenant for the increase in Real Estate Taxes exceeds Tenant's actual liability for such increase, Landlord shall credit such excess to Tenant's account, subject to Section 4.4(d) below. If Tenant's actual liability for such increase in Real Estate Taxes exceeds the estimated payments made by Tenant on account thereof, then Tenant shall pay to Landlord the total amount of such deficiency within thirty (30) days after demand. (b) In the event the Lease Term commences or expires during an operating year, then each of the increase in the Annual Operating Charges to be paid by Tenant for such operating year and the increase in Real Estate Taxes to be paid by Tenant for such operating year shall be determined by multiplying the amount of Tenant's proportionate share thereof for the full operating year by a fraction, the numerator of which is the number of days during such operating year falling within the Lease Term, and the denominator of which is 365. At least thirty (30) days prior to the end of the Lease Term, Landlord may present to Tenant a written statement containing a reasonable estimate of the amounts Tenant would be obligated to pay under this Article if the actual Annual Operating Charges and the actual Real Estate Taxes for the operating year had been determined. Tenant shall be required to pay such estimated amounts on or before the last day of the Lease Term, and if all or any portion of the payments are not made, Landlord shall be entitled to deduct such amount from the Security Deposit, if any. Once the Annual Operating Charges and the Real Estate Taxes for the last operating year of the Lease Term have been determined, Landlord shall provide Tenant with a statement of the actual increase in Annual Operating Charges and the actual increase in Real Estate Taxes for which Tenant is liable. If Tenant owes an additional amount, such amount is due on or before sixty (60) days after receipt of the statement. If Tenant is entitled to a refund, Landlord shall have sixty (60) days from the date of the statement within which to remit payment to Tenant, subject to Section 4.4(d) below. (c) The parties' obligation to reconcile increases in Annual Operating Charges and Real Estate Taxes shall survive the expiration or termination of this Lease, and shall be applicable even if no estimated statement is provided under Section 4.4(a) above. Notwithstanding any dispute which may arise in connection with the computation or estimate of the amount due under this Article, Tenant shall be obligated to pay the amount specified by Landlord, without set-off, recoupment, abatement, counterclaim, adjustment or deduction of any kind, pending the resolution of any dispute. (d) In the event Tenant is in default under this Lease at the time any credit or payment is otherwise to be made to Tenant under this Section, Landlord may offset against such credit or payment to compensate it for any amount owed by Tenant or for damage incurred or that may be incurred by Landlord as a consequence of said default. 14 SECTION 4.5 Additional Taxes or Governmental Charges In the event that any business, rent, or other taxes, or any governmental charges (including mandates for energy savings) that are now or hereafter levied upon Tenant's use or occupancy of the Premises or Tenant's business at the Premises are charged, enacted, changed, or altered so that any of such taxes are levied against Landlord, or the mode of collection of such taxes is changed so that Landlord is responsible for collection or payment of such taxes, Tenant shall pay any and all such taxes to Landlord upon written demand from Landlord. SECTION 4.6 Change In or Contest of Real Estate Taxes In the event of any change by any taxing body in the period or manner in which any of the Real Estate Taxes are levied, assessed or imposed, Landlord shall have the right, in its sole discretion, to make equitable adjustments with respect to computing increases in Real Estate Taxes. Real Estate Taxes which are being contested by Landlord shall be included in computing Tenant's proportionate share of the increases in Real Estate Taxes under this Article, but if Tenant shall have paid additional rent on account of contested Real Estate Taxes and Landlord thereafter receives a refund of such taxes, Tenant shall receive a credit toward subsequent rent payments in an amount equal to Tenant's proportionate share of such refund. SECTION 4.7 Tenant Audit Right Landlord shall maintain reasonably complete and accurate records of matters relating to the calculation of the Annual Operating Charges and Real Estate Taxes and Tenant's share thereof for a period of at least one (1) year. Within sixty (60) days after receipt by Tenant of Landlord's annual reconciliation statement (the "Statement"), Tenant shall advise Landlord whether Tenant desires to conduct an audit of such Statement. If Tenant so advises Landlord, a "Big Four" independent certified public accounting firm, designated and paid for by Tenant, may, after reasonable notice to Landlord and at reasonable times, inspect Landlord's records with respect to the Statement at Landlord's offices, provided that Tenant's disputing or confirming a Statement shall not relieve Tenant from paying the Additional Rent set forth in the Statement during the pendency of the dispute. Tenant's failure to advise Landlord of its intent to conduct such an audit within the aforesaid sixty (60) day period or, in the event Tenant timely gives notice of its intent to conduct such an audit, to dispute in writing with reasonable detail the amount of Additional Rent set forth in any Statement within six (6) months of the date of such Statement, shall be deemed to be Tenant's approval of such Statement and Tenant thereafter waives the right or ability to dispute the amounts set forth in such Statement. Tenant shall bear the expense of any audit or review conducted; provided, however, that in the event that it is ultimately determined that Landlord's Statement is overstated by eight percent (8%) or more, then Landlord shall pay Tenant's reasonable audit or review expenses. Any overcharges shown by any such inspection shall be credited against the next installment(s) of Rent or other charges due from Tenant, or if none, shall be refunded to Tenant. Any undercharges shown by any such inspection shall be paid by Tenant within ten (10) days. 15 ARTICLE 5 SECURITY DEPOSIT ---------------- SECTION 5.1 Amount (a) Simultaneously with the execution of this Lease, Tenant shall deposit with Landlord the sum of Six Hundred Forty-Three Thousand Dollars ($643,000.00) as a security deposit (the "Security Deposit"). (b) Provided Tenant has not failed to make any payment of rent within five (5) days after the due date under this Lease (except that Tenant may fail to make up to two (2) payments of rent per calendar year within ten (10) days after their due dates under this Lease before the foregoing five-day proviso goes into effect), regardless of any other applicable notice and/or cure period, or otherwise been in default hereunder beyond the expiration of any applicable notice and/or cure period, then, at the beginning of the second (2nd) and third (3rd) Lease Years, Landlord shall reduce the amount of the then-outstanding Security Deposit by one-third (1/3rd) at the beginning of each such Lease Year. Provided Tenant has not failed to make any payment of rent within five (5) days after the due date under this Lease (except that Tenant may fail to make up to two (2) payments of rent per calendar year within ten (10) days after their due dates under this Lease before the foregoing five-day proviso goes into effect), regardless of any other applicable notice and/or cure period, or otherwise been in default hereunder beyond the expiration of any applicable notice and/or cure period, then, at the beginning of the fourth (4th) Lease Year, Landlord shall reduce the Security Deposit to an amount equal to two (2) months' fixed monthly rent. Provided Tenant has not failed to make any payment of rent within five (5) days after the due date under this Lease (except that Tenant may fail to make up to two (2) payments of rent per calendar year within ten (10) days after their due dates under this Lease before the foregoing five-day proviso goes into effect), regardless of any other applicable notice and/or cure period, or otherwise been in default hereunder beyond the expiration of any applicable notice and/or cure period, and Tenant renews the Lease Term in accordance with the terms of this Lease, then, at the beginning of the renewal Lease Term, Landlord shall refund the Security Deposit to Tenant. (c) Landlord shall not be required to maintain the Security Deposit in a separate account. The Security Deposit shall not earn interest unless required by applicable law. The Security Deposit shall be security for the performance by Tenant of all of Tenant's obligations, covenants, conditions and agreements under this Lease. SECTION 5.2 Application In the event of any default by Tenant hereunder during the Lease Term, Landlord shall have the right, but shall not be obligated, to use, apply, or retain all or any portion of the Security Deposit for (a) the payment of any rent as to which Tenant is in default, or (b) the payment of any amount which Tenant may be obligated to pay to repair physical damage to the Premises or the Building pursuant to this Lease, or (c) the payment of any amount which Tenant may be obligated to pay for the compensation to Landlord for any losses incurred by reason of Tenant's default, including, but not limited to, any damage or deficiency arising in connection with the 16 reletting of the Premises. If any portion of the Security Deposit is so used or applied, then within ten (10) business days after written notice to Tenant of such use or application, Tenant shall deposit with Landlord cash in an amount sufficient to restore the Security Deposit to its original amount, and Tenant's failure to do so shall constitute a default under this Lease. The Security Deposit is not a measure of damages or liquidated damages, and Landlord's use of the Security Deposit is not a waiver of its other rights and remedies. Provided Tenant is not in default hereunder, Landlord shall return the Security Deposit to Tenant, less such portion thereof as Landlord shall have applied or be entitled to apply to satisfy any default by Tenant hereunder, after the last to occur of the making of the payment of the final operating year's increase in Annual Operating Charges and/or Real Estate Taxes under Section 4.4(b) above, or within forty-five (45) days following the later to occur of the expiration of the Lease Term or the vacating and surrendering of the Premises by Tenant to Landlord. SECTION 5.3 Third Parties In the event of the sale or transfer of Landlord's interest in the Building, Landlord shall have the right to transfer the Security Deposit to the transferee of Landlord's interest, in which event Tenant shall look only to the new landlord for the return of the security deposit, and the transferor Landlord shall thereupon be released from all liability to Tenant for the return of the Security Deposit. SECTION 5.4 Letter of Credit (a) Tenant shall have the right to deposit and maintain the Security Deposit as an irrevocable commercial letter of credit in form and substance reasonably acceptable to Landlord. (A letter of credit meeting the terms of this Section is referred to as the "Letter of Credit.") The Letter of Credit must be issued by NationsBank, N.A. or another commercial bank (the "Issuer") reasonably acceptable to Landlord and must be presentable in the Washington, D.C. metropolitan area. The Letter of Credit must also be payable at sight without presentation of any other documents, statements, or authorizations (except for the draw request form attached thereto), must allow for partial draws, and must have a term of not less than one (1) year from the Commencement Date. The Letter of Credit must also provide for its automatic renewal on a year-to-year basis unless the Issuer gives Landlord at least two (2) months written notice of nonrenewal, and the final expiration date of the Letter of Credit may not be any earlier than the date which is three (3) months after the scheduled initial Lease Term expiration date (or, in the case of a renewal when the Security Deposit has not been refunded to Tenant, three (3) months after the scheduled expiration date of the renewal Lease Term). (b) The Letter of Credit must also be subject to being drawn upon in the event of any default by Tenant under this Lease, or if the Issuer gives notice of nonrenewal to Landlord and a replacement Letter of Credit (or the cash equivalent) is not delivered to Landlord at least thirty (30) days prior to the non-renewed Letter of Credit's expiration date, or if there is a dispute between Landlord and Tenant on the date which is thirty (30) days prior to the stated expiration date of the Letter of Credit over whether Landlord may draw on the Letter of Credit, or if Landlord assigns this Lease to a third party and the Issuer does not consent to the transfer of the Letter of Credit to the successor Landlord, or if the Issuer is not solvent or the Issuer has been put 17 into conservatorship or receivership (or any similar program) by any governmental authority having regulatory oversight over the Issuer. Notwithstanding any implication to the contrary contained in the foregoing, it is understood and agreed that Landlord's willingness to accept a Letter of Credit as the Security Deposit in lieu of cash is an accommodation to Tenant and that Tenant bears all risk of the Issuer failing, refusing or being unable to honor a proper draw thereon. If the Issuer fails, refuses or is unable to honor a proper presentment of the Letter of Credit, Tenant shall be obligated to immediately deliver a replacement Letter of Credit meeting the terms of this paragraph (or the cash equivalent) to serve as the Security Deposit. A letter of credit in the form attached hereto as Exhibit G meets the technical requirements of this Section. (c) In the event the Security Deposit is to be reduced pursuant to Section 5.1 above, Landlord shall return the Letter of Credit it then possesses upon delivery to it of cash or a replacement Letter of Credit in the appropriate amount. ARTICLE 6 USE --- SECTION 6.1 Use Tenant shall use and occupy the Premises solely for an accredited academic institution providing educational instruction to adults, and for ancillary purposes including general office or professional support service uses in connection therewith, but for no other use or purpose other than general office or back room support services. Tenant shall not use or occupy the Premises for any unlawful purpose or in any manner that will constitute waste, nuisance or unreasonable annoyance to Landlord or other tenants of the Building. Notwithstanding anything contained in this Lease to the contrary, Tenant shall have no obligation to occupy the Premises during the Lease Term; provided, however, that Tenant's ceasing to occupy the Premises shall not relieve Tenant from its obligation to pay the rent pursuant to the terms of this Lease. SECTION 6.2 Compliance with Laws Tenant shall comply with all present and future laws, ordinances (including zoning ordinances and land use requirements), regulations, and orders of the United States of America, the District of Columbia, and any other public or quasi-public authority having jurisdiction over the Premises concerning the use, occupancy, facilities in and condition of the Premises and all machinery, equipment, facilities, entrances thereto, exits therefrom and furnishings therein (excluding any requirements for structural changes or matters affecting the restrooms or base building systems, the responsibility for which shall remain with Landlord, who shall comply with all applicable laws relating thereto). It is expressly understood that Tenant, at Tenant's cost and expense, will obtain an occupancy permit for the Premises. If any future law, ordinance, regulation, or order requires another occupancy permit or other permit for the Premises, Tenant will obtain such permit at Tenant's sole expense. Tenant shall pay all costs, expenses, liabilities, losses, damages, fines, penalties, claims, and demands, including reasonable counsel fees, that may in any manner arise out of or be imposed because of the failure of Tenant to comply with the covenants of this Section. 18 SECTION 6.3 Trash Sorting Tenant covenants and agrees, at its sole cost and expense: (a) to comply with all present and future laws, orders, and regulations of the District of Columbia, federal, municipal, and local governments, departments, commissions, agencies and boards regarding the collection, sorting, separation, and recycling of garbage, trash, rubbish and other refuse (collectively, "trash"); (b) to sort and separate its trash into such categories as are provided by law; (c) that each separately sorted category of trash shall be placed in separate receptacles as directed by Landlord; (d) that Landlord reserves the right to refuse to collect or accept from Tenant any trash that is not separated and sorted as required by law, and to require Tenant to arrange for such collection at Tenant's sole cost and expense, utilizing a contractor satisfactory to Landlord; and (e) that Tenant shall pay all costs, expenses, fines, penalties, or damages that may be imposed on Landlord or Tenant by reason of Tenant's failure to comply with the provisions of this Section. SECTION 6.4 Environmental Laws (a) This Section shall survive the expiration or termination of this Lease. (b) Except as otherwise expressly permitted by this Lease, Tenant shall not use any portion or all of the Property for the use, generation, treatment, storage or disposal of "toxic substances," "contaminants," "pollutants," "hazardous materials", "hazardous waste", "hazardous substances" or "oil" (collectively, "Materials") as such terms are defined under the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., as amended, the Resource Conservation and Recovery Act of 1976, 42 U.S.C. 6901 et seq., as amended, and any and all other environmental statutes which regulate the use of hazardous and/or dangerous substances, and the regulations promulgated thereunder and any and all state and local laws, statutes, codes, ordinances, rules and regulations, without the express prior written consent of Landlord, and then only to extent that the presence and/or discharge of the Materials is (i) properly licensed and approved by all appropriate governmental officials and in accordance with all applicable laws and regulations and (ii) in compliance with any terms and conditions stated in said prior written approval by Landlord. Tenant may use such Materials as are used for ordinary office purposes in the ordinary course of Tenant's business, provided that such use is in accordance with all applicable statutes, laws, codes, ordinances, rules and regulations, and any manufacturer's instructions; and provided further that Tenant may not discharge any Materials except as provided by applicable statutes, laws, codes, ordinances, rules and/or regulations, and specifically may not discharge any Materials in any public sewer or any drain and/or drainpipe leading or connected thereto. Tenant shall promptly give written notice to Landlord of any communication received by Tenant from any governmental authority or other person or entity concerning any complaint, investigation or inquiry regarding any use, generation, treatment, storage or disposal (or alleged use, generation, treatment, storage or disposal) by Tenant of any Materials in or about the Premises or Property. Landlord shall have the right (but not the obligation) to conduct such investigations or tests (or both) as Landlord shall reasonably deem necessary with respect to any such complaint, investigation or inquiry, and Tenant, at its expense, shall take such action (or refrain from taking such action) as Landlord may request in connection with such investigations and tests by Landlord. 19 (c) Notwithstanding anything in this Lease to the contrary, Tenant shall not materially adversely affect (as reasonably determined by Landlord) the indoor air quality of the Premises or the Building; without limiting the preceding clause, it shall apply to (and take precedence over any other provision of this Lease concerning) the use of the Premises, the type of equipment, furniture, furnishings, fixtures and personal property that may be brought into the Premises, the construction materials used in Improvements, the standard of maintenance required for the Premises, and compliance with any smoking policy now or hereafter adopted for the Building by Landlord or required by law. (d) Tenant shall be responsible at its own cost for complying with the provisions of the Americans with Disabilities Act or any similar federal or District of Columbia statute, law, ordinance, or code, as they may be amended from time to time, and the rules and regulations which may be adopted thereunder from time to time, as the same may be applicable to the Premises. Landlord's approval of any Improvement or other act by Tenant shall not be deemed to be a representation by Landlord that said Improvement or act complies with applicable law, and Tenant shall remain solely responsible for said compliance. ARTICLE 7 PARKING ------- Tenant shall have the right to purchase one (1) unreserved parking contract in the Building's garage for every 1,500 square feet leased. Tenant must exercise the foregoing right within thirty (30) days after the Lease Commencement Date (or, with respect to any expansion of the Premises, within thirty (30) days after the date such space is added to the Premises) or the right shall expire with respect to any unexercised contracts. All parking contracts and arrangements must be handled by Tenant directly with the operator of the Building's garage and Landlord bears no responsibility or liability with respect thereto (unless and to the extent Landlord self-manages the garage). Parking contracts will be made available on a month-to-month basis and Tenant agrees to pay prevailing prices therefor, as said prices may change from time to time. Tenant agrees to abide by, and to cause anyone acquiring a parking contract through Tenant to abide by, all rules and regulations now or thereafter applicable to the garage. Tenant further agrees that, without limiting any other right or remedy provided by this Lease or by applicable law, its rights under this Article may be revoked in the event of any default under this Lease or under the terms of any parking contract. ARTICLE 8 ASSIGNMENT AND SUBLETTING ------------------------- SECTION 8.1 Landlord's Consent Required (a) Tenant shall not sell, assign, transfer, mortgage, or otherwise encumber this Lease or its interest therein (collectively "assign" or "assignment") or sublet, rent or permit anyone to occupy the Premises, or any part thereof (collectively "sublet"), without obtaining the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or 20 delayed; provided, however, that Landlord shall also have the rights set forth in Section 8.1(b) below. Notwithstanding the foregoing to the contrary, Tenant may assign this Lease or sublease the Premises to any partner, subsidiary, or affiliated corporation of Tenant, to any corporation or person to whom Tenant sells substantially all of its assets, or to any corporation with which Tenant merges or consolidates, provided the resulting entity has a net worth equal to or greater than the assignor Tenant's prior to such merger of consolidation. In no event may this Lease be assigned in part. No assignment or sublet may be effectuated by operation of law or otherwise without the prior written consent of Landlord as aforesaid. The consent of Landlord to any assignment or subletting shall not be construed as a waiver or release of Tenant from liability for the performance of all covenants and obligations to be performed by Tenant under this Lease, nor shall the collection or acceptance of rent from any assignee or subtenant constitute a waiver or release of Tenant from any of its liabilities or obligations under this Lease and the assignor Tenant shall remain jointly and severally liable for the continued performance of Tenant's obligations (all suretyship and similar technical defenses being waived by Tenant). Landlord's consent to any assignment or subletting shall not be construed as relieving Tenant from the obligation of obtaining Landlord's prior written consent to any subsequent assignment or subletting. If Tenant is in default hereunder beyond the expiration of any applicable notice and cure period, Tenant hereby assigns to Landlord the rent due from any subtenant of Tenant and hereby authorizes each such subtenant to pay said rent directly to Landlord. (b) In all cases where Tenant seeks to sublease the Premises or assign this Lease and Landlord's consent is required under Section 8.1(a), Tenant first shall give Landlord fifteen (15) days prior written notice of its intent to do so. For fifteen (15) days following receipt of said notice, Landlord shall have the right, exercisable by sending notice to Tenant, to retake from Tenant: (i) all of the Premises for the balance of the Term in the event Tenant notified Landlord of its intention to assign or transfer this Lease; or (ii) only so much of the Premises for so much of the Term as Tenant intends to sublet in the event Tenant notified Landlord of its intention to sublet the Premises or a portion thereof. In either of the events described in clause (i) or (ii) above, this Lease shall be terminated as of the date specified for such termination in Landlord's notice aforesaid as to the portion or all of the Premises so retaken; provided that any and all liabilities of Tenant which accrued and remained unsatisfied prior to the date of such termination shall survive such termination. In the event Landlord does not exercise its aforesaid right within fifteen (15) days of receipt of said notice, Tenant then may assign or sublet, as the case may be, provided Tenant has obtained the prior written consent of Landlord, which may be given or withheld according to the standard set forth in Section 8.1(a) above. (c) Anything herein to the contrary notwithstanding, if Landlord shall not elect to exercise the right set forth in the immediately preceding paragraph, such election shall not under any circumstances be deemed a consent to the proposed subletting or assignment of Tenant's interest in and to this Lease and/or the Premises and it is expressly understood that any determination by Landlord not to exercise such right shall not preclude Landlord from withholding its consent to such proposed subletting or assignment. (d) In the event of any assignment or sublet, then half (1/2) of any purchase price, assignment fee, furniture or equipment purchase or rental payment, incremental monthly rent or other payment due to Tenant, if any, net of Tenant's reasonable third-party expenses in 21 connection with such assignment or sublet, as the result of any such assignment or sublease which is in excess of the rent (or pro rata portion thereof) then payable by Tenant under this Lease shall be paid by Tenant to Landlord as additional rent as and when received by Tenant. (e) Tenant shall be responsible for and agrees to pay any costs and expenses, including (without limitation) reasonable legal fees, incurred by Landlord in connection with any actual, proposed or purported assignment or sublease, whether or not Landlord consents thereto. SECTION 8.2 Transfers of Interests in Tenant If Tenant is a partnership, a withdrawal or change, whether voluntary, involuntary or by operation of law, of partners owning a controlling or majority interest in Tenant shall be deemed a voluntary assignment of this Lease and subject to the provisions of Section 8.1. If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or the sale or transfer (whether by way of one or more sales or transfers) of a controlling interest of the capital stock of Tenant shall be deemed a voluntary assignment of this Lease and subject to the provisions of Section 8.1. However, the preceding sentence shall not apply to corporations the stock of which is traded through a national or regional exchange or over-the-counter. It is understood and agreed that a controlling interest for purposes of this Article may be less than a majority interest. ARTICLE 9 MAINTENANCE AND REPAIRS ----------------------- SECTION 9.1 Maintenance and Repairs Subject to Landlord's obligations, Tenant will keep and maintain the Premises and all fixtures and equipment located therein in a clean, safe and sanitary condition, will take good care thereof and make all required repairs and replacements thereto (whether structural or non-structural, foreseen or unforeseen), will suffer no waste or injury thereto, and will, at the expiration or other termination of the Lease Term, surrender the Premises, broom clean, in the same order and condition they were in on the Lease Commencement Date (unless otherwise directed by Landlord), ordinary wear and tear and insured damage by the elements excepted. Landlord shall provide and install all original tubes for Building standard lighting fixtures within the Premises (standard lighting fixtures include four foot fluorescent and two foot horseshoe fluorescent fixtures consistent with existing lighting) and all replacement tubes for such lighting as an Annual Operating Charge; all other bulbs, tubes, and lighting fixtures for the Premises (including, without limitation, incandescent bulbs) shall be provided and installed by Tenant at Tenant's cost and expense. Tenant is responsible for providing its own janitorial service to the Premises at its own expense in accordance with the standard set forth above, at least five (5) days per week, on a schedule approved by Landlord. 22 SECTION 9.2 Landlord's Maintenance and Repairs Subject to Section 9.3 below, Landlord shall (a) maintain and keep in good order and repair the roof, foundation, exterior walls and other structural elements of the Building, the building-standard restrooms, and the Building heating, ventilating and air-conditioning, plumbing, electrical, elevator, life safety and other base building systems, and shall make such repairs as become necessary after obtaining actual knowledge of the need for such repairs, and (b) make (i) repairs which are required as a result of latent defects present in the Premises, (iii) repairs to the Premises covered by insurance carried by Landlord and (iii) repairs reasonably required with respect to common areas of the Building which Tenant is entitled to use hereunder. SECTION 9.3 Damage Caused by Tenant All injury, breakage and damage to the Premises and to any other part of the Building caused by any act or omission of Tenant or any agent, employee, subtenant, licensee, contractor, customer, client, family member, or invitee of Tenant, shall be repaired by and at the sole expense of Tenant, except that Landlord shall have the right, at its sole option, to make such repairs and to charge Tenant for all costs and expenses incurred in connection therewith as additional rent hereunder. The liability of Tenant for such costs and expenses shall be reduced by the amount of any insurance proceeds received by Landlord on account of such injury, breakage, or damage. ARTICLE 10 ALTERATIONS ----------- SECTION 10.1 As-Is Condition of Premises The improvements, if any, to be made to the Premises by Landlord to make the Premises ready for Tenant's use and occupancy or, in lieu thereof, the allowance, if any, to be provided by Landlord toward such improvements to the Premises to be performed by Tenant, shall be solely to the extent and subject to the conditions set forth in Exhibit F (the "Work Agreement") attached to this Lease. Except as so provided in Section 24.1 below and in the Work Agreement, Tenant agrees to and shall lease the Premises in its "AS IS" condition as of the date of this Lease, and it is understood and agreed that Landlord will not make or pay for, and is under no obligation to make or pay for, any structural or other alterations, decorations, additions, or improvements in or to the Premises. Notwithstanding the foregoing, however, Landlord shall furnish one (1) submeter (not read by the local utility provider, PEPCO) to monitor Tenant's electrical usage. The cost to install such submeter shall be at Tenant's expense as part of the Tenant Improvement Allowance. SECTION 10.2 Tenant's Improvements (a) Tenant's obligations with respect to the improvements necessary to make the Premises ready for Tenant's use and occupancy shall be as set forth in the Work Agreement. 23 Both as to such work, if any, by Tenant pursuant to the Work Agreement and as to any Improvements (as hereinafter defined) thereafter, Tenant and Tenant's contractors shall abide by Landlord's "Contractor Rules and Regulations" attached hereto as Exhibit E and any reasonable modifications thereto by Landlord. (b) Except for the work, if any, to be performed by Tenant pursuant to the Work Agreement (as to which the Work Agreement shall be controlling), Tenant will not make or permit anyone to make any alterations, decorations, additions, or improvements (hereinafter referred to collectively as "Improvements"), structural or otherwise, in or to the Premises or the Building without the prior written consent of Landlord; provided, however, that Tenant may make cosmetic alterations, such as recarpeting and repairing, not costing more than Fifteen Thousand Dollars ($15,000) for any individual cosmetic alterations (or series of contemporaneous cosmetic alterations) without the necessity of obtaining Landlord's consent. When granting its consent, Landlord may impose any conditions it deems appropriate, including without limitation, the approval of plans and specifications, approval of the contractor or other persons to perform the work, and the obtaining of a performance bond in an amount specified by Landlord and specified insurance. All Improvements permitted by Landlord must conform to all rules and regulations established from time to time by the Board of Fire Underwriters having jurisdiction or any similar body exercising similar functions, and to all laws, statutes, ordinances, codes, rules, regulations, and requirements of the Federal and/or District of Columbia governments. (c) As a condition precedent to such written consent of Landlord, Tenant agrees to obtain and deliver to Landlord written, unconditional waivers of mechanic's and materialmen's liens against the Building and the Land from all work, labor, and services to be performed and materials to be furnished in connection with Improvements. It is further understood and agreed that any Improvements, other than those made by Landlord directly, shall be conducted on behalf of Tenant and not on behalf of Landlord, and that Tenant shall not be deemed to be the agent of Landlord. It is further understood and agreed that in the event Landlord shall give its written consent to the making of any Improvements, such written consent shall not be deemed to be an agreement or consent by Landlord to subject its interest in the Premises, or any leasehold or other interest of Tenant in the Premises, the Building or the Land, to any mechanic's or materialmen's liens which may be filed in connection therewith. If, notwithstanding the foregoing, any mechanic's or materialmen's lien is filed against the Premises, Tenant's interest therein, the Building, and/or the Land for work claimed to have been done for, or materials claimed to have been furnished to, the Premises or to Tenant, such lien shall be discharged by Tenant within fifteen (15) days after notice, at Tenant's sole cost and expense, by the payment thereof or by the filing of a bond. If Tenant shall fail to discharge any such mechanic's or materialmen's lien, Landlord may, at its sole option, discharge such lien and treat the cost thereof (including attorney's fees incurred in connection therewith) as additional rent payable with the next fixed monthly rent payment falling due. It is expressly agreed that such discharge by Landlord shall not be deemed to waive or release the default of Tenant in not discharging such lien. 24 SECTION 10.3 Indemnification for Improvements Tenant shall defend, indemnify and hold Landlord harmless from and against any and all expenses, suits, actions, proceedings, costs, losses, liens, claims, liabilities, judgments, and damages based on or arising directly or indirectly by reason of the making of any Improvements. If any Improvements are made without the prior written consent of Landlord, Landlord shall have the right to remove and correct such Improvements and restore the Premises and the Building to their condition immediately prior thereto and Tenant shall be liable for all expenses incurred by Landlord in connection therewith. All Improvements to the Premises or the Building made by either party shall remain upon and be surrendered with the Premises as part thereof at the end of the Lease Term except that (a) if Tenant is not in default under this Lease, Tenant shall have the right to remove, prior to the expiration of the Lease Term, all movable furniture, furnishings and equipment installed in the Premises solely at the expense of Tenant, and (b) Landlord shall have the right to require Tenant to remove all Improvements and fixtures at the end of the Lease Term at the sole cost of Tenant but only if such Improvement differs materially from typical tenant improvements for office use and Landlord has stated in writing, at or prior to the time Tenant requests the right to make such Improvement that such item must be removed by Tenant at the expiration or early termination of the Term. All damage and injury to the Premises or the Building caused by such removal shall be repaired by Tenant, at Tenant's sole expense. If such property of Tenant is not removed by Tenant prior to the expiration or termination of this Lease, the same shall be deemed to have been abandoned by Tenant and to have become the property of Landlord and shall be surrendered with the Premises as a part thereof, which property may be retained by Landlord or disposed of at Tenant's expense. Tenant's obligation to pay for any costs incurred by Landlord for the disposal of such abandoned property shall survive the expiration or earlier termination of this Lease. ARTICLE 11 SIGNS ----- No sign, advertisement, or notice shall be inscribed, painted, affixed, or otherwise displayed by Tenant on any part of the exterior or the interior (if visible from the exterior) of the Premises or the Building except on the directories and the doors of offices and such other areas as are designated by Landlord. All signage, advertisements or notices on the exterior or, if visible from the exterior, the interior of the Premises or the Building must be only in such place, number, size, color, and style as are approved by Landlord in its sole and absolute discretion. Landlord acknowledges that Tenant may install a sign at the 18th Street entrance to the Permanent Premises and that, if Tenant uses Building-standard signage in doing so, Landlord will not unreasonably withhold, condition or delay its consent to such sign. However, in no event are any free-standing sidewalk signs allowed. All of Tenant's signs that are approved by Landlord shall be obtained by Tenant at its sole cost and expense and installed by Landlord at Tenant's sole cost and expense. Tenant shall reimburse Landlord for such amount upon written demand from Landlord. If any sign, advertisement or notice that has not been approved by Landlord is exhibited or installed by Tenant, Landlord shall have the right to remove the same at Tenant's expense. Landlord shall have the right to prohibit any advertisement of or by Tenant which in Landlord's reasonable opinion tends to impair the reputation of the Building or its 25 desirability as a high-quality office building and, upon written notice from Landlord, Tenant shall immediately refrain from and discontinue any such advertisement. Landlord reserves the right to affix, install, and display signs, advertisements, and notices on any part of the exterior or interior of the Building except in the Premises. ARTICLE 12 TENANT'S EQUIPMENT ------------------ SECTION 12.1 Electrical Capacity Tenant will not install or operate in the Premises any electrically operated equipment or machinery that operates on greater than 110 volt power or anything other than normal office equipment, computers and appliances, without first obtaining the prior written consent of Landlord, which consent may be withheld in Landlord's reasonable discretion. Without limitation, Landlord may condition such consent upon the payment by Tenant of the cost of any base building upgrades or other Improvements, including additional wiring or apparatus, that may be occasioned by the installation or operation of such equipment or machinery. SECTION 12.2 Other Infrastructure Tenant shall not install any equipment of any type or nature that will or may necessitate any changes, replacement or additions to, or in the use of, the water system, heating system, plumbing system, air-conditioning system or electrical system of the Premises or in the Building, without first obtaining the prior written consent of Landlord, which consent may be withheld in Landlord's reasonable discretion. Without limitation, Landlord may condition such consent upon the payment by Tenant of the cost of any base building upgrades or other Improvements that may be occasioned by the installation or operation of such equipment or machinery. Any machines and mechanical equipment belonging to Tenant which causes noise or vibrations that may be transmitted to the structure of the Building or to any space therein to such a degree as to be objectionable to Landlord or to any tenant in the Building shall be installed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to reduce such noise and vibration to a level satisfactory to Landlord. ARTICLE 13 INSPECTIONS BY LANDLORD Tenant shall permit Landlord or its agents or representatives to enter the Premises, at any time and from time to time, without charge therefor to Landlord and without diminution of the rent payable by Tenant, to examine, inspect, and protect the Premises and the Building, to make such alterations and/or repairs as in Landlord's sole judgment may be deemed necessary, or to exhibit the same to prospective purchasers and mortgagees and, during the last twelve (12) months of the Lease Term or at any time following the initiation of any eviction proceeding, to exhibit the same to prospective tenants. In connection with any such entry, Landlord shall endeavor to minimize the disruption to Tenant's use of the Premises, but Landlord shall not be 26 required to perform any alterations or repairs or make any entry at a time other than normal working hours unless Tenant has agreed to pay for the incremental cost increase incurred for overtime work. Landlord shall give reasonable prior notice to Tenant before making an entry pursuant to this Article, which notice may be written or oral; provided, however, in situations reasonably determined by Landlord to be emergencies, no such prior notice shall be required. ARTICLE 14 INSURANCE --------- SECTION 14.1 Insurance To be Carried (a) Tenant covenants and agrees to procure at its expense on or before the Lease Commencement Date and to keep in force during the Lease Term the following insurance naming Tenant as insured party and Landlord and its management agent for the Property (the "Agent") as additional insureds: (i) a commercial general liability insurance policy or such successor comparable form of coverage in the broadest form then available (a "Liability Policy") written on an "occurrence basis" including, without limitation, blanket contractual liability coverage, business interruption, automobile, broad form property damage, independent contractor's coverage and personal injury coverage, protecting Landlord, the Agent and Tenant against any liability whatsoever occasioned by any occurrence on or about the Premises or any appurtenances thereto; (ii) a fire and other casualty policy (a "Fire Policy") insuring the full replacement value of Tenant's leasehold improvements, regardless of by whom installed, and all of the furniture, trade fixtures and other personal property of Tenant located in the Premises against loss or damage by fire, theft and such other risks or hazard; and (iii) a policy of insurance against loss or damage to the major components of the air-conditioning and heating system, flywheels, steam pipes, steam turbines, steam engine, steam boilers, and other pressure vessels, high pressure piping and machinery, if any, such as are installed by or on behalf of Tenant in the Premises. Such policies shall also insure against physical damage to the Premises arising out of an accident covered thereunder; such policies are to be written by good and solvent insurance companies licensed to do business in the District of Columbia satisfactory to Landlord, shall have not less than a Best's A+ 10 rating and shall be in such limits and with such maximum deductibles as Landlord may reasonably require. As of the date of this Lease, Landlord reasonably requires limits of liability under: (x) the Liability Policy of not less than $3,000,000 combined single limit per occurrence for bodily or personal injury (including death) and property damage combined; (y) the Fire Policy equal to the value of Tenant's leasehold improvements, furniture, trade fixtures and other personal property with a deductible of no more than $1,000.00; and (z) machinery insurance for full replacement cost of equipment with a deductible of no more than $1,000.00. Tenant will furnish Landlord with such information as Landlord may reasonably request from time to time as to the value of the items specified in clause (y) above within thirty 27 (30) days after request therefor. Such insurance may be carried under a blanket policy covering the Premises and other locations of Tenant, if any, provided that each such policy shall in all respects comply with this Article and shall specify (I) that the portion of the total coverage of such policy that is allocated to the Premises is in the amounts required pursuant to this Section and (II) any sublimits in such blanket policy and such policy shall also specify, or Tenant shall furnish Landlord a written statement from the insurer under such policy, that the protection afforded Tenant under any such blanket policy shall be no less than that which would have been afforded under a separate policy relating only to the Premises. Prior to the time insurance under this Section is first required to be carried by Tenant, and thereafter at least fifteen (15) days prior to the expiration date of any such policy, Tenant agrees to deliver to Landlord a certificate evidencing such insurance and payment of the premium therefor. Said certificate shall contain an endorsement that such insurance may not be canceled or amended except upon thirty (30) days' prior written notice to Landlord. Subject to all applicable notice and cure rights, Tenant's failure to provide and keep in force the aforementioned insurance shall be regarded as a material default hereunder entitling Landlord to exercise any or all of the remedies provided in this Lease in the event of Tenant's default. Notwithstanding anything to the contrary contained in this Lease, the carrying of insurance by Tenant in compliance with this Section shall not modify, reduce, limit or impair Tenant's obligations and liabilities under any and every indemnity by Tenant to Landlord set forth in this Lease. (b) Landlord shall carry, at its expense (which expense is includable in Annual Operating Charges), all risk insurance (including coverage against boiler related damages), comprehensive general commercial liability insurance insuring Landlord against liability for injury to or death of a person or persons and for damage to property occasioned by or arising out of the maintenance, operation and/or management of the Property by Landlord, or its equivalent, insuring the Building (exclusive of any component thereof which Tenant is required to insure pursuant to the terms of this Lease). The all risk insurance coverage shall be in an amount equal to one hundred percent (100%) of the replacement cost of the Building, as such may increase from time to time, not including footers or foundations. Landlord's liability policy shall have limits that are not less than those required of Tenant under this Lease. All said insurance policies shall be carried with companies licensed to do business in the District of Columbia. Upon Tenant's request from time to time, duly executed certificates of such insurance shall be delivered to Tenant. SECTION 14.2 Indemnity (a) To the extent Landlord's waiver of subrogation under Section 14.5 does not apply, Tenant shall indemnify and defend Landlord and save it harmless from and against any and all claims, suits, actions, proceedings, liabilities, damages, losses, costs or expenses, including attorneys' fees, arising (i) from any act, omission, or negligence of Tenant or its officers, contractors, licensees, agents, employees, guests, invitees, or visitors in or about the Property, (ii) from Tenant's use or occupancy of the Premises or the business conducted by Tenant therein, (iii) from any breach or default under this Lease by Tenant, (iv) from, or relating to, the enforcement by Landlord of the provisions of this Lease as against Tenant, or (v) from any accident, injury, or damage, howsoever and by whomsoever caused, to any person or property, occurring in or about the Premises. This provision shall not be construed to make Tenant responsible for loss, damage, 28 liability or expense resulting from injuries (or death) to third parties to the extent caused by the negligence of Landlord or its officers, contractors, licensees, agents, employees, or invitees. The provisions of this Section shall survive the expiration or termination of this Lease. (b) To the extent Tenant's waiver of subrogation in Section 14.5 does not apply, and to the extent Landlord's insurance covers the same, Landlord shall indemnify and hold harmless Tenant from and against any and all liabilities, damages, obligations, losses, costs and expenses (including attorneys' fees) incurred or imposed upon Tenant (i) in connection with or based upon any breach by Landlord of any of the covenants, representation or warranties of Landlord contained in this Lease; (ii) arising out of any act or omission of Landlord, Landlord's employees, agents, or representatives; or (iii) as a result of any injury to or death of any person or persons or any damage to property in any way arising out of or in connection with the condition, use or occupancy of any of the Property outside the Premises. This provision shall not be construed to make Landlord responsible for loss, damage, liability or expense resulting from injuries (or death) to third parties or damage to property to the extent caused by the negligence of Tenant or its officers, contractors, licensees, agents, employees or invitees. SECTION 14.3 Increases in Insurance Rates Tenant shall not do or permit to be done any act or thing upon or about the Premises or the Property which will (i) result in the assertion of any defense by the insurer to any claim under, (ii) invalidate, or (iii) be in conflict with, the policies covering the Property, and fixtures and property therein, or which would increase the rate of fire insurance applicable to the Property to an amount higher than it otherwise would be; and Tenant shall neither do nor permit to be done any act or thing, upon or about the Property which shall or might subject Landlord to any liability or responsibility for injury to any person or persons or to property; but nothing in this Section shall prevent Tenant's use of the Premises for the purposes stated in this Lease. If, as a result of any act or omission by or on the part of Tenant or violation of this Lease by Tenant, whether or not Landlord has consented to the same, the rate of "All Risk" or other type of insurance maintained by Landlord on the Property shall be increased to an amount higher than it otherwise would be, Tenant shall reimburse Landlord for all increases of Landlord's insurance premiums so caused; such reimbursement to be additional rent payable within thirty (30) days after demand therefor by Landlord. In any action or proceeding wherein Landlord and Tenant are parties, a schedule or "make-up" of rates for the Property or Premises issued by the body making fire insurance rates or established by the insurance carrier providing coverage for the Property or Premises shall be presumptive evidence of the facts stated therein, including the items and charges taken into consideration in fixing the "All Risk" insurance rate then applicable to the Building or Premises. SECTION 14.4 Notice of Accidents Tenant shall give Landlord notice in case of fire or other damage or personal injury resulting from casualty events in the Premises promptly after Tenant is aware of such event. 29 SECTION 14.5 Waiver of Subrogation Notwithstanding anything to the contrary contained in this Lease, Tenant agrees that it will, at its sole cost and expense, include in its property insurance policies appropriate clauses pursuant to which the insurance companies (a) waive all right of subrogation against Landlord, and any tenant of space in the Building, with respect to losses payable under such policies, and (b) agree that such policies shall not be invalidated should the insured waive in writing prior to a loss any or all right of recovery against any party for losses covered by such policies. Tenant shall furnish Landlord evidence satisfactory to Landlord evidencing the inclusion of said clauses in Tenant's property insurance policies. Landlord hereby waives any and all right of recovery which it might otherwise have against Tenant, its servants, agents and employees, for loss or damage occurring to the Building and fixtures, appurtenances and equipment therein to the extent to the same is covered by Landlord's insurance, notwithstanding that such loss or damage may result from the negligence or fault of Tenant, its servants, employees or agents. Landlord warrants, represents and agrees that its insurance policies shall not be invalidated by the foregoing waiver. Tenant hereby waives any and all right of recovery which it might otherwise have against Landlord, its agents, servants and employees, and against every other tenant in the Building which shall have executed a similar waiver in favor of Landlord and other tenants as set forth in this Section, for loss or damage to Tenant's furniture, furnishings, fixtures and other property removable by Tenant under the provisions hereof to the extent that same is covered by Tenant's insurance as required by this Lease whether or not such insurance is maintained, notwithstanding that such loss or damage may result from the negligence or fault of Landlord, its servants, agents or employees, or such other tenant or the servants, agents or employees thereof. ARTICLE 15 SERVICES AND UTILITIES ---------------------- SECTION 15.1 Services and Utilities (a) Landlord shall furnish to the Premises (through the existing Building system), during normal hours of operation of the Building, air-conditioning and heat (as separately submetered) during the seasons when they are required, as and to the extent determined in Landlord's reasonable judgment. Landlord shall also provide separately metered electricity to the Premises and water, 24 hours per day, for standard office equipment, as and to the extent determined by Landlord. Landlord is not providing any janitorial services to the Premises. Tenant shall have access to the Building and the Premises twenty-four (24) hours per day, every day of the year, subject to exclusion during emergencies or repairs if, in Landlord's sole judgment, such exclusion is necessary; provided, however, that access through the Building's main lobby shall be subject to security procedures (e.g. the presentation of identification) as may be adopted by Landlord or the International Bank for Reconstruction and Development (a/k/a The World Bank) from time to time and that elevator access outside normal business hours may be restricted by requiring the use of electronic access cards or similar means. All electronic access cards, keys, or their equivalents will be provided at Tenant's expense. Landlord shall have the right to remove elevators from service as may be required for moving freight or for servicing or maintaining the elevators and/or the Building; provided, however, that except in emergencies 30 or following a casualty, Landlord will also provide at least one elevator subject to call; and, provided further, that elevators shall be used for access to the Permanent Premises only for disabled persons, when the staircase identified in the following sentence is under repair, or as may otherwise be required by law. In lieu of greater elevator access to the Permanent Premises, Tenant shall be afforded access 24 hours per day, every day, except in emergencies or when Landlord is performing repairs thereon, via a staircase that leads from the Permanent Premises to the 18th Street street entrance to the Building. (b) The normal hours of operation of the Building will be 7:00 a.m. to 7:00 p.m. on Monday through Friday (except legal holidays) and 9:00 a.m. to noon on Saturday (except legal holidays), subject, however, to the right of the International Bank for Reconstruction and Development (a/k/a The World Bank) to change the same to be any consecutive twelve (12) hour period Monday-Friday and any consecutive three (3) hour period on Saturdays. There will be no normal hours of operation of the Building on Sundays or legal holidays and Landlord shall not be obligated to maintain or operate the Building at such times unless special arrangements are made by Tenant. Such special arrangements shall include, but are not limited to, the activation of the air-conditioning units as well as an additional hourly charge to activate the cooling towers; such charge includes components for Landlord's electric charges, chemical treatment costs, labor and overhead, and the cost of water, but does not include any profit to Landlord. Landlord will furnish all services and utilities required by this Lease only during the normal hours of operation of the Building unless otherwise specified herein. (c) Tenant shall also be responsible for and agrees to pay the cost of all above-standard or non-standard uses of the utilities and services provided to the Premises. The parties acknowledge and agree that the Premises is separately metered for all electrical usage, and that the Premises' HVAC service is powered by electrical consumption measured on such separate meter. Except (i) for the electrical costs associated with the provision of HVAC service to the Premises (which costs Tenant agrees to pay to Landlord promptly when billed), or (ii) to the extent such charges are permitted to be included in the sums constituting Annual Operating Charges, Landlord shall not charge Tenant for the electrical portion of HVAC service to the Premises. (d) Tenant shall pay Landlord as additional rent for all electrical usage in the Premises as measured by the submeter installed therein. If such submeter covers an area (e.g., the Permanent Premises) that is larger than the area to which this Lease then applies (e.g., if possession of the Phase II Premises has not yet been delivered to Tenant), then electrical usage for the area covered by the submeter shall be equitably apportioned based on relative square footage (unless usage differs widely so that such an apportionment would itself be inequitable, in which event Landlord may make an allocation based upon its own reasonable judgment of what would be equitable under the circumstances). Prior to the installation of such submeter and the levying of additional rent for the use of electricity under the preceding sentences, Tenant shall pay Landlord, as additional rent for electric usage during normal hours of Building operation and at a building-standard level, Seventeen Cents ($0.17) per year per rentable square foot in any part of the Premises for which fixed monthly rent is not then abated under Section 3.1 above, such rent to be payable in equal monthly installments in advance on the Lease Commencement Date and thereafter on the first day of each calendar month until the submeter is operational (with a 31 per diem refund if the submeter becomes operational on a day other than the first day of a calendar month); there shall be no charge for electrical usage under this sentence for any part of the Premises for which fixed monthly rent is abated under Section 3.1 above. (e) Tenant shall provide, at its own cost and expense, janitorial services in the Premises in compliance with the cleaning specifications attached hereto as Exhibit D. SECTION 15.2 Interruption of Services and Utilities Unless resulting from the willful misconduct or gross negligence of Landlord, it is understood and agreed that Landlord shall not have any liability whatsoever to Tenant as a result of Landlord's failure or inability to furnish any of the utilities or services required to be furnished by Landlord hereunder, whether resulting from breakdown, removal from service for maintenance or repairs, strikes, scarcity of labor or materials, acts of God, governmental requirements or from any other cause whatsoever. In the event that Landlord fails to provide services to Tenant or to make and complete any repair as required by this Lease for a continuous period in excess of five (5) business days after Landlord learns of such failure in the case of failures arising from matters within Landlord's reasonable control, or in excess of ten (10) business days after Landlord learns of such failure with respect to failures not arising from matters within Landlord's reasonable control, and such failure materially interferes with Tenant's use and enjoyment of all or a portion of the Premises such that the same becomes untenantable and is, in fact, not utilized by the Tenant, then, and in such event, Landlord shall provide Tenant a credit against the fixed annual rent and additional rent under Article 4 next owing, in an amount equal to the fixed annual rent and additional rent under Article 4 due under the Lease (with the amount of such rent being prorated in the event such failure does not affect Tenant's ability to use the entire Premises) from and after the expiration of such five (5) or ten (10) business day period, as the case may be, and until such time as the affected Premises becomes tenantable or Tenant resumes utilization of the affected Premises, whichever is earlier. Notwithstanding anything contained herein to the contrary, no abatement shall be allowed (i) if the event which would otherwise give rise to abatement arises from an act or omission of Tenant, its assignees or subtenants or any of their respective contractors, agents, employees or invitees, or (ii) with respect to a de minimis portion of the Premises (i.e., 100 rentable sq. ft. or less) or with respect to areas not actively utilized by Tenant in the conduct of its business (i.e., janitorial closets and similar spaces). In no event shall Landlord be liable for incidental or consequential damages. SECTION 15.3 Conservation Controls The parties hereto agree to comply with all mandatory and voluntary energy, water, or other conservation controls or requirements applicable to office buildings required by the Federal or District of Columbia governments or any public utility or insurance carrier including, without limitation, controls on the permitted range of temperature settings in office buildings or requirements necessitating curtailment of the volume of energy consumption or the hours of operation of the Building. Any terms or conditions of this Lease that conflict or interfere with compliance by Landlord with such controls or requirements shall be suspended for the duration of such controls or requirements. It is further agreed that compliance with such controls or requirements shall not be considered an eviction, actual or constructive, of Tenant from the 32 Premises and shall not entitle Tenant to terminate this Lease or to an abatement or reduction of any rent payable hereunder. ARTICLE 16 LIABILITY OF LANDLORD --------------------- SECTION 16.1 No Liability of Landlord Except as provided in Section 15.2 above, Landlord shall not be liable to Tenant, its employees, agents, business invitees, licensees, customers, clients, family members or guests for any damage, injury (including death), loss, compensation, or claim, including, but not limited to, claims for the interruption or loss of Tenant's business, based on, arising out of, or resulting from any cause whatsoever, including, but not limited to, the following: repairs to any portion of the Premises or the Building; the negligence of Landlord or any of its servants, agents, contractors or employees; interruption in the use of the Premises; any accident or damage resulting from the use or operation (by Landlord, Tenant, or any other person or persons) of elevators, or of the heating, air-conditioning, electrical, or plumbing equipment or apparatus; the termination of this Lease by reason of the destruction of the Premises; any fire, explosion, falling plaster, steam, gas, robbery, theft, mysterious disappearance, and/or any other casualty; the actions of any other tenants of the Building or of any other person or persons; any failure or inability to furnish any of the utilities or services required to be furnished by Landlord hereunder; any leakage in any part or portion of the Premises or the Building, or from water, rain or snow that may leak into, or flow from, any part of the Premises or the Building, or from drains, pipes, appliances or plumbing work in the Building or from the roof, street or subsurface or resulting from dampness or from any other cause of whatsoever nature. Except as provided in Section 15.2 above, the occurrence of any of the foregoing items described in this Section shall not entitle Tenant to an abatement, set-off, counterclaim against, or reduction of, any rent payable hereunder. Any goods, property, or personal effects stored or placed by Tenant or its employees in or about the Premises or Building shall be at the sole risk of Tenant, and Landlord shall not in any manner be held responsible therefor. It is understood that the employees of Landlord are prohibited from receiving any packages or other articles delivered to the Building for Tenant, and if any such employee receives any such package or articles, such employee shall be acting as the agent of Tenant for such purposes and not as the employee or agent of Landlord. In no event shall Tenant make any claim against Landlord for consequential, indirect or special damages. Notwithstanding the foregoing provisions of this Section, Landlord shall not be released from liability to Tenant for any damage or injury caused by the willful misconduct of Landlord or its employees. SECTION 16.2 Transfer by Landlord In the event that at any time Landlord shall sell or transfer the Building, the transferor Landlord shall not be liable to Tenant for any obligations or liabilities based on or arising out of events or conditions occurring on or after the date of such sale or transfer. SECTION 16.3 Disputed Payments 33 In the event that at any time during the Lease Term Tenant shall have a claim against Landlord, Tenant shall not have the right to deduct the amount allegedly owed to Tenant from any rent payable to Landlord hereunder, it being understood that Tenant's sole method for recovering upon such claim shall be to institute an independent action against Landlord. SECTION 16.4 Extent of Landlord's Liability Notwithstanding any other provision of this Lease whatsoever, no recourse shall be had on any of Landlord's obligations hereunder or for any claim based thereon or otherwise in respect thereof against any incorporator, subscriber to the capital stock, shareholder, officer or director, past, present or future, of any corporation, or any partner or joint venturer of any partnership or joint venture, or any member or manager of any limited liability company, which shall be Landlord hereunder or included in the term "Landlord" or of any successor of any such corporation, limited liability company, partnership or joint venture, or against any principal, disclosed or undisclosed, or any affiliate of any party which shall be Landlord or included in the term "Landlord", whether directly or through Landlord or through any receiver, assignee, trustee in bankruptcy or through any other person, firm or corporation, whether by virtue of any constitution, statute or rule of law or by enforcement of any assessment or penalty or otherwise, all such liability being expressly waived and released by Tenant. Tenant shall look solely to Landlord's estate and interest in the Property and all rent or other proceeds relating thereto, or the lease of the Building or of the Property, and the Premises for the satisfaction of any right or remedy of Tenant for the collection of a judgment or other judicial process or arbitration award requiring the payment of money by Landlord. No other property or assets of Landlord, Landlord's agents, incorporators, shareholders, officers, directors, partners, members, managers, principals (disclosed or undisclosed) or affiliates shall be subject to levy, lien, execution, attachment, or other enforcement procedure for the satisfaction of Tenant's rights and remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder or under law, or Tenant's use and occupancy of the Premises, or any other liability of Landlord to Tenant. ARTICLE 17 RULES AND REGULATIONS --------------------- Tenant and its agents, employees, invitees, licensees, customers, clients, family members, guests and subtenants shall at all times abide by and observe the rules and regulations promulgated by Landlord and attached hereto as Exhibit C. In addition, Tenant and its agents, employees, invitees, licensees, customers, clients, family members, guests and subtenants shall abide by and observe all other rules or regulations that Landlord may reasonably promulgate from time to time for the operation and maintenance of the Building, provided that notice thereof is given to Tenant, that such rules and regulations are not inconsistent with provisions of this Lease, and that such additional rules and regulations are not enforced in a discriminatory manner against Tenant. Nothing contained in this Lease shall be construed as imposing upon Landlord any duty or obligation to enforce such rules and regulations or the terms, conditions, or covenants contained in any other lease as against any other tenant, and Landlord shall not be liable to Tenant for the violation of such rules or regulations or lease by any other tenant or its 34 employees, agents, business invitees, licensees, customers, clients, family members, guests or subtenants. ARTICLE 18 DAMAGE OR DESTRUCTION --------------------- SECTION 18.1 Casualty If during the Lease Term the Premises or the Building are totally or partially damaged or destroyed by a casualty, thereby rendering the Premises totally or partially inaccessible or unusable, Landlord shall diligently (taking into account the time necessary to effectuate a satisfactory settlement with any insurance company involved) restore and repair the Premises and the Building to substantially the same condition they were in prior to such damage; provided, however, if Landlord reasonably believes that the repairs and restoration cannot be completed despite reasonable efforts within ninety (90) days after the occurrence of such damage, Landlord shall promptly notify Tenant of the estimated repair time and either Landlord or Tenant shall have the right, at its sole option, to terminate this Lease by giving written notice of termination to the other within forty-five (45) days after the occurrence of such damage. If this Lease is terminated pursuant to the preceding sentence, all rent payable hereunder shall be apportioned and paid to the date of the occurrence of such damage. Until the repair and restoration of the Premises is completed Tenant shall be required to pay rent only for that part of the Premises that Tenant is able to use while repairs are being made, based on the ratio that the amount of usable rentable area bears to the total rentable area in the Premises; provided that if the damages result from the negligence or willful misconduct of Tenant or its employees or contractors, Landlord shall only allow Tenant a proportional abatement of rent to the extent Landlord is reimbursed from the proceeds of rental interruption insurance purchased by Landlord. Landlord shall bear the costs and expenses of repairing and restoring the Premises, except that if such damage or destruction was caused by the act or omission of Tenant or any of its employees, agents, licensees, subtenants, customers, clients, family members, or guests, upon written demand from Landlord Tenant shall pay to Landlord the amount by which such costs and expenses exceed the insurance proceeds, if any, received by Landlord on account of such damage or destruction. Nothing in this Lease shall be construed as requiring Landlord to spend more than the net proceeds of any insurance available to it for any restoration, repair or rebuilding. If Landlord fails to timely substantially complete such repair and restoration within the longer of ninety (90) days or thirty (30) days after the expiration of the repair time estimated by Landlord (notice to which was provided to Tenant within thirty (30) days after the casualty), then Tenant shall have the option, upon written notice to Landlord given before the first to occur of such substantial completion or fourteen (14) days after the expiration of the aforesaid period, to elect to terminate this Lease; Tenant's failure to timely exercise such termination right shall be a conclusive waiver of such right. Notwithstanding anything contained in this Section to the contrary, if Tenant is deprived of the use of all or any portion of the Premises by reason of such damage or destruction and such damage or destruction occurs during the last twelve (12) months of the Lease Term (giving due consideration to any extension thereof), and if, in Landlord's reasonable judgment, the time needed for such repair and restoration is sixty (60) days or more, then either party shall have the right to terminate this Lease, effective as of the date of such damage or destruction, by 35 giving written notice of such election to the other party within sixty (60) days after the occurrence of such damage or destruction and, if such notice of termination is given, Landlord shall not be obligated to repair the damage and restore the Property. SECTION 18.2 Limitations on Landlord's Obligations Notwithstanding anything in Section 18.1 or any other part of this Lease, if Landlord is obligated to repair and restore the Premises as provided in Section 18.1, Landlord shall not be required to repair or restore any decorations, alterations, or improvements to the Premises (regardless of by whom made) or any trade fixtures, furnishings, equipment, or personal property belonging to Tenant. It shall be Tenant's sole responsibility to repair and restore all such items. SECTION 18.3 Right to Terminate Notwithstanding anything to the contrary contained herein, if there is a destruction of the Building that exceeds twenty-five percent (25%) of the replacement value of the Building from any risk, whether or not the Premises are damaged or destroyed, Landlord shall have the right to terminate this Lease by written notice to Tenant. ARTICLE 19 CONDEMNATION ------------ SECTION 19.1 Termination for Condemnation If the whole or a substantial part (as hereinafter defined) of the Premises and/or the Building or the use or occupancy of the Premises shall be taken or condemned by any governmental or quasi-governmental authority for any public or quasi-public use or purpose (including a sale thereof under threat of such taking), then this Lease shall terminate on the date title thereto vests in such governmental or quasi-governmental authority, and all rent payable hereunder shall be apportioned as of such date. If less than a substantial part of the Premises (or the use and occupancy thereof) is taken or condemned by any governmental or quasi-governmental authority for any public or quasi public use or purpose (including a sale thereof under threat of such a taking), this Lease shall continue in full force and effect, but the rent thereafter payable hereunder shall be equitably adjusted (on the basis of the ratio of the number of square feet of rentable area taken to the total rentable area in the Premises prior to such taking) as of the date title vests in the governmental or quasi-governmental authority. For purposes of this Section, a substantial part of the Premises or the Building shall be considered to have been taken if more than twenty-five percent (25%) of the Premises or Building is rendered unusable as a result of such taking. SECTION 19.2 Award All awards, damages, and other compensation paid by the condemning authority on account of the taking or condemnation (or sale under threat of such a taking) shall belong to Landlord, and Tenant hereby assigns to Landlord all rights to such awards, damages and 36 compensation. Tenant agrees not to make any claim against Landlord or the condemning authority for any portion of such award or compensation attributable to damages to the Premises, the value of the unexpired term of this Lease, the loss of profits or goodwill, leasehold improvements or severance damages. Nothing contained herein, however, shall prevent Tenant from pursuing a separate claim against the condemning authority for the value of furnishings, equipment and trade fixtures installed in the Premises at Tenant's expense and for relocation expenses, provided that such claim shall in no way diminish the award or compensation payable to or recoverable by Landlord in connection with such taking or condemnation. ARTICLE 20 DEFAULT ------- SECTION 20.1 Defaults by Tenant The occurrence of any of the following shall constitute a default by Tenant under this Lease: (a) If Tenant fails to make any payment of fixed annual rent or other rent (i) for which a due date is specified in this Lease up to two (2) times in any calendar year within five (5) days after notice is given that such rent is overdue and thereafter during that calendar year within five (5) days after the date due (without notice) or, (ii) if no due date is specified in this Lease for such payment, within ten (10) days after notice is given. (b) If Tenant violates or fails to perform any obligation set forth in Article 8, Section 10.2, Section 21.1, Section 24.2 or Section 24.5 of this Lease beyond the expiration of any performance, notice or cure period set forth therein. (c) If Tenant violates or fails to perform any other term, condition, covenant or agreement to be performed or observed by Tenant under this Lease (other than as specified in this Section), and such violation or failure shall continue for ten (10) days after written notice from Landlord to Tenant of such violation or failure, however, if Tenant promptly commences to cure such violation or failure and diligently prosecutes such cure, and if such violation or failure is not reasonably curable in ten (10) days, Tenant shall have a reasonable additional period, not to exceed an aggregate of twenty (20) days to effect such cure, provided that Tenant must commence its cure within the original ten (10) day period and thereafter diligently prosecute the cure to completion. (d) If Tenant or any guarantor (i) is voluntarily adjudicated a bankrupt or insolvent, (ii) seeks or consents to the appointment of a receiver or trustee for itself or for all or a part of its property, (iii) files a petition seeking relief under the bankruptcy or similar laws of the United States or any state or any other jurisdiction, (iv) makes a general assignment for the benefit of creditors, or (v) admits in writing its inability to pay its debts as they mature. (e) If a petition is filed against Tenant or any guarantor seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any 37 present or future federal or state law or other statute, law, or regulation and shall remain undismissed or unstayed for sixty (60) days, or if any trustee, receiver or liquidator of Tenant or any guarantor, or of all or any substantial part of its properties, shall be appointed without the consent or acquiescence of Tenant or any guarantor and such appointment shall remain unvacated or unstayed for sixty (60) days. (f) If any attachment or execution of any type is issued against Tenant or any guarantor, or Tenant's property located on the Premises, or Tenant's rights or interest in the Lease, or guarantor's or Tenant's assets of any type or nature whatsoever, including but not limited to federal, state, or municipal tax liens, and such is not dismissed or released within ten (10) days thereafter. SECTION 20.2 Landlord's Rights If Tenant shall be in default under this Lease, Landlord shall have the right, at its sole option, to terminate this Lease. With or without terminating this Lease, Landlord may re-enter and take possession of the Premises and the provisions of this Article shall operate as a notice to quit, any other notice to quit or notice of Landlord's intention to re-enter the Premises is hereby expressly waived. If necessary, Landlord may proceed to recover possession of the Premises under and by virtue of the laws of the District of Columbia, or by such other proceedings, including re-entry and possession, as may be applicable. If Landlord elects to terminate this Lease, everything contained in this Lease on the part of the Landlord to be done and performed shall cease without prejudice, subject, however, to the right of Landlord to recover from Tenant all rent accrued up to the time of termination or recovery of possession by Landlord, whichever is later. Whether or not this Lease is terminated by reason of Tenant's default, the Premises may be relet by Landlord for such rent and upon such terms as Landlord deems reasonable under the circumstances and, if the full rent provided herein plus the costs, expenses, and damages described below shall not be realized by Landlord, Tenant shall be liable for all damages sustained by Landlord, including, without limitation, deficiency in fixed and additional rent, reasonable attorneys' fees, brokerage fees, and the expenses of placing the Premises in first-class rentable condition. Any damages or loss of rent sustained by Landlord may be recovered by Landlord, at Landlord's option, at the time of the reletting or in separate actions, from time to time, as said damage shall have been made more easily ascertainable by successive relettings, or, at Landlord's option, may be deferred until the expiration of the Lease Term, in which event Tenant hereby agrees that the cause of action shall not be deemed to have accrued until the date of expiration of the Lease Term. The provisions contained in this Section shall be in addition to, and shall not prevent the enforcement of, any claim Landlord may have against Tenant for anticipatory breach of this Lease. SECTION 20.3 Liquidated Damages If Landlord recovers possession of the premises or terminates this Lease pursuant to Section 20.2, Landlord shall forthwith upon such termination, any other provisions of this Lease to the contrary notwithstanding, become entitled to recover from Tenant as and for liquidated damages for Tenant's default hereunder, the difference, discounted to present value by applying a discount rate equal to eight percent (8%), between (a) the annual fixed rent reserved hereunder 38 for what, but for such termination, would have been the unexpired portion of the Lease Term, and (b) the cash rental value of the Premises for such unexpired portion of the Lease Term (unless the statute that governs or shall govern the proceedings in which such damages are to be proved limits the amount of such claim capable of being so proved, in which case Landlord shall be entitled to prove as and for liquidated damages an amount equal to that allowed by or under any such statute). In calculating such liquidated damages, the then cash rental value of the Premises shall be deemed prima facie to be the actual rent received by Landlord for the Premises or, if not received, the estimated cash rental value of the Premises upon any reletting, as determined by a broker or an appraiser selected by Landlord and approved by Tenant, such approval not to be unreasonably withheld, conditioned or delayed; if Tenant fails to object to a proposed broker or nominee and give the reason for its objection within ten (10) days after Landlord gives notice of a proposed broker or nominee, Tenant's consent shall be deemed given. Tenant shall not be entitled to receive any excess of any such rents collected from a third party over the rent reserved herein. The provisions of this Section shall be without prejudice to Landlord's right to prove and collect, in full, damages for all rent accrued prior to the termination of this Lease but not paid. In the event of a default by Tenant hereunder, if Landlord does not seek or obtain recovery in the nature of liquidated damages pursuant to this Section 20.3, Landlord will act in such a manner intended to reasonably mitigate the damages caused by Tenant's default. In any judicial proceeding, the burden of proof shall be on Tenant to show by clear and convincing evidence that Landlord failed to reasonably attempt to mitigate its damages. SECTION 20.4 Landlord's Rights Cumulative All rights and remedies of Landlord set forth herein are in addition to all other rights and remedies available to Landlord at law or in equity. All rights and remedies available to Landlord hereunder or at law or in equity are expressly declared to be cumulative. The exercise by Landlord of any such right or remedy shall not prevent the concurrent or subsequent exercise of any other right or remedy. SECTION 20.5 No Waiver By Landlord No delay in the enforcement or exercise of any right or remedy shall constitute a waiver of any default by Tenant hereunder or of any of Landlord's rights or remedies in connection therewith. Landlord shall not be deemed to have waived any default by Tenant hereunder unless such waiver is set forth in a written instrument signed by Landlord. If Landlord waives in writing any default by Tenant, such waiver shall not be construed as a waiver of any covenant, condition, or agreement set forth in this Lease except as to the specific circumstances described in such written waiver. If Landlord institutes proceedings against Tenant and a compromise or settlement thereof is made, the same shall not constitute a waiver of the same or any other covenant, condition, or agreement set forth herein or of any of Landlord's rights hereunder. Neither the payment by Tenant of a lesser amount than the rent due hereunder nor any endorsement or statement on any check or letter accompanying a check for payment of rent shall be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or to pursue any other remedy available to Landlord. No reentry by Landlord, and no acceptance by Landlord of keys from Tenant, shall be considered an acceptance of a surrender of this Lease. 39 SECTION 20.6 Landlord's Right to Cure If Tenant defaults in the making of any payment or in the doing of any act herein required to be made or done by Tenant, then Landlord may, but shall not be required to, make such payment or do such act. If Landlord elects to make such payment or do such act, all costs and expenses incurred by Landlord, plus interest thereon at the rate of eighteen percent (18%) per annum from the date paid by Landlord to the date of payment thereof by Tenant, shall be immediately paid by Tenant to Landlord upon demand; provided, however, that nothing contained herein shall be construed as permitting Landlord to charge or receive interest in excess of the maximum legal rate then allowed by law. The making of any payment or the taking of such action by Landlord shall not be considered as a cure of such default by Tenant or prevent Landlord from pursuing any remedy it is otherwise entitled to pursue in connection with such default. SECTION 20.7 Default by Landlord (a) In the event Landlord shall default in the payment, when due, of any monetary obligations to be paid by Landlord hereunder (including any interest or Tenant Improvement Allowance [as defined in Exhibit F] due hereunder), and Landlord has acknowledged the existence of its obligation to make the payment and the actual amount due, and Landlord fails to cure said default within fifteen (15) days after written notice thereof from Tenant, or if Tenant has obtained a final, nonappealable judgment against Landlord for a liquidated sum and Landlord fails to pay such amount within fifteen (15) days after written notice thereof from Tenant, Tenant shall be entitled to offset the amount owed by Landlord (including any interest due hereunder) against rent next accruing hereunder. If Landlord shall default in performing any of the covenants, terms or provisions of this Lease (other than the payment, when due, of any of Landlord's monetary obligations hereunder to which the preceding sentence applies), and fails to cure such default within fifteen (15) days after written notice thereof from Tenant (or such longer period as may be reasonably necessary to cure such default if such default is not reasonably susceptible to being cured within such fifteen (15) day period and Landlord commences its efforts promptly to cure the same and thereafter diligently, continuously and in good faith pursues the curing of the same to completion as soon as possible and in any event within forty-five (45) days), then, and in any of said events, Tenant shall be entitled to exercise any other right or remedy available to Tenant under law or equity, except for self-help or set-off. The remedies set forth above are in addition to and cumulative with Tenant's rental abatement rights set forth elsewhere in the Lease. Such rental abatement rights are independent of any rights or remedies set forth above. (b) No waiver of any provision of this Lease shall be implied by any failure of Tenant to enforce any remedy on account of the violation of such provision, even if such violation shall continue or be repeated subsequently, any waiver by Tenant of any provision of this Lease may only be in writing, and no express waiver shall affect any provision other than the one specified in such waiver and that one only for the time and in the manner specifically stated. (c) In addition to and not in lieu of any cure rights given to Landlord herein in the event that Landlord defaults under this Lease, each and every mortgagee and ground lessor 40 having an interest in the Property shall have the right (but not the obligation) to cure any such defaults on the part of Landlord hereunder in accordance with and subject to the terms of any separate subordination, nondisturbance and attornment between it and Tenant or, in the absence of such a separate agreement, the following terms and conditions: (i) The rights granted hereunder to a mortgagee or a ground lessor shall be given to any mortgagee or ground lessor of which Tenant has written notice prior to the occurrence of such default in accordance with the notice provisions specified herein. Such notice shall specify the name and address for such notice purposes of the mortgagee or ground lessor in question, and the instrument or document from which the interest of the mortgagee or ground lessor derives. (ii) Tenant shall deliver to all such mortgagee or ground lessors a copy of any notice of default or demand to perform on the part of Landlord hereunder at the time such notice or demand is delivered to Landlord, and no such notice shall be effective as to the mortgagee or ground lessor unless and until it has been so delivered to such mortgagee or ground lessor; (iii) The mortgagee or ground lessor in question shall have the same amount of time from the date of default that Landlord has (without duplication) to cure any default on the party of Landlord under this Lease; and (iv) Tenant shall accept a cure of the mortgagee or the ground lessor in question within any applicable cure period as if such cure were the cure of Landlord. SECTION 20.8 Attorney's Fees If, as the result of any alleged breach or default in the performance of the other party's obligations under this Lease, either party uses the service of an attorney in order to secure compliance with such provisions or to recover damages therefor or possession of the Premises, or if either party is made a party to an action as a result of any alleged act or failure to act of the other party, then the prevailing party in any suit, action, proceeding, arbitration, mediation or other dispute resolution mechanism shall be entitled to be paid the reasonable attorneys' fees and costs incurred by it as a result of the foregoing circumstances. ARTICLE 21 SUBORDINATION AND ATTORNMENT ---------------------------- SECTION 21.1 Subordination (a) This Lease and Tenant's interest hereunder is and shall remain subject and subordinate to the lien of any and all current and future mortgages and/or any ground leases (which term "mortgages" shall include both construction and permanent financing and shall include deeds of trust, similar security instruments, and ground leases) which may now or hereafter encumber the Building and/or the Land, or any part thereof, and to all and any renewals, extensions, modifications, recastings, or refinancings thereof, if the holder or beneficiary thereof enters into a subordination, nondisturbance and attornment agreement on 41 terms reasonably acceptable to Tenant. Without limiting such holder's or beneficiary's rights to request other terms or use a different form, Tenant hereby agrees that the terms in the form attached hereto as Exhibit H are reasonably acceptable to it. At any time after the execution of this Lease, the holder of any mortgage to which this Lease is subordinate shall have the right to declare this Lease to be superior to the lien of such mortgage and Tenant agrees to execute all documents required by such holder in confirmation thereof. (b) Landlord hereby subordinates its statutory lien rights, if any, as landlord, in the personal property of Tenant located at the Premises to any bona fide third party lender making financing available to Tenant and agrees to execute an instrument reasonably acceptable to it confirming such subordination upon the request of Tenant in connection with any such financing. SECTION 21.2 Attornment Tenant agrees that in the event any proceedings are brought for the foreclosure of any mortgage encumbering the Building, the Land, or any part thereof, or the termination of any ground lease affecting the Building, the Land, or any part thereof, Tenant shall attorn to the purchaser at such foreclosure sale or any ground lessor, as the case may be, if requested to do so by such party, and shall recognize such party as Landlord under this Lease, and Tenant waives the provisions of any statute or rule of law now or hereafter in effect which may give or purport to give Tenant any right to terminate or otherwise adversely affect this Lease and the obligations of Tenant hereunder in the event any such foreclosure proceeding is prosecuted or completed. ARTICLE 22 DELIVERY AT END OF LEASE TERM ----------------------------- SECTION 22.1 Surrender of Premises On the date of the expiration or termination of the Lease Term, Tenant shall quit and surrender the Premises broom clean and in good condition and repair (ordinary wear and tear and insured damage by fire or other casualty excepted), together with all Improvements which may have been made in or attached to the Premises, unless otherwise directed by Landlord pursuant to Section 10.3 hereof. SECTION 22.2 Holding Over In the event that Tenant or any party claiming under Tenant shall not immediately surrender the Premises on the date of the expiration or termination of the Lease Term, Tenant shall become a tenant by the month at one hundred fifty percent (150%) of the fixed monthly rent in effect during the last month of the Lease Term, plus one hundred percent (100%) of all additional rent in effect during the last month of the Lease Term (subject to increases thereafter as determined by Landlord in accordance with the provisions of this Lease). Said monthly tenancy shall commence on the first day following the expiration of the Lease Term. As a monthly tenant, Tenant shall be subject to all the terms, conditions, covenants, and agreements of this Lease, except as to the amount of the monthly rent, which shall be in the amount specified in 42 this Section. As a monthly tenant, Tenant shall give to Landlord at least thirty (30) days' written notice of any intention to quit the Premises, and Tenant shall be entitled to thirty (30) days' written notice to quit the Premises, unless Tenant is in default hereunder, in which event Tenant shall not be entitled to any notice to quit, the usual thirty (30) days' notice to quit being hereby expressly waived. Notwithstanding the foregoing provisions of this Section, in the event Tenant shall hold over after the expiration of the Lease Term and if Landlord shall desire to regain possession of the Premises promptly at the expiration of the Lease Term, then at any time prior to Landlord's acceptance of rent from Tenant as a monthly tenant hereunder Landlord, at its option, may forthwith re-enter and take possession of the Premises by any legal process in force in the District of Columbia. Landlord may accept rent in the holdover amount and concurrently commence legal proceedings to regain possession of the Premises. Tenant shall also pay to Landlord all damages sustained by Landlord resulting from retention of possession by Tenant, including the loss of any proposed subsequent tenant for all or any portion of the Premises. Force majeure is not an excuse to holding over. ARTICLE 23 COVENANTS OF LANDLORD AND RESERVATION OF RIGHTS ----------------------------------------------- SECTION 23.1 Covenants of Landlord Landlord covenants that it has the right to make this Lease for the Lease Term and that if Tenant shall pay all rent when due and punctually perform all of the covenants, terms, conditions, and agreements of this Lease to be performed by Tenant, Tenant shall have the right, during the Lease Term, to freely, peaceably, and quietly occupy and enjoy the full possession of the Premises without molestation or hindrance by Landlord or any party claiming through or under Landlord, subject to the provisions of this Lease. SECTION 23.2 Landlord's Reservation of Rights Landlord hereby reserves to itself and its successors and assigns the following rights (all of which are hereby consented to by Tenant): (a) to change the street address and/or name of the Building (provided, however, that Landlord agrees to reimburse Tenant for is reasonable costs in printing change-of-address notices and for replacing obsolete stationary, brochures or other similar printed materials if such change is at Landlord's initiative and not the initiative of the U.S. Postal Service or any other governmental authority), and/or the arrangement and/or location of entrances, passageways, doors, doorways, corridors, elevators, stairs, toilets, or other public parts of the Building and to change the design or configuration of the Building; (b) to erect, use, and maintain pipes and conduits in and through the Premises; and (c) to grant to anyone the exclusive right to conduct any particular business or undertaking in the Building. Landlord may exercise any or all of the foregoing rights without being deemed to be guilty of an eviction, actual or constructive, or a disturbance or interruption of the business of Tenant or of Tenant's use or occupancy of the Premises. 43 ARTICLE 24 GENERAL PROVISIONS ------------------ SECTION 24.1 Representations by Landlord (a) Tenant acknowledges that neither Landlord nor any broker, agent, or employee of Landlord has made any representations or promises with respect to the Premises or the Property except as herein expressly set forth, and no rights, privileges, easements, or licenses are acquired by Tenant except as herein expressly set forth. (b) Landlord hereby represents and warrants to Tenant that (i) Landlord is the owner of the Premises in fee simple absolute and the Premises are not subject to the lien of any deed of trust, mortgage or other similar encumbering instrument except a deed of trust and related security instrument benefitting G Street Funding Company, an affiliate of J.P. Morgan & Co.; (ii) Landlord's title to the Premises is not subject to any lien, easement, covenant or encumbrance which prohibits the use of the Premises as contemplated in this Lease; (iii) to the best of Landlord's knowledge and belief, no existing zoning ordinance prevents the use of the Premises for the specific purpose set forth in this Lease; (iv) to the best of Landlord's knowledge and belief, no Materials exist on, under or about the Premises as of the date hereof nor have any Materials been transported to or from the Premises or used, generated, manufactured, stored or disposed of on, under or about the Premises except in compliance with all applicable laws; (v) subject to the consent of G Street Funding Company, Landlord has full authority to enter into this Lease; (vi) subject to the consent of G Street Funding Company, no joinder or approval of another party is required with respect to Landlord's right and authority to enter into this Lease (vii) to the best of Landlord's knowledge and belief, the Building structure is in good condition and repair and has no structural defects nor are there any defects affecting any base building systems; (viii) to the best of Landlord's knowledge and belief, the structure (specifically including without limitation all restrooms and other base building items) has been (or as of the Lease Commencement Date will be) constructed in accordance with, and is otherwise in full compliance with, all applicable federal, state and local laws, statutes, ordinances, rules, regulations and other requirements; and (ix) a permanent certificate of occupancy has been issued for the Building. 44 As used herein, "to the best of Landlord's knowledge and belief" means to the best knowledge and belief of the general partner(s) therein. SECTION 24.2 No Partnership Nothing contained in this Lease shall be construed as creating a partnership or joint venture of or between Landlord and Tenant, or to create any other relationship between the parties hereto other than that of landlord and tenant. SECTION 24.3 Brokers Landlord and Tenant recognize Cushman & Wakefield of Washington, D.C., Inc. as the sole broker procuring this Lease on behalf of Tenant and Cassidy & Pinkard, Inc. as the sole broker procuring this Lease on behalf of Landlord. Landlord shall pay said broker(s) a commission therefor pursuant to a separate agreement between said broker(s) and Landlord. Landlord and Tenant each represent and warrant to the other that, except as provided above, neither of them has employed or dealt with any broker, agent, or finder in carrying on the negotiations relating to this Lease. Landlord shall indemnify and hold Tenant harmless, and Tenant shall indemnify and hold Landlord harmless, from and against any claim or claims for brokerage or other commissions arising from or out of any breach of the foregoing representation and warranty by the respective indemnitor. No broker is a third party beneficiary of this Lease. SECTION 24.4 Tenant Estoppel Certificates Tenant agrees, at any time from time to time, upon not less than ten (10) days' prior written notice by Landlord, to execute, acknowledge and deliver to Landlord a statement in writing: (a) certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the Lease is in full force and effect as modified and stating the modifications); (b) stating whether any rent abatements remain under this Lease and the dates to which the rent has been paid by Tenant; (c) stating whether or not, to the best knowledge of Tenant, Landlord is in default in the performance of any covenant, agreement, or condition contained in this Lease and, if so, specifying the nature of such default; (d) if any improvements are required to be performed by Landlord under this Lease, stating that all such work has been satisfactorily completed or, if not, providing a list of items excepted; (e) stating the address to which notices to Tenant are to be sent; (f) stating the Lease Commencement Date, the rent commencement date, and the scheduled expiration date of the Lease Term; (g) stating whether any security deposit has been posted; (h) stating whether Tenant has any knowledge of any environmental problem affecting the Premises or the Property; (i) stating whether Tenant has any expansion, contraction, renewal, or termination options of any sort or any right to purchase the Building and/or the Land and, if Tenant does have any of the foregoing, stating whether Tenant has exercised such option(s); and (j) certifying as to such other matters as may reasonably be requested. Any such statement delivered by Tenant may be relied upon by Landlord, any owner of the Building or the Land, any prospective purchaser of the Building or Land, any mortgagee or prospective mortgagee of the Building or Land or of Landlord's interest therein, or any prospective assignee of any such mortgagee. Any failure by Tenant to execute, acknowledge and deliver within the aforesaid ten (10) day period any estoppel certificate shall be deemed a default 45 under this Lease. If Tenant fails to deliver such certificate within the ten (10) day period described above and within the ten (10) day period following a second notice from Landlord, then Tenant hereby irrevocably constitutes and appoints Landlord as Tenant's attorney-in-fact to execute, acknowledge and deliver any such certificate. Any such statement delivered by Landlord as Tenant's attorney-in-fact may be relied upon as aforesaid. SECTION 24.5 Waiver of Jury Trial LANDLORD AND TENANT EACH HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER OF THEM AGAINST THE OTHER IN CONNECTION WITH ANY MATTER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT HEREUNDER, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE. SECTION 24.6 Notices (a) Whenever any notice, demand or request is required or permitted hereunder, such notice, demand or request shall be hand-delivered (which term includes delivery by overnight courier services), sent by facsimile, or sent by United States Mail, registered or certified, return receipt requested, postage prepaid, to the addresses set forth below: TENANT: American InterContinental University Tower Place Suite 2000 3340 Peachtree Road, N.E. Atlanta, Georgia 30326 Attn: Ms. Stephanie Kirkpatrick Facsimile: (404) 812-8204 with a copy to: Arthur Jay Schwartz, Esq. Smith, Gambrell & Russell Suite 3100, Promenade II 1230 Peachtree Street, N.E. Atlanta, Georgia 30309 Facsimile: (404) 815-3509 LANDLORD: The 1770 G Street Limited Partnership c/o Robert T. Foley Company 5530 Wisconsin Avenue Suite 945 Chevy Chase, Maryland 20815 Facsimile: (301) 951-0248 Tenant shall also send a copy of any notice to any mortgagee pursuant to Section 21.3 above. 46 (b) Either Landlord or Tenant shall have the right from time to time to designate by written notice to the other party such other persons or places in the United States as Landlord or Tenant may desire written notice to be delivered or sent in accordance herewith; provided, however, at no time shall either party be required to send more than an original and two copies of any such notice, demand, or request required or permitted hereunder. (c) Any notice, demand, or request which shall be served upon either of the parties in the manner aforesaid shall be deemed sufficiently given for all purposes hereunder (i) at the time such notice, demand, or request is hand-delivered, or (ii) if first sent by facsimile before 5:00 pm (recipient's local time) on a Monday-Friday (except federal holidays), upon receipt, or if sent by facsimile at any other time, then on the first (1st) business day after being sent, or (iii) on the third (3rd) day after the mailing of such notice, demand, or request in accordance with the preceding portions of this Section. SECTION 24.7 Partial Invalidity If any provision of this Lease or the application thereof to any person or circumstances shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and enforced to the fullest extent permitted by law. SECTION 24.8 Pronouns Feminine or neuter pronouns shall be substituted for those of masculine form, and the plural shall be substituted for the singular number in any place or places herein in which the context may require such substitution. SECTION 24.9 Successors and Assigns The provisions of this Lease shall be binding upon, and shall inure to the benefit of, the parties hereto and each of their respective representatives, successors, and assigns, subject to the provisions hereof prohibiting assignment or subletting by Tenant. SECTION 24.10 Entire Agreement This Lease contains the entire agreement of the parties, and no representations, inducements, or agreements, oral or otherwise, not contained in this Lease shall be of any force or effect. This Lease may not be modified or changed in whole or in part in any manner other than by an instrument in writing duly signed by both parties hereto. SECTION 24.11 Governing Law This Lease shall be governed by and construed in accordance with the laws of the District of Columbia without regard to conflicts of laws. 47 SECTION 24.12 Section Headings Article and Section headings are used herein for the convenience of reference and shall not be considered when construing or interpreting this Lease. SECTION 24.13 No Offer The submission of an unsigned copy of this document to Tenant for Tenant's consideration does not constitute an offer to lease the Premises or an option to or for the Premises. This document shall become effective and binding only upon the execution and delivery of this Lease by both Landlord and Tenant. SECTION 24.14 Multiple Counterparts This Lease may be executed in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same document. SECTION 24.15 Time of Essence TIME IS OF THE ESSENCE WITH RESPECT TO THE CARRYING OUT BY EACH PARTY HERETO OF EACH TERM OR PROVISION OF THIS LEASE TO BE PERFORMED BY SUCH PARTY. SECTION 24.16 Conflict In the event of any conflict between the main text of this Lease and any Exhibit hereto, the provisions of the main text of this Lease shall prevail. SECTION 24.17 [Intentionally Omitted] SECTION 24.18 Joint and Several Liability If more than one person or entity signs this Lease as Tenant, the liability of each such person and entity shall be joint and several. SECTION 24.19 Force Majeure Except with respect to Tenant's monetary obligations hereunder, in the event that Landlord or Tenant shall be delayed or hindered in or prevented from the performance of any act or obligation required of it hereunder by reason of a labor strike, lockout, inability to procure materials, failure of power, riot, insurrection, war, or other reason not within the reasonable control of the party so affected, then performance of such act or obligation by the party so affected shall be excused for a period equivalent to the period of such delay. 48 SECTION 24.20 No Construction of Lease Against Drafter Should any provision of this Lease require judicial interpretation, it is agreed that the court interpreting or considering same shall not apply the presumption that the terms hereof shall be more strictly construed against a party by reason of the rule or conclusion that a document should be construed more strictly against the party who itself or through its agent prepared the same, it being agreed that all parties hereto have participated in the preparation of this Lease and that legal counsel was consulted by each party hereto (or opportunity for such legal consultation afforded to each party) before the execution of this Lease. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease under seal as of the day and year first above written. LANDLORD: THE 1770 G STREET LIMITED PARTNERSHIP ATTEST: By: Robert T. Foley Company, general partner Susan Shirsoc By: /s/ Robert T. Foley - ---------------------- ------------------------- [Corporate Seal] Name: Robert T. Foley Title: General Partner TENANT: ATTEST: AMERICAN INTERCONTINENTAL UNIVERSITY, INC. Douglas C. Chait By: /s/ Steve Bostic - ---------------------- ------------------------- [Corporate Seal] Name: Steve Bostic Title: President 49 EX-23.1 4 EX-23.1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 333-41543 and 333-46655 of EduTrek International, Inc. on Form S-8 of our report dated August 7, 1998 appearing in the Annual Report on Form 10-K of EduTrek International, Inc. for the year ended May 31, 1998. DELOITTE & TOUCHE LLP Atlanta, Georgia August 31, 1998 EX-24.1 5 EX-24.1 Exhibit 24.1 Power of Attorney of Stephen G. Franklin, Sr. STATE OF GEORGIA COUNTY OF COBB POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that I, Stephen G. Franklin, Sr., a Director of EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint Steve Bostic and Donald J. Blankers, 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 May 31, 1998, 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 26th day of August 1998. /s/ Stephen G. Franklin, Sr. ------------------------------ Stephen G. Franklin, Sr. ACKNOWLEDGMENT -------------- BEFORE me this 26th day of August 1998, came Stephen G. Franklin, Sr., 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, 1999 ------------------ EX-24.2 6 EX-24.2 Exhibit 24.2 Power of Attorney of Paul D. Beckham STATE OF GEORGIA COUNTY OF COBB 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 Donald J. Blankers, 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 May 31, 1998, 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 26th day of August 1998. /s/ Paul D. Beckham --------------------- Paul D. Beckham ACKNOWLEDGMENT -------------- BEFORE me this 26th day of August 1998, 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, 1999 ------------------ EX-24.3 7 EX-24.3 Exhibit 24.3 Power of Attorney of Fred C. Davison STATE OF GEORGIA COUNTY OF COBB 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 Donald J. Blankers, 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 May 31, 1998, 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 26th day of August 1998. /s/ Fred C. Davison --------------------- Fred C. Davison ACKNOWLEDGMENT -------------- BEFORE me this 26th day of August 1998, 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, 1999 ------------------ EX-24.4 8 EX-24.4 Exhibit 24.4 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 Donald J. Blankers 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 May 31, 1998, 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 25th day of August 1998. /s/ Ronald P. Hogan ------------------- Ronald P. Hogan ACKNOWLEDGMENT -------------- BEFORE me this 25th day of August 1998, 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-24.5 9 EX-24.5 Exhibit 24.5 Power of Attorney of Gaylen D. Kemp STATE OF GEORGIA COUNTY OF COBB 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 Donald J. Blankers 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 May 31, 1998, 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 26th day of August 1998. /s/ Gaylen D. Kemp -------------------- Gaylen D. Kemp ACKNOWLEDGMENT -------------- BEFORE me this 26th day of August 1998, 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, 1999 ------------------ EX-24.6 10 EX-24.6 Exhibit 24.6 Power of Attorney of Gerald Tellefsen STATE OF GEORGIA COUNTY OF COBB 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 Donald J. Blankers 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 May 31, 1998, 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 26th day of August 1998. /s/ Gerald Tellefsen ---------------------- Gerald Tellefsen ACKNOWLEDGMENT -------------- BEFORE me this 26th day of August 1998, 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, 1999 ------------------ EX-27.1 11 EX-27.1
5 1,000 YEAR MAY-31-1998 JUN-01-1997 MAY-31-1998 5,843 0 5,592 190 0 12,134 5,729 0 58,285 12,415 0 0 0 40,537 3,757 58,285 41,914 41,914 35,259 35,259 (23) 0 1,328 6,889 2,581 2,863 0 (960) 0 1,903 .20 .19
EX-27.2 12 EX-27.2
5 3-MOS 3-MOS MAY-31-1998 MAY-31-1998 JUN-01-1997 SEP-01-1997 AUG-31-1997 NOV-30-1997 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (.13) (.08) 0 (.07)
EX-27.3 13 EX-27.3
5 YEAR MAY-31-1997 JUN-01-1996 MAY-31-1997 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 .29 .26
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