<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 1997
REGISTRATION NO. 333-29603
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
EDUTREK INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
GEORGIA 8221 58-2255472
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
3340 PEACHTREE ROAD
SUITE 2000
ATLANTA, GEORGIA 30326
(404) 812-8200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
STEVE BOSTIC
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
EDUTREK INTERNATIONAL, INC.
3340 PEACHTREE ROAD, SUITE 2000
ATLANTA, GEORGIA 30326
(404) 812-8200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
ARTHUR JAY SCHWARTZ, ESQ. M. HILL JEFFRIES, JR.
SMITH, GAMBRELL & RUSSELL, LLP ALSTON & BIRD LLP
SUITE 1800 ONE ATLANTIC CENTER
3343 PEACHTREE ROAD, N.E. 1201 WEST PEACHTREE STREET
ATLANTA, GEORGIA 30326 ATLANTA, GEORGIA 30309-3424
(404) 264-2620 (404) 881-7000
(404) 264-2652 (FAX) (404) 881-7777 (FAX)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 1, 1997
PROSPECTUS
2,600,000 SHARES
[EDUTREK LOGO]
CLASS A COMMON STOCK
---------------------
Of the 2,600,000 shares of Class A Common Stock (the "Class A Common
Stock") being offered hereby (the "Offering"), 2,342,890 shares are being sold
by EduTrek International, Inc. (the "Company") and 257,110 shares are being sold
by a shareholder of the Company (the "Selling Shareholder"). The Company will
not receive any proceeds from the sale of shares of Class A Common Stock by the
Selling Shareholder. See "Principal and Selling Shareholders."
Prior to this Offering, there has been no public market for the Class A
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $ and $ per share. See
"Underwriting" for information relating to the factors to be considered in
determining the initial public offering price. Application has been made to have
the Class A Common Stock listed on the Nasdaq National Market under the trading
symbol "EDUT."
The Company's authorized capital stock includes the Class A Common Stock
and shares of Class B Common Stock, without par value (the "Class B Common
Stock"). The economic rights of the Class A Common Stock and the Class B Common
Stock (collectively, the "Common Stock") are identical, but each share of Class
A Common Stock generally entitles the holder thereof to one vote in respect of
matters submitted for the vote of holders of Common Stock, whereas each share of
Class B Common Stock entitles the holder thereof to ten votes on such matters.
Immediately after this Offering, Steve Bostic, the Company's Chairman and Chief
Executive Officer, and his controlled affiliates will have the power to vote all
of the outstanding shares of Class B Common Stock (representing approximately
95.1% of the aggregate voting power of the Common Stock, assuming no exercise of
the Underwriters' over-allotment option). Each share of Class B Common Stock
converts automatically into one share of Class A Common Stock upon sale or other
transfer to a party other than Permitted Transferees (as defined herein). See
"Description of Capital Stock."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDER
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------
Total(3) $ $ $ $
=======================================================================================================================
</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering, estimated at $500,000, which are
payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
390,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. See "Underwriting." If the option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ , and $ ,
respectively. Proceeds to Selling Shareholder will not be affected.
---------------------
The shares of Class A Common Stock are being offered by the several
Underwriters named herein, subject to prior sale, when, as and if accepted by
them and subject to certain conditions. It is expected that certificates for the
shares of Class A Common Stock offered hereby will be available for delivery on
or about , 1997 at the offices of Smith Barney Inc., 333 West 34th
Street, New York, New York 10001.
---------------------
SMITH BARNEY INC. THE ROBINSON-HUMPHREY COMPANY, INC.
, 1997
<PAGE> 3
[PHOTOGRAPH OF THE EXTERIOR OF THE COLLEGE'S CAMPUS IN LONDON]
[PHOTOGRAPH DEPICTING STUDENTS STUDYING IN A WORKING GROUP]
The American College's faculty utilizes collaborative learning techniques
to teach students to work effectively in teams.
[PHOTOGRAPH DEPICTING A STUDENT AND TEACHER INTERACTING IN AN INTERIOR DESIGN
PROGRAM CLASS]
The American College's interior design program is supported by an extensive
library of design resources.
[PHOTOGRAPH OF THE EXTERIOR OF THE COLLEGE'S CAMPUS IN DUBAI]
[PHOTOGRAPH OF THE EXTERIOR OF THE COLLEGE'S CAMPUS IN ATLANTA]
[PHOTOGRAPH DEPICTING STUDENTS PARTICIPATING IN THE COLLEGE'S VIDEO PRODUCTION
PROGRAM]
Students enrolled in The American College's video production program employ
the latest technology to complete projects.
[PHOTOGRAPH DEPICTING A STUDENT WORKING AT A COMPUTER TERMINAL.]
The American College's students utilize state of the art computer equipment
and software to refine their design skills.
[PHOTOGRAPH OF THE EXTERIOR OF THE COLLEGE'S CAMPUS IN LOS ANGELES]
The Company intends to furnish its shareholders annual reports containing
audited financial statements and, upon request, will make available copies of
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial information.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. As used in
this Prospectus, unless the context otherwise requires, the term "Company"
includes EduTrek International, Inc. and the Predecessor (as defined in
"Acquisitions"), together with its subsidiaries. The offering of shares of the
Class A Common Stock of the Company is referred to herein as the "Offering."
Unless otherwise indicated, all information included in this Prospectus reflects
a 7-for-1 split of the Company's Common Stock effected as of June 17, 1997 and
assumes no exercise of the Underwriters' over-allotment option. See "Description
of Capital Stock" and "Principal and Selling Shareholders."
THE COMPANY
EduTrek International, Inc. (the "Company") intends to become a leading
provider of career-oriented, internationally focused higher education designed
to prepare students to compete in the global marketplace. The Company operates
The American College ("The American College" or the "College"), an international
postsecondary educational institution with campuses in Atlanta, Los Angeles,
London and Dubai, United Arab Emirates serving approximately 2,800 students from
the U.S. and over 100 other countries. The American College's curriculum
includes such academic disciplines as international business, multimedia
communications and international design. To respond to the increasingly
technology-intensive workplace, The American College intends to expand its
curriculum to include academic programs in the field of information technology
management. The American College's Fall term enrollment has increased from 2,209
students in 1994 to 2,815 students in 1996, and its net revenues have increased
from approximately $23.7 million for the fiscal year ended May 31, 1995 to
approximately $29.8 million on a pro forma basis for the fiscal year ended May
31, 1997. See "-- Summary Consolidated Financial Data."
Originally established as a two-year institution, The American College has
grown into a diversified institution awarding associate's and bachelor's degrees
as well as a master of business administration ("MBA") degree in international
business. Of its May 1997 graduates, 9.5% graduated with an associate's degree,
86.4% graduated with a bachelor's degree and 4.1% graduated with a master's
degree. In 1987, The American College became the first for-profit four-year
university to be accredited by the Commission of Colleges of the Southern
Association of Colleges and Schools ("SACS"), one of six regional accrediting
agencies recognized by the U.S. Department of Education. The American College
offers an authentic international educational environment with over half of its
students being non-U.S. students. Through its Study Abroad Program (the "SAP
program"), The American College provides nearly 500 students from U.S.
universities the opportunity to earn academic credit toward a degree from their
home university by studying international business, liberal arts and applied art
at one of The American College's international campuses. The Company, through
EduTrek Systems, Inc. ("EduTrek Systems"), also licenses from third parties,
acquires, develops and implements corporate education programs.
The Company believes that the demand for postsecondary career-oriented
education will increase over the next several years as a result of certain
demographic, economic and social trends. The United States Department of
Education (the "U.S. Department of Education") estimates that the number of new
high school graduates is expected to increase by approximately 20% from 2.5
million graduates in 1994 to 3.0 million graduates in 2005. In addition, the
U.S. Department of Education expects significant growth to result from increased
enrollment of students over the age of 24 seeking to enhance their skills or
retrain for new technologies. Two significant segments in the U.S. postsecondary
education market are international students enrolling in U.S. institutions and
U.S. students studying abroad. According to the Institute of International
Education, international student enrollment at U.S. colleges and universities
reached a record high of over 450,000 for the 1995-1996 academic year. In
addition, the number of U.S. students studying abroad has risen from
approximately 48,000 in the 1985-1986 academic year to approximately 84,000 in
the 1994-1995 academic year.
The key elements of the Company's growth strategy are to (i) enhance growth
at existing campuses through an integrated marketing program, increased student
retention and job placement assistance and
3
<PAGE> 5
competitive financing programs; (ii) expand education program offerings,
including information technology management and corporate education; and (iii)
capitalize on The American College's international educational capabilities by
aggressive international student recruiting and growth in its SAP program.
The Company's principal executive offices are located at 3340 Peachtree
Road, Suite 2000, Atlanta, Georgia 30326, and its telephone number is (404)
812-8200.
LICENSE AGREEMENT
On July 26, 1997, the Company and its subsidiary, American European
Corporation ("American European"), entered into a License Agreement (the
"License Agreement") with ITI Learning Systems, Inc. ("ITI") pursuant to which
ITI has licensed its Applied Information Technology ("AIT") program to the
Company for use in the State of Georgia, including The American College's campus
in Atlanta. The AIT program is an intensive nine month post-graduate program in
applied information technology designed to train and certify students in the
growing field of information technology management. The License Agreement
expires on July 31, 2007 and is renewable for one ten-year term. The License
Agreement requires the Company to implement the AIT program in the Atlanta
campus by November 3, 1997, unless a later date is mutually agreed upon.
Under the License Agreement, the Company will pay ITI a one-time initial
licensing fee and royalties of a percentage of gross revenues derived from The
American College's operation of the AIT program. Under the terms of the License
Agreement, the Company is required, among other things, to (i) pay ITI royalties
based on the higher of actual tuition levels charged students enrolled in the
AIT program or minimum tuition levels specified in the License Agreement, (ii)
expend a percentage of revenues derived from the operation of the AIT program to
advertise and promote the AIT program, (iii) purchase from ITI certain
courseware, equipment and other materials, and (iv) make such capital
investments or expenditures as may be necessary to upgrade the AIT program. The
License Agreement further grants the Company the right to implement the AIT
program in the cities of Los Angeles, London and Dubai upon payment of an
additional license fee and the execution of an additional license agreement
substantially in the form of the License Agreement for each additional
territory. The Company intends to enter into license agreements for such
territories over the next two years. ITI also has agreed that until July 26,
1998, it will negotiate exclusively with the Company for additional license
agreements for the territories of the States of California (in addition to Los
Angeles), Florida, Texas and Virginia, the District of Columbia and the United
Arab Emirates (in addition to Dubai) and has granted the Company a right of
first refusal in the event that ITI receives an offer to license its AIT program
in any of such territories during the 24-month period beginning on July 26,
1998.
The Company anticipates that the investment and start-up costs of
approximately $2.0 million per campus associated with the implementation of the
AIT program will be funded primarily from working capital and additional lines
of credit currently being negotiated with certain lenders. The Company expects
that cash flow will repay the investment and start-up costs over a period of
approximately two years. See "Business -- Applied Information Technology
Program" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
RISK FACTORS
An investment in the Class A Common Stock offered hereby involves a high
degree of risk. See "Risk Factors."
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.................. 2,342,890 shares of Class A Common Stock
Common Stock offered by the Selling Shareholder...... 257,110 shares of Class A Common Stock
Common Stock to be outstanding after the
Offering........................................... 3,265,000 shares of Class A Common Stock(1)
6,335,000 shares of Class B Common Stock
Use of proceeds by the Company....................... To repay certain indebtedness of the Company
and for general corporate purposes, including
working capital. See "Use of Proceeds."
Proposed Nasdaq National Market symbol............... "EDUT"
</TABLE>
- ---------------
(1) Excludes (i) 829,388 shares of Class A Common Stock reserved for issuance
under the Company's 1997 Incentive Plan, of which 410,550 shares were
subject to outstanding stock options as of August 1, 1997 and (ii) 622,041
shares of Class A Common Stock issuable upon the exercise of stock purchase
warrants. See "Use of Proceeds," "Management -- 1997 Incentive Plan,"
"Principal and Selling Shareholders," and "Description of Capital
Stock -- Warrants to Purchase Class A Common Stock."
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE, PERCENTAGE AND ENROLLMENT DATA)
The following table sets forth certain consolidated financial and other
operating data for the Company and the Predecessor. This information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company's Consolidated Financial
Statements and Notes thereto, the Predecessor's Consolidated Financial
Statements and Notes thereto, and other financial information included elsewhere
herein.
<TABLE>
<CAPTION>
THE PREDECESSOR(1)(2) THE COMPANY(1)
--------------------------------------------- ---------------------------
FISCAL YEAR ENDED
PERIOD FROM MAY 31, 1997
FISCAL YEAR ENDED MAY 31, JUNE 1, 1996 ---------------------------
--------------------------- THROUGH PRO FORMA
1994 1995 1996 OCTOBER 8, 1996 ACTUAL(2) AS ADJUSTED(3)
------- ------- ------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:(4)
Net revenues...................................... $20,654 $23,696 $26,493 $ 6,189 $ 23,590 $ 29,779
Cost of education and facilities.................. 8,611 10,051 11,144 3,256 9,014 12,270
Selling and promotional expenses.................. 3,165 3,083 3,614 1,335 2,428 3,763
General and administrative expenses............... 6,264 6,115 6,677 2,739 5,468 8,357
Rents paid to majority shareholder................ 146 145 150 49 0 0
Amortization of goodwill.......................... 0 0 0 0 696 1,040
------- ------- ------- ------- ---------- -----------
Income (loss) from campus operations.............. 2,468 4,302 4,908 (1,190) 5,984 4,349
Income (loss) from management agreement........... 0 0 127 (21) 479 458
------- ------- ------- ------- ---------- -----------
Income (loss) from operations..................... 2,468 4,302 5,035 (1,211) 6,463 4,807
Interest expense.................................. 440 607 730 258 2,499 468
Interest income -- shareholder notes.............. 183 153 361 98 0 0
Other income -- net............................... 483 25 72 66 19 85
------- ------- ------- ------- ---------- -----------
Income (loss) before income taxes................. 2,694 3,873 4,738 (1,305) 3,983 4,424
Provision for income taxes(5)..................... 148 124 107 0 1,981 2,019
------- ------- ------- ------- ---------- -----------
Net income (loss)................................. $ 2,546 $ 3,749 $ 4,631 $(1,305) $ 2,002 $ 2,405
======= ======= ======= ======= ========== ===========
Net income per share(6)........................... $ 0.24
==========
Weighted average shares outstanding............... 8,267,033
==========
Pro forma net income per share.................... $ 0.23
===========
Pro forma weighted average shares
outstanding(7).................................. 10,609,923
===========
PRO FORMA DATA:
Income before income taxes, as reported........... $ 2,694 $ 3,873 $ 4,738 $(1,305)
Pro forma provision for income taxes(5)........... 1,051 1,510 1,848 509
------- ------- ------- -------
Pro forma net income.............................. $ 1,643 $ 2,363 $ 2,890 $ (796)
======= ======= ======= =======
SELECTED OPERATING DATA:
EBITDA(8)......................................... $ 3,695 $ 5,445 $ 6,135 $ (820) $ 8,236 $ 7,199
EBITDA margin..................................... 17.9% 23.0% 23.2% (13.2)% 34.9% 24.2%
Net cash provided by (used in) operating
activities...................................... 4,375 5,522 5,798 1,413 1,356
Net cash provided by (used in) investing
activities...................................... 725 (1,507) (2,662) (288) (31,428)
Net cash provided by (used in) financing
activities...................................... (5,030) (3,916) (3,442) (1,196) (30,780)
The American College Fall term enrollment(9)...... 2,001 2,209 2,440 2,815 2,815
</TABLE>
<TABLE>
<CAPTION>
AT MAY 31, 1997
---------------------------
ACTUAL AS ADJUSTED(10)
-------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ (9,716) $(5,739)
Total assets................................................ 47,671 48,206
Long-term debt, including current portion................... 30,075 2,194
Shareholders' equity........................................ 7,877 36,928
</TABLE>
See accompanying notes on following page.
6
<PAGE> 8
(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 "Acquisitions."
(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 Summary 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 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) Assumes that the Company was formed on June 1, 1996 and gives effect to the
acquisitions of the Predecessor and EduTrek Systems as if such acquisitions
had occurred on June 1, 1996. See "Acquisitions." As adjusted to (i) give
effect to the sale of 2,342,890 shares of Class A Common Stock offered by
the Company hereby and (ii) the application of the estimated net proceeds
therefrom as if such application had occurred on June 1, 1996. See "Pro
Forma Consolidated Financial Data."
(4) The Company's results of operations are affected by The American College'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."
(5) 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%. Prior to this 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.
(6) Net 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. Net
income per share of the Company is based upon net income divided by the
weighted average number of shares for the period. All stock options and
stock purchase warrants outstanding are assumed to be exercised as of the
beginning of the period.
(7) Pro forma weighted average shares outstanding includes 665,000 shares of
Class A Common Stock and 6,335,000 shares of Class B Common Stock issued
and outstanding as of May 31, 1997, as adjusted for the 2,342,890 shares of
Class A Common Stock offered hereby and all outstanding warrants and
options (1,267,033) to purchase Class A Common Stock.
(8) EBITDA represents income from operations plus depreciation and
amortization. While EBITDA data should not be construed as a substitute for
income from operations, net income, or cash flows from operations, in
accordance with generally accepted accounting principles, in analyzing the
Company's and the Predecessor's operating performance, financial position
and cash flows, the Company has included EBITDA data (which is not a
measure of financial performance under generally accepted accounting
principles) because it understands that such data are commonly used by
certain investors to evaluate a company's performance in the postsecondary
education industry.
(9) Represents enrollment data as measured on the first day of each Fall term.
(10) As adjusted to give effect to the sale of 2,342,890 shares of Class A
Common Stock offered by the Company hereby, the exercise of a warrant to
purchase 257,110 shares of Class A Common Stock and the application of the
estimated net proceeds therefrom as if such application had occurred on May
31, 1997. See "Use of Proceeds."
7
<PAGE> 9
ACQUISITIONS
The Company, formerly known as E Holdings, Inc., is the successor to a
business organized in 1970 for the purpose of founding and operating the
College. The Company was organized by Mr. Steve Bostic, the Company's current
Chairman and Chief Executive Officer, for the purpose of acquiring all of the
capital stock of EduTrek Systems (a company also controlled by Mr. Bostic),
American European 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 American European 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 (the "College Acquisition") which, prior to its acquisition,
operated The American College. 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. See Note 1 of Notes to the Company's
Consolidated Financial Statements.
8
<PAGE> 10
RISK FACTORS
An investment in the shares of Class A Common Stock offered hereby involves
a high degree of risk. In addition to the other information in this Prospectus,
the following factors should be considered carefully in evaluating an investment
in the shares of Class A Common Stock offered hereby. Certain statements
included in this Prospectus concerning the Company's future financial condition
and performance are forward-looking statements, and the factors discussed below,
as well as those discussed elsewhere in this Prospectus, could cause actual
results and developments to be materially different from those expressed in or
implied by such statements.
POTENTIAL ADVERSE EFFECTS OF REGULATION; IMPAIRMENT OF FEDERAL FUNDING
General
The Company and The American College are subject to extensive regulation by
federal, state and foreign governmental agencies and accrediting agencies. In
particular, the Higher Education Act of 1965, as amended (the "HEA"), and the
regulations (the "Regulations") promulgated thereunder by the U.S. Department of
Education set forth numerous standards that schools must satisfy in order to
participate in the various federal student financial assistance programs under
Title IV of the HEA ("Title IV Programs"). For example, the HEA and the
Regulations (i) establish certain financial responsibility and administrative
capability standards, (ii) establish maximum acceptable rates of default by
students on federally guaranteed or funded student loans, (iii) restrict the
ability of a school or its parent corporation to engage in certain types of
transactions that would result in a change in ownership and control of that
school or corporation, (iv) limit the proportion of school revenues that may be
derived from Title IV Programs, and (v) prohibit the payment of certain types of
incentives to personnel engaged in student recruiting and admissions activities.
See "Business -- Regulatory Environment -- Student Financial
Assistance -- Federal Oversight of Title IV Programs."
In the event of a determination by the U.S. Department of Education that
The American College has improperly disbursed Title IV Program funds, The
American College could be required to repay those funds and could be assessed an
administrative fine. Alternatively, the U.S. Department of Education could
transfer The American College from the "advance" system of payment of Title IV
Program funds, under which a school requests and receives funding from the U.S.
Department of Education in advance based on anticipated needs, to the
"reimbursement" system of payment, under which a school must disburse funds to
students and document their eligibility for Title IV Program funds before
receiving funds from the U.S. Department of Education. Violations of Title IV
Program requirements could also subject The American College or the Company to
sanctions under the federal False Claims Act as well as other civil and criminal
penalties. The failure by The American College to comply with applicable
federal, state or accrediting agency requirements could result in the
limitation, suspension or termination of the ability of The American College's
campuses to participate in Title IV Programs or the loss of state licensure or
accreditation. Given that approximately 27% of the Company's revenues are
indirectly derived from Title IV Programs, the loss of or a significant
reduction in Title IV Program funds would have a material adverse effect on the
Company's revenues and cash flow because The American College's student
enrollment would likely decline as a result of its students' inability to
finance their education without the availability of Title IV Program funds. The
loss of or a significant reduction in Title IV Program funds may also increase
the amount of credit risk borne by the Company as it would likely have to
explore alternative means of providing student financing, including
Company-sponsored financing programs. See "Business -- Regulatory
Environment -- Student Financial Assistance -- Federal Oversight of Title IV
Programs."
Significant factors related to the HEA and its implementing regulations
that could adversely affect the Company include the following:
Financial Responsibility Standards
The HEA and the Regulations establish specific standards of financial
responsibility that must be satisfied in order to qualify for participation in
Title IV Programs. Such standards include certain financial requirements under
which an institution must: (i) have an acid test ratio (defined as the ratio of
cash, cash
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equivalents and current accounts receivable to current liabilities) of at least
1:1 at the end of each fiscal year, (ii) have a positive tangible net worth at
the end of each fiscal year, and (iii) not have a cumulative net operating loss
during either of its two most recent fiscal years that results in a decline of
more than 10% of the institution's tangible net worth at the beginning of that
two-year period. An institution that is determined by the U.S. Department of
Education not to meet the standards of financial responsibility on the basis of
failing to meet one or more of the specified numeric indicators is nonetheless
entitled to participate in Title IV Programs if it can demonstrate to the U.S.
Department of Education that it is financially responsible on an alternative
basis. An institution may do so by demonstrating, with the support of a
statement from a certified public accountant, proof of prior compliance with the
numeric standards and other information specified in the regulations, 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 U.S. Department of Education has interpreted this surety condition to
require the posting of an irrevocable letter of credit in favor of the U.S.
Department of Education.
The U.S. Department of Education applies the financial responsibility
standards to The American College on a consolidated basis at the level of the
Company in evaluating the financial condition of The American College. Based on
the consolidated financial statements of the Company as of May 31, 1997, The
American College does not satisfy either the acid test ratio or the tangible net
worth test. As of May 31, 1997, the Company's acid test ratio was .086 and the
Company had a negative tangible net worth of approximately $33.6 million.
Notwithstanding such noncompliance, the Company has maintained The American
College's eligibility to continue participating in Title IV Programs by posting
an irrevocable letter of credit in the amount of $3.75 million in favor of the
U.S. Department of Education, which amount is approximately 50% of the Company's
1996 Title IV Program funds received by students enrolled at The American
College. The letter of credit was posted on March 19, 1997 and will expire on
March 31, 1998. Because the amount of the letter of credit is based on the
amount of Title IV Program funds received by The American College's students, to
the extent that such funds have increased during 1997, the Company may be
required to increase the letter of credit on or around March 19, 1998, the date
the U.S. Department of Education re-assesses the College's compliance with the
financial responsibility standards. If the Company continues to fail these
financial responsibility standards, the Company may be required to increase its
letter of credit. The Company believes that it will have sufficient liquidity to
increase the letter of credit should the U.S. Department of Education so
require. However, there can be no assurance that, if required, the Company will
be able to maintain its letter of credit or increase its letter of credit in the
future. In addition, expenditures required to implement the AIT program may
adversely affect the Company's ability to satisfy these financial responsibility
standards. See "-- Risks Associated with Implementation of AIT Information
Technology Program."
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 U.S. Department of Education equal to
25% of the Title IV Program refunds that the institution was required to make
for the previous year. During the past two years the College has made all Title
IV Program refunds on a timely basis.
In 1996, the U.S. Department of Education issued proposed regulations that
would establish new measures of financial responsibility. The Department has
extended the period for comment on the proposed regulations on three occasions
because of concerns expressed by members of the higher education community about
the proposed standards. If the proposed standards are adopted, there can be no
assurance that the Company's consolidated financial statements would satisfy
such standards as it is not possible to predict the outcome of this rulemaking
proceeding at this time. See "Business -- Regulatory Environment -- Student
Financial Assistance -- Federal Oversight of Title IV Programs -- Financial
Responsibility Standards."
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Student Loan Defaults
Under the HEA, an institution could lose its eligibility to participate in
some or all Title IV Programs if the defaults of its students on their federal
student loans exceed specified rates for specified periods of time. Under the
Federal Family Education Loan (the "FFEL") program, any institution that has
FFEL cohort default rates of 25% or greater for three consecutive federal fiscal
years will no longer be eligible to participate in the FFEL program or the
William D. Ford Federal Direct Loan (the "Direct Loan") program for the
remainder of the federal fiscal year in which the determination of ineligibility
is made and for the two subsequent federal fiscal years. 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. If an institution's FFEL cohort default rate is 25% or greater 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,
but does subject that institution to closer review by the U.S. Department of
Education and possible summary adverse action if that institution commits
violations of Title IV Program requirements.
The American College has not had published FFEL cohort default rates of 25%
or greater for three consecutive federal fiscal years or during any of the last
three fiscal years. The American College had a published cohort default rate of
14.3% and 14.0% for federal fiscal 1993 and 1994, respectively. For federal
fiscal 1995, the preliminary FFEL cohort default rate for all borrowers at the
College was 18.5%, although the Company anticipates the final FFEL cohort
default rate for all borrowers at the College will be 15.8%. (Each year,
guaranty agencies submit data to the U.S. Department of Education to enable the
U.S. Department of Education to calculate such institution's cohort default
rate. Prior to publishing final rates, however, the U.S. Department of Education
issues each submitting institution a preliminary cohort default rate.
Preliminary cohort default rates are subject to revision by the U.S. Department
of Education based on information that schools and guaranty agencies identify
and submit to the U.S. Department of Education for review, in order to correct
any errors in the data previously provided to the U.S. Department of Education.
Any such adjustment will be made by the U.S. Department of Education at the time
that final rates are officially published. The American College has submitted
such corrections for its 1995 preliminary cohort default rate and anticipates
that the U.S. Department of Education will reduce the College's cohort default
rate from a preliminary rate of 18.5% to a final rate of 15.8%, although there
can be no assurance that the U.S. Department of Education will agree with the
corrections submitted by the College with regard to its 1995 preliminary cohort
default rate.) Further, there can be no assurance that the College will be able
to maintain cohort default rates below the required regulatory minimums, and the
loss of The American College's eligibility to participate in Title IV Programs
due to high FFEL cohort default rates could have a material adverse effect on
the Company. See "Business -- Regulatory Environment -- Student Financial
Assistance -- Federal Oversight of Title IV Programs -- Cohort Default Rates."
Regulatory Consequences of a Change in Ownership or Control
Upon a "change in ownership" of an institution resulting in a "change of
control," as defined in the HEA and the Regulations, that institution becomes
ineligible to participate in Title IV Programs. In such event, an institution
may receive and disburse only previously committed Title IV Program funds to its
students until it has applied for and received from the U.S. Department of
Education recertification under such institution's new ownership. Approval of an
application for recertification must be based upon a determination by the U.S.
Department of Education that the institution under its new ownership is in
compliance with the requirements for institutional eligibility. The time
required to act on such an application can vary substantially and may take
several months. If a school is recertified, it will be on a provisional basis.
Under the HEA and the Regulations, a change in ownership resulting in a change
of control would occur upon the transfer of a controlling interest in the voting
stock of an institution or such institution's parent corporation. For a
corporation qualifying as closely held under the law of the state of its
incorporation, such as the Company, a change in ownership resulting in a change
of control would occur (i) if any person acquires ownership or control of more
than 50% of such corporation's total outstanding voting stock, or (ii) if a
person having ownership or control of more than 50% of such corporation's total
outstanding stock ceases to hold or control more than 50% of such
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<PAGE> 13
corporation's total outstanding stock. With respect to a publicly traded
corporation, a change in ownership resulting in a change of control occurs when
there is an event that would obligate that corporation to file a Current Report
on Form 8-K with the Securities and Exchange Commission (the "Commission")
disclosing a change of control. A change in ownership and control also could
require an institution to secure approval from the agency which accredits the
institution and the states which issue its authorization. The requirements of
state and accrediting agencies with jurisdiction over The American College vary
widely in this regard. See "Business -- Regulatory Environment -- State
Authorization." With respect to the Company's acquisition of American European
and the resulting change of control of the College, The American College has
been provisionally certified for eligibility to participate in Title IV Programs
by the U.S. Department of Education and has obtained the required state and
accrediting agency approvals. The American College's provisional certification
will expire in December 1999 at which time the College expects to receive full
certification. Provisional certification differs from full 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 U.S. Department of Education may impose such
further conditions on a provisionally certified institution's eligibility to
continue participating in the Title IV Programs as the Department deems
necessary.
If the Offering were determined to constitute a change in ownership
resulting in a change of control, the Company would be required to re-establish
the state authorization and accreditation of The American College's campuses and
apply to the U.S. Department of Education to re-establish the certification of
The American College to enable it to participate in Title IV Programs. A
significant delay in reobtaining or the failure to reobtain state authorization,
accreditation or Title IV Program certification could have a material adverse
effect on the Company. The Company has been advised by the U.S. Department of
Education that, based on the facts pertaining to the Company's ownership and
control which are set forth in this Prospectus, the consummation of this
Offering will not constitute a change in ownership resulting in a change of
control within the meaning of the HEA and the Regulations. In addition, the
Commission of Colleges of the Southern Association of Colleges and Schools
("SACS") and each of the regulatory agencies in the States of Georgia and
California and in the District of Columbia have advised the Company that, based
on the facts pertaining to the Company's ownership and control which are set
forth in this Prospectus, the consummation of this Offering will not constitute
a change in ownership resulting in a change of control within the meanings of
their respective accreditation standards and state laws and regulations.
Once the Company is deemed to be publicly traded, the potential adverse
implications of a change in ownership resulting in a change of control could
influence future decisions by the Company and its shareholders regarding the
sale, purchase, transfer, issuance or redemption of the Company's capital stock.
However, the Company believes that any such future transaction having an adverse
effect on state authorization, accreditation or participation in Title IV
Programs of any of the College's campuses is not likely to occur without the
consent of the Company's controlling shareholder and/or the Company's Board of
Directors. See "--Voting Control by Principal Shareholder," "--Anti-Takeover
Provisions," "Principal and Selling Shareholders" and "Description of Capital
Stock."
Accreditation
In order to participate in Title IV Programs, an institution must be
accredited by an accrediting agency recognized by the U.S. Department of
Education. Accreditation is a non-governmental process through which an
institution submits to qualitative review by an organization of peer
institutions, based on the standards of the accrediting agency and the stated
aims and purposes of the institution. An accrediting agency primarily examines
the academic quality of an institution's programs, as well as the institution's
administrative and financial operations. The HEA specifies certain standards
that each accrediting agency must utilize in reviewing institutions in order for
such accrediting agency to be recognized by the U.S. Department of Education.
The American College is accredited by SACS, an accrediting agency recognized by
the U.S. Department of Education which serves as The American College's
accreditor for purposes of participation in
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Title IV Programs. If The American College were to have its accreditation
revoked by SACS, it would lose its eligibility to participate in Title IV
Programs, which could have a material adverse effect on the Company. See
"Business -- Regulatory Environment -- Accreditation."
State Authorization
In order to award degrees and certificates and to participate in Title IV
Programs, an institution must be authorized to offer its programs of instruction
by the relevant agency of the state in which such school is located. Each state
has its own standards and requirements for authorization, which vary
substantially among the states. Typically, state laws require that an
institution demonstrate that it has the personnel, resources and facilities
appropriate to its instructional programs. The American College's campuses in
Atlanta and Los Angeles are licensed and approved by the relevant agencies in
Georgia and California, respectively. In addition, because The American
College's London campus is operated under a corporation whose parent corporation
is organized under the laws of the District of Columbia, the London campus has
been licensed and approved by the Education Licensure Commission of the District
of Columbia. If any of The American College's campuses were to lose its state
license or authorization, The American College would lose its eligibility to
participate in Title IV Programs, which could have a material adverse effect on
the Company. See "Business -- Regulatory Environment -- State Authorization."
Risk of Legislative Action
The HEA was most recently reauthorized by the U.S. Congress in 1992, at
which time funding for the Title IV Programs was authorized through September
30, 1997, with an automatic one-year extension if the HEA were not reauthorized
by that date. Congress has commenced the reauthorization process, which is
expected to be completed in late 1997 or during 1998. Although there is no
present indication that Congress will decline to reauthorize the Title IV
Programs, at this time it is not possible to predict the outcome of the
reauthorization process. There can be no assurance that federal funding will
continue to be available for any or all Title IV Programs for proprietary
institutions such as The American College, that such funding will be maintained
at current levels for any or all such programs, that current requirements for
student and institutional participation will be unchanged, or that one or more
present Title IV Programs will not be replaced by other programs with materially
different student or institutional eligibility requirements or benefits. Given
that approximately 27% of the Company's revenues are indirectly derived from the
Title IV Programs, the loss of or a significant reduction in Title IV Program
funds available to The American College's students would have a material adverse
effect on the Company.
MANAGEMENT'S LIMITED HISTORY OF OPERATING THE COLLEGE
In October 1996, the Company acquired The American College through the
acquisition of the Predecessor. Because the Company only recently acquired The
American College, management of the Company has limited experience in operating
the College. The Company intends to continue efforts to build a management team
that is highly skilled in the operation of a proprietary post secondary
educational institution such as The American College. Although the Company
believes it has assembled a management team with the necessary experience and
skill to operate the College, there can be no assurance that such a management
team will be successful in operating the College. See "Acquisitions."
RISKS ASSOCIATED WITH POSSIBLE EXPANSION AND ACQUISITION PLANS
The Company expects that a portion of its future growth will be based on
its ability to open and profitably operate additional schools to serve as branch
campuses of The American College. While the Company has no current agreements in
place or negotiations underway with respect to any acquisition, the Company also
plans to regularly evaluate acquisition opportunities. If the Company acquires
an existing school, a significant portion of the purchase price for such school
may be allocated to goodwill and intangibles where such acquisition does not
involve the purchase of significant amounts of tangible property. All of such
goodwill and intangibles must be amortized over time, which amortization would
reduce the Company's reported earnings. In addition, there can be no assurance
that suitable expansion or acquisition opportunities will be identified or
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that any new or acquired institutions can be operated profitably or successfully
integrated into the Company's operations. Growth through expansion or
acquisition also could involve other risks, including the diversion of
management's attention from normal operating activities, the inability to find
appropriate personnel to manage the Company's expanding operations and the
possibility that new or acquired schools will be subject to unanticipated
business or regulatory uncertainties or liabilities. The failure of the Company
to manage any expansion and acquisitions effectively could have a material
adverse effect on the Company.
The Company's acquisition of a school located in the United States
constitutes a change in ownership resulting in a change of control with respect
to such school for purposes of Title IV eligibility, which means that schools
which participate in the Title IV Programs must either be acquired subject to
recertification of eligibility by the U.S. Department of Education or lose
eligibility to participate in Title IV Programs for an indeterminate period of
time during which it applies for recertification of eligibility. The U.S.
Department of Education typically processes such applications for
recertification in three to nine months. There can be no assurance, however,
that recertification applications will be acted upon on a timely basis by the
U.S. Department of Education so as to avoid any significant interruption of
Title IV funding to students at the acquired school. Prior to recertification by
the U.S. Department of Education, the Company must also obtain approval of the
change of control from applicable states and accrediting agencies. In the event
the Company opens an additional school to serve as a branch campus, the Company
also must obtain authorization from the relevant regulatory agency of the state
in which such school is located, as well as the approval of SACS and the U.S.
Department of Education. There can be no assurance that such state, accrediting
agency and U.S. Department of Education approvals may not be subject to
unexpected delays or difficulties which may materially and adversely affect the
Company's operations. See "-- Regulatory Consequences of a Change in Ownership
or Control," "-- State Authorization" and "-- Accreditation."
RISKS ASSOCIATED WITH IMPLEMENTATION OF AIT INFORMATION TECHNOLOGY PROGRAM
On July 26, 1997, the Company entered into the License Agreement with ITI
pursuant to which ITI has licensed its AIT program to the Company for use in the
State of Georgia, including the College's campus in Atlanta. Under the License
Agreement, the Company will pay ITI a one-time license fee and royalties of a
percentage of gross revenues derived from The American College's operation of
the AIT program. The License Agreement also grants the Company the right to
implement the AIT program in the cities of Los Angeles, London and Dubai upon
payment of an additional license fee and the execution of an additional license
agreement substantially in the form of the License Agreement for each additional
territory. The Company intends to enter into license agreements for such
territories over the next two years, although there can be no assurances that
the Company will enter into such additional agreements. Unless a later date is
mutually agreed upon, the License Agreement requires the Company to implement
the AIT program in the Atlanta campus by November 3, 1997. There can be no
assurances that the College will be able to successfully operate and integrate
the AIT program into its curricula or that the College will be able to implement
the AIT program in its Atlanta campus by November 3, 1997. The failure of any
such event to occur could have a negative impact on the Company's growth
strategy. See "Summary -- License Agreement" and "Business -- Growth Strategy."
In addition, because license fees are accounted for as an intangible asset, the
payment of such fees will further reduce the Company's tangible net worth and
adversely impact the ability of the Company to satisfy the financial
responsibility standards promulgated by the U.S. Department of Education. See
"-- Potential Adverse Effects of Regulation; Impairment of Federal
Funding -- Financial Responsibility Standards."
RISKS ASSOCIATED WITH CHANGES IN TECHNOLOGY
The College's development of new courses, or enhancements to existing
courses, must anticipate and keep pace with the introduction in the marketplace
of new hardware, software and networking technology. The need to respond to
technological changes may require the Company to make substantial, unanticipated
expenditures in order to develop new courses and acquire additional equipment in
order to deliver such new courses. In addition, the College is contemplating the
development of distance learning capabilities such as videoconferencing
technology and the Internet. Any future development by The American College of
such
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distance learning capabilities must anticipate and keep pace with the
introduction in the marketplace of new hardware, software and networking
technology, including changes in the Internet and the online delivery of
educational services. There can be no assurance that the Company will be able to
respond successfully to technological change. If, because of financial,
technological or other constraints, the Company could not adequately anticipate
or respond to changes in technology, the College's AIT program and other
curricula and its plans to develop distance learning capabilities could be
materially adversely affected.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company presently maintains offices and education centers in two
countries outside the United States. In fiscal 1997, international revenues
represented approximately 43% of the Company's revenues. The Company intends, on
an ongoing basis, to seek ways to expand its international operations and
expects that revenues derived from international sources will continue to
account for a significant portion of its revenues. Inherent risks represented by
the Company's international operations include currency fluctuations, varying
political and economic conditions, unanticipated changes in regulation, trade
barriers, staffing and management problems, and adverse tax consequences. See
"-- Risks Associated with Currency Fluctuations." There can be no assurance that
such factors will not have a material adverse effect on the Company in the
future. In addition, failure to staff and manage foreign campuses adequately
could result in the loss of accreditation for all of the College's campuses
which, in turn, could result in the inability of The American College to
participate in Title IV Programs. The inability of The American College to
participate in Title IV Programs could have a material adverse effect on the
Company.
NEED FOR ADDITIONAL FINANCING
The Company anticipates that it will need additional debt or equity
financing, in addition to the proceeds of this Offering, in order to grow
through expansion and acquisitions. The amount and timing of financing which the
Company may need will vary principally depending on the timing and size of any
expansion and acquisitions and sellers' willingness to provide financing. To the
extent that the Company requires additional financing in the future and is
unable to obtain such additional financing, it may not be able to implement
fully its growth strategy. Following the completion of this Offering, the
Company will have the ability to borrow up to $2.5 million (of which $1.5
million is currently available) under its revolving loan with NationsBank, N.A.
The Company believes this borrowing capacity, together with the proceeds of this
Offering, will provide adequate financing to support its existing level of
operations as well as any acquisitions or expansion activities for at least the
next twelve months. If the Company's available funds are not adequate, however,
there can be no assurance that any necessary capital leases or additional
financing, whether debt or equity, will be obtainable on terms favorable to, or
affordable by, the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
RISKS ASSOCIATED WITH CURRENCY FLUCTUATIONS
The Company's consolidated financial statements are prepared in U.S.
dollars while the operations of its foreign campuses are recorded in their
respective local currencies. Consequently, fluctuations in exchange rates may
have an adverse effect on the Company's consolidated operating results and could
result in exchange losses (the currency in Dubai is pegged to the U.S. dollar).
During fiscal 1997, the Company reported $147,000 in translation losses compared
to $35,000 in translation gains for fiscal 1996. The impact of future
fluctuations in exchange rates cannot be predicted with any measure of accuracy.
No assurance can be given that any future exchange rate fluctuations will not
have a material adverse effect on the Company's operations. To date, the Company
has not sought to hedge the risks associated with fluctuations in exchange rates
and therefore continues to be subject to such risks. In the future, the Company
may undertake such transactions. If any hedging techniques are implemented by
the Company, there can be no assurance that such techniques would be successful
in eliminating or reducing the effects of currency fluctuations.
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COMPETITION
The postsecondary education market is highly competitive. In the U.S. and
London, The American College competes with traditional public and private
two-year and four-year colleges and universities and other proprietary schools,
many of which have greater financial and other resources than the Company.
Certain public and private colleges and universities may offer programs similar
to those of The American College. Such competing institutions are often able to
charge lower tuition than The American College, due in part to government
subsidies, government and foundation grants, tax-deductible contributions and
other financial sources not available to the College. Tuition at private
non-profit institutions is, on average, higher than The American College's
tuition. In addition, the College's campus in Dubai competes with numerous
institutions in the Persian Gulf region, certain of which are government
sponsored and charge lower tuition than the College. See
"Business -- Competition."
The information technology training and the corporate education markets are
highly fragmented, with low barriers to entry and no single competitor
accounting for a dominant market share. The College's competitors in the
information technology training market include computer systems vendors, other
independent education and training companies, systems integrators and software
vendors, as well as certain of the Company's own customers that maintain
internal training departments. The Company's primary competitors in the
corporate education market include other independent education and training
companies as well as many of the Company's own customers that maintain internal
training departments. Some of these competitors offer, at lower prices, courses
and programs similar to those the Company offers in its corporate education
program as well as those the College intends to offer in its AIT program. In
addition, some competitors have greater financial and other resources than the
Company. There can be no assurance that the Company will be successful against
such competition. See "Business -- Competition."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS AND VOLATILITY OF STOCK PRICE
The Company's quarterly revenues have varied in the past and may vary
significantly in the future as a result of a number of factors, including
fluctuations in the number of students enrolling in the College's programs. The
Company's fiscal year ends on May 31. Historically, the Company has experienced
losses during the first quarter of its fiscal year because revenues and income
during the first quarter are typically at their lowest due to lower student
enrollment during the summer months. The Company expects these seasonal trends
will continue. See "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Seasonality."
From time to time after this Offering there may be significant volatility
in the market price for the Class A Common Stock. Quarterly operating results of
the Company or of other companies participating in the educational services
industry, changes in estimates by analysts, changes in conditions in the
economy, the financial markets or the educational services industry, natural
disasters or other developments affecting the Company or its competitors could
cause the market price of the Class A Common Stock to fluctuate substantially.
DEPENDENCE ON KEY PERSONNEL
The Company's continuing and future success depends in large part on the
continued services of Mr. Steve Bostic, its Chairman and Chief Executive
Officer, as well as certain of its other officers and key personnel. The loss of
the services of Mr. Bostic, certain of the Company's officers or other key
personnel could have a material adverse effect on the Company. The Company and
Mr. Bostic have not entered into an employment agreement and presently have no
intention to enter into an employment agreement. The Company currently maintains
key man life insurance policies on the life of Mr. Bostic in the aggregate
amount of $25 million, which policies have been pledged to secure certain
indebtedness incurred by the Company. The Company's continuing and future
success will also depend on its ability to attract and retain highly-skilled
personnel, including its faculty. There can be no assurance that the Company
will be successful in these recruitment and training efforts, and the failure to
hire and train the intended complement of faculty members may have a material
adverse effect on the Company's operations. See "Management."
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VOTING CONTROL BY PRINCIPAL SHAREHOLDER
After this Offering, Steve Bostic, Chairman and Chief Executive Officer of
the Company, and his controlled affiliates will own all 6,335,000 shares of
Class B Common Stock outstanding, representing approximately 95.1% of the total
voting power of the Common Stock. As a result of such concentration of
ownership, Mr. Bostic will have the ability to exert significant influence on
the policies and affairs of the Company and corporate actions requiring
shareholder approval, including the election of the members of the Board of
Directors. This concentration of ownership could have the effect of delaying,
deferring or preventing a change of control of the Company, including any
business combination with an unaffiliated party, and could also affect the price
that investors might be willing to pay in the future for shares of Class A
Common Stock. See "Principal and Selling Shareholders" and "Description of
Capital Stock."
VOTING RIGHTS OF CLASS A AND CLASS B COMMON STOCK
The voting rights of the Class A Common Stock are limited by the Company's
Articles of Incorporation, as amended (the "Articles of Incorporation"). On all
matters with respect to which the Company's shareholders have a right to vote,
including the election of directors, each share of Class A Common Stock is
entitled to one vote, while each share of Class B Common Stock is entitled to
ten votes. Except as otherwise required by law or expressly provided in the
Articles of Incorporation, the Class A Common Stock and Class B Common Stock
vote together as a single class. Class B Common Stock can be converted into
shares of Class A Common Stock on a share-for-share basis at the election of the
holder and will be converted to shares of Class A Common Stock automatically
upon transfer by Steve Bostic, Alice Jane Bostic or the Bostic Family Limited
Partnership, except for transfers to immediate family members, the trustees of
certain trusts and entities controlled by such holders of the Class B Common
Stock (collectively, the "Permitted Transferees"). The Articles of Incorporation
prohibit the Company from issuing additional Class B Common Stock to any person
or entity except Steve Bostic, Alice Jane Bostic, the Bostic Family Limited
Partnership or a Permitted Transferee. See "Description of Capital Stock."
DIVIDEND POLICY
The Company currently anticipates that it will retain future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future. See "Dividend Policy." In
addition, U.S. Department of Education financial responsibility standards
applicable to The American College could, in certain circumstances, restrict the
ability of the Company to obtain dividends or other funds from its subsidiaries,
which, in turn, could limit the Company's ability to pay dividends. See
"-- Potential Adverse Effects of Regulation; Impairment of Federal
Funding -- Financial Responsibility Standards." Also, certain of the Company's
present credit arrangements contain restrictions on the ability of the Company
to pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
ABSENCE OF PRIOR PUBLIC MARKET; DILUTION
Prior to this Offering there has been no public market for shares of the
Company's Class A Common Stock. Although the Company has applied for listing of
the Class A Common Stock on the Nasdaq National Market, there can be no
assurance that the Company's application will be approved or that an active
trading market for the Class A Common Stock will develop or continue after the
Offering. The initial offering price of the Class A Common Stock will be
determined by negotiations among the Company, the Selling Shareholder and the
Underwriters based on several factors and may not be indicative of the market
price for the Class A Common Stock after this Offering. See "Underwriting."
Investors in the Offering will experience immediate and substantial dilution,
and present shareholders will receive a material increase in the book value of
their shares of Class A Common Stock. See "Dilution."
17
<PAGE> 19
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon completion of this Offering, the Company will have 3,265,000 shares of
Class A Common Stock and 6,335,000 shares of Class B Common Stock outstanding,
assuming no exercise of the Underwriters' over-allotment option. Of these
shares, the 2,600,000 shares of Class A Common Stock offered hereby will be
eligible for sale in the open market without restriction (except for any such
shares purchased by affiliates of the Company). All of the remaining 665,000
shares of Class A Common Stock (and 6,335,000 shares of Class A Common Stock
into which shares of Class B Common Stock are convertible) are "restricted
securities" as that term is defined in Rule 144 ("Rule 144") promulgated under
the Securities Act of 1933, as amended (the "Securities Act"). All of these
restricted securities will be eligible for sale in the public market 90 days
following the date of this Prospectus pursuant to Rule 144. Additional shares of
Class A Common Stock, including shares issuable upon exercise of options and
warrants, will also become eligible for sale in the public market pursuant to
Rule 144 from time to time. The Company, the holders of warrants to purchase an
aggregate of 622,041 shares of Class A Common Stock and the Company's directors,
executive officers and shareholders have agreed, however, not to sell any of
their shares of Common Stock (other than the shares to be sold by the Company
and the Selling Shareholder in this Offering) for a period of 180 days from the
date of this Prospectus without the prior written consent of Smith Barney Inc.
Following this Offering, sales and potential sales of substantial amounts of the
Company's Class A Common Stock in the public market pursuant to Rule 144 or
otherwise could adversely affect the prevailing market prices for the Class A
Common Stock and impair the Company's ability to raise additional capital
through the sale of equity securities. See "Principal and Selling Shareholders,"
"Description of Capital Stock," "Shares Eligible for Future Sale" and
"Underwriting."
As of the date of this Prospectus, the holders of 350,000 shares of Class A
Common Stock and of warrants to purchase an aggregate of 622,041 shares of Class
A Common Stock are entitled to certain demand and piggyback registration rights
with respect to such shares. If the Company were required to register or to
include in a Company-initiated registration shares held by such holders pursuant
to the exercise of their demand or piggyback registration rights, sales or
potential sales of the shares so registered might have an adverse effect on the
Company's ability to raise needed capital in the capital markets at a time and
price favorable to the Company. See "Description of Capital Stock" and "Shares
Eligible for Future Sale -- Registration Rights."
ANTI-TAKEOVER PROVISIONS
The Board of Directors has authority to issue shares of preferred stock and
to fix the rights, preferences, privileges and restrictions, including voting
rights, of the preferred stock without further vote or action by the Company's
shareholders. The rights of the holders of Class A Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any preferred
stock that may be issued in the future. While the Company has no present
intention to issue additional shares of preferred stock, such issuance, while
providing desired flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. See "Description of Capital Stock -- Preferred Stock." Provisions in
the Regulations pursuant to which the Company would lose its Title IV
eligibility in the event of a change in ownership resulting in a change of
control could have a similar discouraging effect. See "-- Potential Adverse
Effects of Regulation; Impairment of Federal Funding -- Regulatory Consequences
of a Change in Ownership or Control."
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,342,890 shares of
Class A Common Stock offered by the Company, at an assumed initial public
offering price of $14.00 per share, are estimated to be approximately $30.0
million, after deducting the estimated underwriting discounts and commissions
and Offering expenses payable by the Company. The Company will not receive any
proceeds from the sale of Class A Common Stock by the Selling Shareholder.
The Company anticipates that of the net proceeds received by the Company in
the Offering, (i) approximately $21.5 million will be used to repay the
Company's outstanding principal and accrued interest under its term loan (the
"Term Loan") pursuant to its credit agreement with NationsBank, N.A. (the
"NationsBank Credit Agreement"), (ii) approximately $7.1 million will be used to
repay the Company's outstanding principal and accrued interest (the "Subordinate
Debt") to Stratford Capital Partners, L.P. ("Stratford") and GMM Investors SBIC,
L.P. ("GMM"), (iii) approximately $1.1 will be used to reduce the outstanding
principal and accrued interest under its revolving loan (the "Revolving Loan")
established under the NationsBank Credit Agreement and (iv) any remaining amount
will be used for general corporate purposes, including the increased working
capital requirements of the Company resulting from its growth.
The Company's outstanding indebtedness under the Term Loan and the
Subordinate Debt was incurred in October 1996 primarily to fund the acquisition
of the Predecessor. Borrowings under the Revolving Loan provide working capital
for the Company's operations. The Term Loan currently bears interest at 9.75%
per year which is payable quarterly. Beginning on October 31, 1997, the
principal amount under the Term Loan is payable in 22 equal consecutive
quarterly installments of $875,000 plus accrued and unpaid interest, and a 23rd
final payment of $1,750,000 plus accrued and unpaid interest is due on March 31,
2003. Borrowings under the Revolving Loan bear interest at the prime rate plus
1% (9.5% as of May 31, 1997) and are payable quarterly. Borrowings under the
Revolving Loan are due on October 8, 1999; provided, however, that the Company
shall be in default if, during each calendar year, there are not at least two
occasions of consecutive 30 day periods in which the balance under the Revolving
Loan is zero and in which the Company has not borrowed under the Revolving Loan.
The Subordinate Debt bears interest at a fixed rate of 13% per year and is
payable in monthly installments of accrued interest until maturity on October 8,
2003, at which time the outstanding principal amount and accrued interest is due
in full. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Pending such uses, the net proceeds of this Offering will be invested in
short-term, interest-bearing obligations of investment grade.
DIVIDEND POLICY
The Company currently anticipates that all of its earnings will be retained
for development of the Company's business and does not anticipate paying any
cash dividends in the foreseeable future. Certain of the Company's present
credit arrangements contain restrictions on the ability of the Company to pay
dividends. In addition, U.S. Department of Education financial responsibility
standards applicable to The American College could, in certain circumstances,
restrict the ability of the Company to receive dividends or other funds from its
subsidiaries, which, in turn, could limit the Company's ability to pay
dividends. See "Business -- Regulatory Environment -- Student Financial
Assistance -- Federal Oversight of Title IV Programs -- Financial Responsibility
Standards." Future cash dividends, if any, will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, the
Company's future earnings, operations, capital requirements and surplus, general
financial condition, contractual restrictions and such other factors as the
Board of Directors may deem relevant. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the cash position, actual indebtedness and
capitalization of the Company as of May 31, 1997 and as adjusted to reflect the
sale by the Company of 2,342,890 shares of Class A Common Stock offered hereby
(at an assumed initial public offering price of $14.00 per share) and the
application of the estimated net proceeds therefrom as described under "Use of
Proceeds." The following table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
MAY 31, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash........................................................ $ 678 $ 2,270
======= =======
Current portion of long-term debt........................... $ 2,014 $ 264
Long-term debt.............................................. 28,061 1,930
Shareholders' equity:
Preferred stock, 5,000,000 shares authorized; no shares
issued and outstanding................................. -- --
Class A Common Stock, no par value per share, 40,000,000
shares authorized; 665,000 shares issued and
outstanding; 3,265,000 shares issued and outstanding as
adjusted(1)............................................ 1,287 31,291
Warrants to acquire 622,041 shares of Class A Common Stock
at a price of $.0014 per share......................... 677 677
Class B Common Stock, no par value per share, 10,000,000
shares authorized; 6,335,000 shares issued and
outstanding as of May 31, 1997 and as adjusted......... 4,000 4,000
Foreign currency translation.............................. 147 147
Retained earnings(2)...................................... 1,766 813
------- -------
Total shareholders' equity........................ 7,877 36,928
------- -------
Total capitalization.............................. $37,952 $39,122
======= =======
</TABLE>
- ---------------
(1) Includes 257,110 shares of Class A Common Stock issued upon the exercise of
stock purchase warrants which were outstanding as of May 31, 1997. See Note
6 of the Notes to the Consolidated Financial Statements of the Company.
(2) Reflects write-off of deferred costs and discounts related to debt which
will be repaid from proceeds of the Offering in the amount of $1,588,000 net
of taxes of $635,000.
20
<PAGE> 22
DILUTION
The pro forma net tangible book value of the Company at May 31, 1997 was
approximately $(32,890,000) or $(3.98) per share of Class A and Class B Common
Stock. Pro forma net tangible book value per share represents the amount of the
Company's total assets less intangible assets and total liabilities, divided by
the total number of shares of Class A and Class B Common Stock outstanding, as
adjusted to include all outstanding stock options and warrants (10,609,923).
After giving effect to the sale by the Company of 2,342,890 shares of Class A
Common Stock offered hereby at an assumed initial public offering price of
$14.00 per share and the application of the estimated net proceeds therefrom,
the pro forma net tangible book value of the Company at May 31, 1997 would have
been approximately $(2,782,000) or $(0.26) per share of Class A and Class B
Common Stock, as adjusted to include all outstanding stock options and warrants
(10,609,923). This represents an immediate increase in such pro forma net
tangible book value of $3.72 per share to existing shareholders and an immediate
dilution in the pro forma net tangible book value of $14.26 per share to
investors purchasing shares of Class A Common Stock in this Offering. The
following table illustrates the resulting per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $14.00
Net tangible book value per share prior to this
Offering............................................... $(3.98)
Increase per share attributable to new investors(1)....... 3.72
------
Pro forma net tangible book value per share after this
Offering.................................................. (0.26)
------
Dilution per share to new investors(2)...................... $14.26
======
</TABLE>
- ---------------
(1) After deduction of underwriting discounts and commissions and estimated
Offering expenses.
(2) Determined by subtracting the adjusted net tangible book value per share
after the Offering from the amount of cash paid by a new investor for every
share of Class A Common Stock.
The following table summarizes, on a pro forma basis as of May 31, 1997,
the number of shares of Common Stock previously purchased from the Company and
the total consideration paid and the average price per share paid to the Company
by existing shareholders and by new investors purchasing the shares of Class A
Common Stock offered hereby, assuming an initial public offering price of $14.00
per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 7,257,110 75.6% $ 5,286,744 13.9% $ 0.73
New investors....................... 2,342,890 24.4 32,800,460 86.1 14.00
--------- ----- ----------- -----
Total(1).................. 9,600,000 100.0% $38,087,204 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Total shares outstanding excludes warrants to purchase 622,041 shares of
Class A Common Stock and options to purchase 410,550 shares of Class A
Common Stock.
The sale of shares by the Selling Shareholder in this Offering will cause
the number of shares of Class A Common Stock held by all existing shareholders
as of May 31, 1997 on a pro forma basis to be reduced to 665,000 shares, or
20.4% of total shares of Class A Common Stock to be outstanding after this
Offering, and the number of shares of Class A Common Stock held by new investors
as of May 31, 1997 on a pro forma basis to be 2,600,000 shares, or 79.6% of the
total shares of Class A Common Stock to be outstanding after this Offering. See
"Principal and Selling Shareholders."
21
<PAGE> 23
PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE, PERCENTAGE AND ENROLLMENT DATA)
The unaudited pro forma consolidated financial data set forth below assumes
that the Company was formed on June 1, 1996 and gives effect to the acquisition
of the Predecessor and the acquisition of EduTrek Systems as if such
acquisitions had occurred on June 1, 1996. The pro forma as adjusted data
adjusts the pro forma data to give effect to the Offering and the application of
the net proceeds to the Company as described in "Use of Proceeds" as if they had
occurred on June 1, 1996. The pro forma consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company's Consolidated Financial
Statements and Notes thereto, the Predecessor's Consolidated Financial
Statements and Notes thereto, and other financial information included elsewhere
herein. The pro forma results are not necessarily indicative of the results that
would have been achieved had the acquisition of the Predecessor, the acquisition
of EduTrek Systems and the Offering occurred on June 1, 1996, or of future
operations.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
--------------- --------------------------------------------------------------------------
PERIOD FROM PERIOD FROM
JUNE 1, 1996 JULY 1, 1996
THROUGH THROUGH PRO FORMA PRO FORMA ADJUSTMENTS PRO FORMA
OCTOBER 8, 1996 MAY 31, 1997 ADJUSTMENT CONSOLIDATED FOR OFFERING AS ADJUSTED
--------------- ------------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................... $ 6,189 $ 23,590 $ 0 $ 29,779 $ 0 $ 29,779
Cost of education and
facilities................... 3,256 9,014 0 12,270 0 12,270
Selling and promotional
expenses..................... 1,335 2,428 0 3,763 0 3,763
General and administrative
expenses..................... 2,739 5,468 150(1)(2) 8,357 0 8,357
Rents paid to majority
shareholder.................. 49 0 (49)(3) 0 0 0
Amortization of goodwill....... 0 696 344(4) 1,040 0 1,040
------- --------- ----- --------- --------- ----------
Income (loss) from campus
operations................... (1,190) 5,984 (445) 4,349 0 4,349
Income (loss) from management
agreement.................... (21) 479 0 458 0 458
------- --------- ----- --------- --------- ----------
Income (loss) from
operations................... (1,211) 6,463 (445) 4,807 0 4,807
Interest expense............... 258 2,499 (52)(5) 2,705 2,237(6) 468
Interest income -- shareholder
notes........................ 98 0 (98)(7) 0 0 0
Other income -- net............ 66 19 0 85 0 85
------- --------- ----- --------- --------- ----------
Income (loss) before income
taxes........................ (1,305) 3,983 (491) 2,187 2,237 4,424
Provision for income taxes..... 0 1,981 856(8) 1,125 895(9) 2,019
------- --------- ----- --------- --------- ----------
Net income (loss).............. $(1,305) $ 2,002 $(365) $ 1,062 $ 1,342 $ 2,405
======= ========= ===== ========= ========= ==========
Net income per share(10)....... $ 0.24
=========
Weighted average shares
outstanding.................. 8,267,033
=========
Pro forma net income per
share........................ $ 0.23
==========
Pro forma weighted average
shares outstanding(11)....... 10,609,923
==========
SELECTED OPERATING DATA:
EBITDA......................... $ (820) $ 8,236 $(217) $ 7,199 $ 0 $ 7,199
EBITDA margin.................. (13.2)% 34.9% 24.2% 24.2%
</TABLE>
See accompanying notes on the following page.
22
<PAGE> 24
The pro forma adjustments and adjustments for the Offering detailed below
reflect (i) the elimination of identifiable nonrecurring actual costs incurred
by the Predecessor in the period from June 1 to October 8, 1996 as a result of
the acquisition of the Predecessor by the Company, (ii) the addition of
identifiable actual costs which would have been incurred by the Company to
replace certain of the eliminated costs resulting from the ownership change,
(iii) the effect of the Offering on interest expense due to the repayment of
debt, (iv) the inclusion of costs of being a public company, based upon bids and
analysis, and (v) the impact on income taxes resulting from the change to C
Corporation status from the Predecessor's S Corporation status for income tax
purposes.
(1) Represents an adjustment to eliminate costs of $1,101,000 relating to (i)
compensation costs of $450,000 associated with a selling shareholder of the
Predecessor, (ii) costs of $461,000 relating to assets purchased by a
selling shareholder of the Predecessor, (iii) staff costs of employees who
remained with a selling shareholder of the Predecessor of $153,000 and (iv)
office costs of a selling shareholder of the Predecessor of $37,000.
(2) Represents an adjustment of $1,251,000 to reflect the effect of (i)
additions of home office staff of $496,000, (ii) office space of $255,000
and (iii) other costs associated with being a public company of $500,000.
(3) Represents an adjustment of $49,000 to eliminate rent paid to majority
shareholder on office facilities that remained with a selling shareholder.
(4) Represents an adjustment of $344,000 to reflect the effect of goodwill
amortization for the twelve month period.
(5) Represents an adjustment of $52,000 to eliminate interest expense relating
to the financing of assets purchased by one of the selling shareholders
prior to acquisition of the Predecessor.
(6) Represents an adjustment of $2,072,000 to reflect the reduction of interest
expense relating to the elimination of borrowings from the application of
the net proceeds and of $165,000 to reflect the elimination of amortization
of deferred financing costs. An extraordinary charge to write off
unamortized deferred financing costs of $634,000, net of taxes, and a
unamortized debt discount of $319,000, net of taxes, will be made
concurrent with the elimination of related borrowings.
(7) Represents an adjustment of $98,000 to eliminate interest income from
shareholder notes.
(8) Represents an adjustment to record pro forma income taxes giving effect to
the Predecessor's loss during the period. Prior to October 8, 1996, the
Predecessor was an S Corporation and, therefore, had no federal tax
obligation.
(9) Represents an adjustment to reflect a provision for income taxes on the
income (loss) from pro forma adjustments and adjustments for Offering at a
marginal rate of 40%.
(10) Net income per share 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. Net income per
share of the Company is based upon the weighted average number of shares
divided into net income for the period. All stock options and stock
purchase warrants outstanding are assumed to be exercised as of the
beginning of the period.
(11) Pro forma weighted average shares outstanding include 665,000 shares of
Class A Common Stock and 6,335,000 shares of Class B Common Stock issued
and outstanding as of May 31, 1997, as adjusted for the 2,342,890 shares of
Class A Common Stock included in this Offering and all outstanding warrants
and options (1,267,033) with respect to Class A Common Stock.
23
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE, PERCENTAGE AND ENROLLMENT DATA)
The following tables set forth selected consolidated financial data of the
Company and the Predecessor for the periods indicated. The selected consolidated
financial data of the Company as of May 31, 1997 and for the year ended May 31,
1997 are derived from the Consolidated Financial Statements of the Company which
have been audited by Deloitte & Touche LLP, independent auditors. The selected
consolidated financial data of the Predecessor as of May 31, 1996, for the
period from June 1, 1996 through October 8, 1996 and for each of the two years
ended May 31, 1996 are derived from the Consolidated Financial Statements of the
Predecessor which have been audited by Deloitte & Touche LLP, independent
auditors. The selected consolidated financial data of the Predecessor as of May
31, 1993, 1994 and 1995 and for the two years ended May 31, 1994 are derived
from the unaudited Consolidated Financial Statements of the Predecessor for such
periods. The pro forma as adjusted selected consolidated financial data as of
May 31, 1997 and for the year ended May 31, 1997 are unaudited. The unaudited
financial statements of the Company and the Predecessor include all adjustments,
consisting solely of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the financial condition and results of
operations for these periods. These selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the Company's Consolidated Financial
Statements and Notes thereto, the Predecessor's Consolidated Financial
Statements and Notes thereto, and other financial information included elsewhere
herein.
<TABLE>
<CAPTION>
THE PREDECESSOR(1)(2) THE COMPANY(1)
------------------------------------------------------- --------------------------
FISCAL YEAR ENDED
PERIOD FROM MAY 31, 1997
FISCAL YEAR ENDED MAY 31, JUNE 1, 1996 --------------------------
------------------------------------- THROUGH PRO FORMA
1993 1994 1995 1996 OCTOBER 8, 1996 ACTUAL(2) AS ADJUSTED(3)
------- ------- ------- ------- --------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(4):
Net revenues............................... $19,995 $20,654 $23,696 $26,493 $ 6,189 $ 23,590 $ 29,779
Cost of education and facilities........... 8,654 8,611 10,051 11,144 3,256 9,014 12,270
Selling and promotional expenses........... 3,129 3,165 3,083 3,614 1,335 2,428 3,763
General and administrative expenses........ 6,549 6,264 6,115 6,677 2,739 5,468 8,357
Rents paid to majority shareholder......... 135 146 145 150 49 0 0
Amortization of goodwill................... 0 0 0 0 0 696 1,040
------- ------- ------- ------- ------- --------- ----------
Income (loss) from campus operations....... 1,528 2,468 4,302 4,908 (1,190) 5,984 4,349
Income (loss) from management agreement.... 0 0 0 127 (21) 479 458
------- ------- ------- ------- ------- --------- ----------
Income (loss) from operations.............. 1,528 2,468 4,302 5,035 (1,211) 6,463 4,807
Interest expense........................... 433 440 607 730 258 2,499 468
Interest income -- shareholder notes....... 169 183 153 361 98 0 0
Other income -- net........................ 304 483 25 72 66 19 85
------- ------- ------- ------- ------- --------- ----------
Income (loss) before income taxes.......... 1,568 2,694 3,873 4,738 (1,305) 3,983 4,424
Provision for income taxes(5).............. 88 148 124 107 0 1,981 2,019
------- ------- ------- ------- ------- --------- ----------
Net income (loss).......................... $ 1,480 $ 2,546 $ 3,749 $ 4,631 $(1,305) $ 2,002 $ 2,405
======= ======= ======= ======= ======= ========= ==========
Net income per share(6).................... $ 0.24
=========
Weighted average shares outstanding........ 8,267,033
=========
Pro forma net income per share............. $ 0.23
==========
Pro forma weighted average shares
outstanding(7)........................... 10,609,923
==========
PRO FORMA DATA:
Income before income taxes, as reported.... $ 1,568 $ 2,694 $ 3,873 $ 4,738 $(1,305)
Pro forma provision for income taxes(5).... 613 1,051 1,510 1,848 509
------- ------- ------- ------- -------
Pro forma net income....................... $ 956 $ 1,643 $ 2,363 $ 2,890 $ (796)
======= ======= ======= ======= =======
SELECTED OPERATING DATA:
EBITDA(8).................................. $ 2,824 $ 3,695 $ 5,445 $ 6,135 $ (820) $ 8,236 $ 7,199
EBITDA margin.............................. 14.1% 17.9% 23.0% 23.2% (13.2)% 34.9% 24.2%
Net cash provided by (used in) operating
activities............................... 1,937 4,375 5,522 5,798 1,412 1,356
Net cash provided by (used in) investing
activities............................... (1,373) 725 (1,507) (2,662) (288) (31,428)
Net cash provided by (used in) financing
activities............................... (968) (5,030) (3,916) (3,442) (1,196) (30,780)
The American College Fall term
enrollment(9)............................ 2,037 2,001 2,209 2,440 2,815 2,815
</TABLE>
See accompanying notes on following page.
24
<PAGE> 26
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
------------------------------------- --------------------------
AT MAY 31, AT MAY 31, 1997
------------------------------------- --------------------------
1993 1994 1995 1996 ACTUAL AS ADJUSTED(10)
------- ------- ------- ------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....................................... $(6,372) $(8,467) $(8,355) $(8,696) $(9,716) $(5,739)
Total assets.......................................... 5,976 7,190 6,682 7,253 47,671 48,206
Long-term debt, including current portion............. 1,637 2,333 2,874 4,756 30,075 2,194
Shareholders' equity.................................. (3,562) (4,877) (6,166) (7,287) 7,877 36,928
</TABLE>
- ---------------
(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 "Acquisitions."
(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 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) Assumes that the Company was formed on June 1, 1996 and gives effect to the
acquisitions of the Predecessor and EduTrek Systems as if such acquisitions
had occurred on June 1, 1996. See "Acquisitions." As adjusted to (i) give
effect to the sale of 2,342,890 shares of Class A Common Stock offered by
the Company hereby and (ii) the application of the estimated net proceeds
therefrom as if such application had occurred on June 1, 1996. See "Pro
Forma Consolidated Financial Data."
(4) The Company's results of operations are affected by The American College'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."
(5) 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%. Prior to this 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
$1,200,000, $2,000,000, $4,068,962, $3,800,000, $4,500,000 and $1,889,694
for the fiscal years ended May 31, 1992, 1993, 1994, 1995 and 1996 and for
the period from June 1, 1996 through October 8, 1996, respectively.
(6) Net 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. Net
income per share of the Company is based upon net income divided by the
weighted average number of shares for the period. All stock options and
stock purchase warrants outstanding are assumed to be exercised as of the
beginning of the period.
(7) Pro forma weighted average shares outstanding includes 665,000 shares of
Class A Common Stock and 6,335,000 shares of Class B Common Stock issued
and outstanding as of May 31, 1997, as adjusted for the 2,342,890 shares of
Class A Common Stock offered hereby and all outstanding warrants and
options (1,267,033) to purchase Class A Common Stock.
(8) EBITDA represents income from operations plus depreciation and
amortization. While EBITDA data should not be construed as a substitute for
income from operations, net income, or cash flows from operations, in
accordance with generally accepted accounting principles, in analyzing the
Company's and the Predecessor's operating performance, financial position
and cash flows, the Company has included EBITDA data (which is not a
measure of financial performance under generally accepted accounting
principles) because it understands that such data are commonly used by
certain investors to evaluate a company's performance in the postsecondary
education industry.
(9) Represents enrollment data as measured on the first day of each Fall term.
(10) As adjusted to give effect to the sale of 2,342,890 shares of Class A
Common Stock offered by the Company hereby, the exercise of a warrant to
purchase 257,110 shares of Class A Common Stock and the application of the
estimated net proceeds therefrom as if such application had occurred on May
31, 1997. See "Use of Proceeds."
25
<PAGE> 27
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 the Predecessor should be read in conjunction with
the "Selected Consolidated Financial Data," the Company's Consolidated Financial
Statements and Notes thereto and the Predecessor's Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus. Unless
otherwise specified, any reference to a "fiscal year" is to a fiscal year ended
May 31.
OVERVIEW
The Company acquired The American College through its acquisition of the
Predecessor on October 8, 1996. Through its American European subsidiary, the
Company operates The American College, an international postsecondary
educational institution with campuses in Atlanta, Los Angeles, London and Dubai,
United Arab Emirates. Founded in Atlanta in 1970, the College has grown from
2,209 students for the 1994 Fall term to 2,815 students for the 1996 Fall term.
The Company's principal sources of revenues are tuition, related fees and
payments for student housing collected from its students. Net revenues are
calculated by deducting College awarded scholarships and cash discounts from
gross revenues. Cash discounts reflect deductions granted for tuition and fee
payments received in advance of their due dates. The College's cash discount
program was discontinued at the end of fiscal 1997.
The College's academic year is generally divided into three 10-week terms:
Fall, Winter and Spring. In addition, the College offers two eight-week Summer
terms: Summer I and Summer II. Summer terms are shorter, more concentrated and
equal to a 10-week term with regard to the delivery of education services and
related per student tuition and fee levels. Because of lower student enrollment
during the Summer terms, the two Summer terms together are the equivalent of a
10-week term with respect to their contribution to net revenues. The average
term enrollment levels for the Winter, Spring and Summer terms are approximately
95%, 90% and 85%, respectively, of the Fall term benchmark. The following table
relates the Company's fiscal quarters to the College's academic terms:
<TABLE>
<CAPTION>
FISCAL QUARTERS ACADEMIC TERMS
- --------------- --------------
<S> <C>
First (June -- August) Summer I and one-half of Summer II
Second (September -- November) Last half of Summer II and two-thirds of Fall Term
Third (December -- February) Last third of Fall Term and four-fifths of Winter Term
Fourth (March -- May) Last fifth of Winter Term and all of Spring Term
</TABLE>
Tuition and related 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 0.6% of annual net revenues during each of the fiscal years in the
three-year period ended May 31, 1997.
Each of the College's campuses is owned and controlled by the Company
except the campus in Dubai which is operated by the College under a management
agreement with an investment group based in the United Arab Emirates. Under the
terms of the agreement, the local investment group in Dubai provided all of the
start-up capital required to open the campus in Dubai and is responsible for
ongoing capital expenditures in exchange for 65% of the net operating cash flow
from that campus. In exchange for its management services, the Company receives
approximately 30% of the net operating cash flow. See "Business -- Dubai Campus
Management Agreement."
As tuition is received, normally before the start of the academic term or
in some cases the full academic year, 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 due to several factors, including: (i)
the Fall
26
<PAGE> 28
term represents the highest level of enrollment for the year; (ii) some
students, principally non-US citizens in London, pay a full year's tuition in
advance; and (iii) the College has in the past offered a tuition and fee
discount of up to 15% based on the then current tuition rates for payments made
three to four months in advance of the normal due date. Total discounts in each
of the last three years have averaged approximately $500,000, or approximately
2.0% of net revenues. This program has been discontinued and will reduce
discounts in fiscal 1998 as compared to prior years.
The Company'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 includes salaries of full and part-time faculty,
instructional support, academic administrators, student development and support
costs relating to their activities including library and classroom expenses.
Facility costs consist of leasing, maintenance and other occupancy costs
relating to campus facilities. In addition, housing costs relating to the
student housing program are included. Home office facilities costs for office
space located near the Atlanta campus are included in general and administrative
expenses.
Selling and promotional expenses include salaries of personnel involved in
recruitment, admissions and marketing at the campus and home office level and
their related costs, including off-campus presentations. In addition, the costs
of advertising and production of marketing materials such as catalogs are
included.
General and administrative expenses include salaries of personnel engaged
in general administration, accounting, financial aid, personnel and compliance
at the campus level, all home office personnel and their related expenses and
the net cost of the Company's airplane. These expenses also include depreciation
and amortization of related fixed assets and deferred costs as well as benefits
relating to personnel throughout the campuses and at the home office.
As a result of its election to be treated as an S Corporation for income
tax purposes, the Predecessor was not subject to federal and most state income
taxes. Accordingly, the provision for income taxes for the Predecessor includes
income taxes only for those jurisdictions that do not recognize S Corporation
status. Since its incorporation in July 1996, the Company has been a C
Corporation for income tax purposes. The Company's income tax provision is
provided at rates approximating statutory federal and state rates (approximately
40%).
The Company acquired the Predecessor on October 8, 1996 for a purchase
price of approximately $38.0 million. The purchase price was determined through
arms-length negotiation with an independent third party based, in part, on
historical and projected future cash flows and earnings. The Predecessor had
minimized the accumulation of tangible assets (through, among other things,
financial and operating practices such as leasing as opposed to owning
facilities and certain equipment), and the former owner of the Predecessor
purchased many of the existing tangible assets (such as aircraft and home office
furniture, fixtures and equipment) immediately prior to the sale of the Company.
The sum of the contract purchase price and the net liabilities assumed was
recorded as goodwill. No part of the purchase price was allocated to the
identifiable intangible assets (curriculum, faculty, leases and facilities)
because little or no value was attributable to such intangible assets. The
curriculum was in the process of a necessary upgrade, approximately 75% of the
faculty was part-time as adjunct faculty, all of the facilities were held under
lease arrangements, and the leases provided no advantages in relation to market
rates.
27
<PAGE> 29
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 the Predecessor:
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
-------------------------------------------- -----------------
PERIOD FROM
FISCAL YEAR ENDED MAY 31, JUNE 1, 1996 FISCAL YEAR
-------------------------- THROUGH ENDED
1994 1995 1996 OCTOBER 8, 1996 MAY 31, 1997
------ ------ ------ --------------- -----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of education and
facilities..................... 41.7 42.4 42.1 52.6 38.2
Selling and promotional
expenses....................... 15.3 13.0 13.6 21.6 10.3
General and administrative
expenses....................... 30.3 25.8 25.2 44.3 23.2
Rents paid to majority
shareholder.................... 0.7 0.6 0.6 0.8 0
Amortization of goodwill......... 0 0 0 0 2.9
----- ----- ----- ----- ------
Income (loss) from campus
operations..................... 11.9 18.2 18.5 (19.3) 25.3
Income (loss) from management
agreement...................... 0 0 0.5 (0.3) 2.0
----- ----- ----- ----- ------
Income (loss) from operations.... 11.9 18.2 19.0 (19.6) 27.3
Interest expense................. 2.1 2.6 2.8 4.2 10.6
Interest income -- shareholder
notes.......................... 0.9 0.6 1.4 1.6 0
Other income -- net.............. 2.3 0.1 0.3 1.1 0.1
----- ----- ----- ----- ------
Income (loss) before income
taxes.......................... 13.0 16.3 17.9 (21.1) 16.8
Provision for income taxes....... 0.7 0.5 0.4 0 8.4
----- ----- ----- ----- ------
Net income (loss)................ 12.3% 15.8% 17.5% (21.1)% 8.4%
===== ===== ===== ===== ======
</TABLE>
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 the College'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. See "Business -- Tuition and Fees."
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
of 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.
28
<PAGE> 30
Selling and promotional expenses. Selling and promotional expenses
increased by approximately $41,000 or 1.7% from $2.4 million in the 1996 period
to $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 and to additions of personnel at the home office after the
acquisition of the Predecessor, which expenses were offset in part by a
reduction in costs relating to assets purchased by one of the selling
shareholders in the College Acquisition. 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.
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.
Income from operations. Income from operations increased approximately
$107,000 or 1.7% from $6.4 million in the 1996 period to $6.5 million in the
1997 period. The increase was due to the 13.0% increase in net revenues of $2.7
million and income of approximately $393,000 generated from the Dubai campus
management agreement, offset in part by increases in expenses of $3.0 million.
As a percentage of net revenues, income from operations decreased from 30.4% in
the 1996 period to 27.4% in the 1997 period.
Before acquisition related amortization expenses of approximately $696,000
in the 1997 period, income from operations as a percentage of net revenues was
30.4% in each of the 1996 and the 1997 periods.
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.
YEAR ENDED MAY 31, 1996 (PREDECESSOR) COMPARED TO YEAR ENDED MAY 31, 1995
(PREDECESSOR)
Net revenues. Net revenues increased $2.8 million or 11.8% from $23.7
million for the year ended May 31, 1995 to $26.5 million for the year ended May
31, 1996. Of this 11.8% increase, 3.0% or approximately $700,000 was due to an
increase in student enrollment and 8.8% or approximately $2.1 million was due to
an effective price increase.
Cost of education and facilities. Cost of education and facilities
increased $1.1 million or 10.9% from $10.1 million for the year ended May 31,
1995 to $11.1 million for the year ended May 31, 1996, approximating the
increase in net revenues. Education costs increased approximately $580,000 or
10.3% from $5.6 million for the year ended May 31, 1995 to $6.2 million for the
year ended May 31, 1996 due to salary and other cost increases. Facility costs
increased approximately $509,000 or 11.5% from $4.4 million for the year ended
May 31, 1995 to $5.0 million for the year ended May 31, 1996 due to increases in
rental rates. Cost of education and facilities decreased as a percentage of net
revenues from 42.4% for the year ended May 31, 1995 to 42.1% for the year ended
May 31, 1996, primarily due to a decrease in education costs as a percentage of
revenues from 23.7% for the year ended May 31, 1995 to 23.4% for the year ended
May 31, 1996.
Selling and promotional expenses. Selling and promotional expenses
increased approximately $531,000 or 17.2% from $3.1 million for the year ended
May 31, 1995 to $3.6 million for the year ended May 31, 1996
29
<PAGE> 31
due principally to advertising and salary increases. As a percentage of net
revenues, selling and promotional expenses increased from 13.0% for the year
ended May 31, 1995 to 13.6% for the year ended May 31, 1996.
General and administrative expenses. General and administrative expenses
increased approximately $562,000 or 9.2% from $6.1 million for the year ended
May 31, 1995 to $6.7 million for the year ended May 31, 1996. The increase was
due primarily to an increase in salaries and bonuses paid to managing
shareholders in 1996. General and administrative expenses decreased as a
percentage of net revenues from 25.8% for the year ended May 31, 1995 to 25.2%
for the year ended May 31, 1996.
Income from management agreement. Income from the Dubai campus management
agreement was approximately $127,000 for the year ended May 31, 1996 compared to
its start-up status in the prior year.
Income from operations. Income from operations increased approximately
$733,000 or 17.0% from $4.3 million for the year ended May 31, 1995 to $5.0
million for the year ended May 31, 1996 due to the increase in net revenues of
$2.8 million and income of approximately $127,000 generated from the Dubai
campus management agreement, offset by the smaller overall increase in expenses
of $2.2 million. As a percentage of net revenues, income from operations
increased from 18.2% for the year ended May 31, 1995 to 19.0% for the year ended
May 31, 1996 reflecting the fixed nature of many of the College's operating
expenses.
Interest expense. Interest expense increased approximately $123,000 or
20.3% from approximately $607,000 for the year ended May 31, 1995 to
approximately $730,000 for the year ended May 31, 1996 due to an increase in the
level of borrowing in 1996 compared to 1995.
Other income -- net. Other income increased approximately $47,000 or
188.0% from $25,000 for the year ended May 31, 1995 to approximately $72,000 for
the year ended May 31, 1996 due primarily to a loss on sale of assets in 1995 of
approximately $200,000.
SEASONALITY
The following table sets forth unaudited quarterly financial data for each
of the eight fiscal quarters in the two years ended May 31, 1997. 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 consolidated financial
statements of the Company and the Predecessor included elsewhere herein. The
operating results for any quarter are not necessarily indicative of the results
for any future period.
<TABLE>
<CAPTION>
PREDECESSOR THE COMPANY
----------------------------------------------- ------------------------------
FISCAL YEAR ENDED MAY 31, 1996 FISCAL YEAR ENDED MAY 31, 1997
------------------------------------- ----------------------------------------
1ST QTR 2ND QTR 3RD QTR 4TH QTR 1ST QTR 2ND QTR(1) 3RD QTR 4TH QTR
------- ------- ------- ------- ------- ---------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Amount........................ $4,447 $5,879 $7,960 $8,207 $4,842 $6,718 $8,803 $9,416
Percentage of fiscal year
total....................... 16.8% 22.2% 30.0% 31.0% 16.3% 22.6% 29.6% 31.5%
Income (loss) from operations:
Amount........................ $ (456) $ 843 $2,360 $2,288 $ (284) $ 371 $2,699 $2,466
Percentage of fiscal year
total....................... (9.0)% 16.7% 46.9% 45.4% (5.4)% 7.0% 51.4% 47.0%
</TABLE>
- ---------------
(1) Includes financial data of the Predecessor from September 1, 1996 through
October 8, 1996, the date the Company acquired the Predecessor.
The Company's quarterly revenues have fluctuated in the past and may
fluctuate significantly in the future as a result of a number of factors,
primarily the number and timing of new students enrolling in the College's
programs. Enrollment generally is highest in the second quarter, or Fall term,
and lowest in the first quarter, or Summer terms. In 1996, enrollments at the
beginning of the first and second Summer terms were 1,344 and 900, respectively,
and enrollments at the beginning of the Fall, Winter and Spring academic terms
were 2,815, 2,347 and 2,298, respectively. Costs are generally highest in the
second and third quarters due to higher student enrollment and because a larger
faculty is needed. To some extent, instructional and educational support
expenses are lower in the first quarter because fewer faculty are needed. Other
factors
30
<PAGE> 32
affecting quarterly revenues include student withdrawals, the termination of
programs, the introduction of new programs, the upgrading or lengthening of
programs, changes in tuition rates (including changes in response to pricing
actions by competitors), changes in government-supported financial aid programs,
modification of applicable government regulations or interpretations, or other
actions by regulatory authorities. In the past, the Company has raised its
tuition by amounts which exceeded the rate of inflation. For the foreseeable
future, the Company anticipates that tuition increases will keep pace with
inflation. Because certain of the Company's expenses do not vary with student
enrollment, quarterly variations in net revenues are amplified at the income
(loss) from operations level.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operating activities and capital requirements,
including debt repayments, principally from cash provided by operating
activities and borrowings under the NationsBank Credit Agreement. The Company
has generated positive cash flow from operations over the last three fiscal
years. Cash flow from operations was $5.5 million, $5.8 million and $1.4 million
for fiscal 1995, 1996 and 1997, where fiscal 1997 includes the operations of the
College from October 8, 1996. The Company's principal sources of funds as of May
31, 1997 were cash and cash equivalents of $678,000 and available borrowings of
$2.5 million under the Revolving Loan. As of May 31, 1997, the maximum permitted
borrowings under the Revolving Loan was $2.5 million. The NationsBank Credit
Agreement provides that, beginning on October 1, 1997, the maximum permitted
borrowings under the Revolving Loan is to be reduced to $1.75 million and on
October 1, 1998, the maximum permitted borrowings under the Revolving Loan is to
be further reduced to $1.0 million.
Historically, the Company's investing activity has primarily consisted of
capital asset purchases. Capital expenditures, excluding capital leases, totaled
approximately $489,000, $1.4 million and $681,000 for fiscal 1995, 1996 and
1997.
The Company's capital assets consist primarily of classroom equipment (such
as computers, software and video equipment), classroom and office furniture, and
leasehold improvements. All building facilities are leased. The Company plans to
continue to expand current facilities, upgrade and replace equipment, and open
new campuses. During fiscal 1998, the Company intends to make certain
improvements to its campuses including furniture, fixtures and equipment
improvements, computerizing classrooms, and implementing electronic library
systems, at an estimated cost of $2.0 million. Also by November 1997 and by May
1998, the Company plans to implement the AIT program in the Atlanta and Los
Angeles campus curricula, respectively. The Company estimates that the total
cash required to implement the AIT programs at such campuses, including
computers, software, leasehold improvements, license fees and other start-up
expenses, will be approximately $2.0 million for each campus that implements the
AIT program. The Company anticipates that the investment and start-up costs of
approximately $2.0 million per campus will be funded primarily from working
capital and additional lines of credit currently being negotiated with certain
lenders. The Company expects primarily to use cash flow to repay such investment
and start-up costs associated with the implementation of the AIT program over a
period of approximately two years. Although the payment of the initial license
fees in connection with the implementation of the AIT program will reduce
tangible net worth, management does not believe that eligibility to participate
in Title IV Programs will be materially adversely effected. See "Risk
Factors -- Risks Associated with Implementation of AIT Information Technology
Program." To support its growth, the Company also is implementing a centralized
information system to integrate The American College's campus operations and
financial data including admissions, financial aid, student services, placement
services and default management. The Company anticipates that the information
system will be fully operational by the end of fiscal 1998 and that it will
require approximately $1.0 million in fiscal 1998 to develop and implement this
integrated information system.
Including the improvements to its campuses, the implementation of the AIT
program into the Atlanta and Los Angeles campus curricula and the development
and implementation of its integrated information system, the Company expects
fiscal 1998 capital expenditures to be approximately $5.5 million. While the
Company's financing agreements limit the amount of capital expenditures which
may be incurred by the Company, management intends to seek waivers of or
renegotiate such limitations. There can be no assurances,
31
<PAGE> 33
however, that such limitations will be waived or renegotiated on terms
acceptable to the Company. To take advantage of the highly fragmented
postsecondary education market and to expand its international presence, from
time to time the Company also plans to acquire existing schools in favorable
locations throughout the U.S. as well as utilize joint ventures to open campuses
outside of the U.S. The Company's ability to fund its working capital and
capital expenditure requirements, implement the AIT program, make interest
payments, fund future acquisitions and meet its other cash requirements depends
on, among other things, internally generated funds, the continued availability
of and compliance with the terms of the NationsBank Credit Agreement and the
availability of additional lines of credit currently being negotiated.
Management believes that the proceeds from this Offering, internally generated
funds and funds available under the Company's Revolving Loan will be sufficient
to meet the Company's capital requirements and operating needs for fiscal 1998.
However, if there is a significant reduction of internally generated funds or if
the Company is unable to satisfy the financial covenants of the NationsBank
Credit Agreement, the Company may require additional funds from outside
financing sources. In such event, there can be no assurance that the Company
will be able to obtain such funding as and when required or on acceptable terms.
Cash flow from operations on a long-term basis is partly dependent on the
receipt of funds from Title IV Programs. Presently, approximately 27% of the
Company's net revenues is derived from Title IV Programs. Disbursement of Title
IV Program funds is dictated by federal regulations including, among others,
certain financial responsibility standards. Based on the consolidated financial
statements of the Company as of May 31, 1997, The American College does not
satisfy either of the acid test ratio or the tangible net worth test as required
under such financial responsibility standards. As of May 31, 1997, the Company's
acid test ratio was .086 and the Company had a negative tangible net worth of
approximately $32.4 million. Notwithstanding, the Company has maintained The
American College's eligibility to continue participating in the Title IV
Programs by posting an irrevocable letter of credit in the amount of $3.75
million in favor of the U.S. Department of Education, which amount is
approximately 50% of the Title IV Program funds received by students enrolled at
The American College. The letter of credit was posted on March 19, 1997 and will
expire on March 31, 1998. Because the amount of the letter of credit is based on
the amount of Title IV Program funds received by The American College's
students, to the extent that such funds have increased during 1997, the Company
may be required to increase the letter of credit on or around March 19, 1998,
the date the U.S. Department of Education re-assesses the College's compliance
with the financial responsibility standards. The Company believes that it will
have sufficient liquidity to increase the letter of credit should the U.S.
Department of Education so require. However, there can be no assurance that, if
required, the Company will be able to maintain its letter of credit or increase
its letter of credit in the future. In addition, expenditures required to
implement the AIT program may adversely affect the Company's ability to satisfy
these financial responsibility standards. See "Risk Factors -- Risks Associated
with Implementation of AIT Information Technology Program." Because the HEA and
the Regulations are subject to amendment, and because the U.S. Department of
Education may change its interpretation of the HEA and the Regulations, there
can be no assurance that such requirements will not change in the future. See
"Business -- Regulatory Environment."
Pursuant to the NationsBank Credit Agreement, as of May 31, 1997 the
Company had borrowed $21.0 million under the Term Loan and had no borrowings
outstanding under the Revolving Loan. The Company has borrowed an additional
$7.0 million under its Subordinate Loan and Warrant Agreement with Stratford and
GMM (the "Stratford Subordinate Loan Agreement"). The Term Loan and the
Subordinate Debt were incurred primarily to fund the Company's acquisition of
the Predecessor. The Revolving Loan is intended to provide working capital for
the Company's operations. The Term Loan currently bears interest at 9.75% per
year which is payable quarterly. Beginning on October 31, 1997, the principal
amount under the Term Loan is payable in 22 equal consecutive quarterly
installments of $875,000 plus accrued and unpaid interest and a 23rd final
payment of $1,750,000 plus accrued and unpaid interest is due on March 31, 2003.
Borrowings under the Revolving Loan bear interest at the prime rate plus 1%
(9.5% as of May 31, 1997) and are payable quarterly. Borrowings under the
Revolving Loan are due on October 8, 1999; provided, however, that the Company
shall be in default if, during each calendar year, there are not at least two
occasions of consecutive 30 day periods in which the balance under the Revolving
Loan is zero and in which the Company has not borrowed under the Revolving Loan.
The Subordinate Debt bears interest at a fixed rate of 13% per year and is
payable in monthly installments of accrued interest until maturity on October 8,
2003, at which time the outstanding principal
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amount and accrued interest is due in full. Under the NationsBank Credit
Agreement, the Company may also borrow up to an additional $500,000 to finance
the cost of furniture, fixtures and equipment and leasehold improvements for The
American College's campus located in Los Angeles (the "LA Loan"). The
NationsBank Credit Agreement and the Stratford Subordinate Loan Agreement
contain customary covenants that, among other things, require the Company to
maintain specified capitalization levels and meet specified interest and debt
service coverage ratios, restrict capital expenditures by the Company, restrict
the payment of dividends and restrict the incurrence of certain additional
indebtedness. As of May 31, 1997, the Company was not in compliance with certain
covenants under the NationsBank Credit Agreement and the Stratford Subordinate
Loan Agreement. Although such non-compliance has been waived by the respective
lenders under the credit and loan agreements, management anticipates that the
Company will be in compliance with these provisions by September 1997. There can
be no assurances, however, that the Company will be in compliance by September
1997 or that the lenders will grant additional waivers in the future. Management
does not believe that such non-compliance will have a material adverse effect on
the financial condition or results of operations of the Company.
Following the consummation of the Offering, approximately $29.7 million of
the net proceeds received by the Company will be used to repay in full the
outstanding principal and interest under the Term Loan and the Subordinate Debt
and a portion of the Revolving Loan.
EFFECT OF INFLATION
The Company does not believe its operations have been materially affected
by inflation.
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 128, Earnings Per Share,
will require the presentation of basic and diluted net income per share. Basic
net income per share excludes common stock equivalents such as options, while
diluted net income per share considers the possible effect of all common shares
which potentially can be issued. The Statement will be effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Early adoption of this Statement is not permitted.
Statement of Financial Accounting Standards No. 129 will establish
standards for disclosing information about an entity's capital structure and is
effective for periods ending after December 15, 1997.
Statement of Financial Accounting Standards No. 130 establishes standards
for reporting and display of comprehensive income and its components (revenues,
gains, expenses, losses) in a full set of general purpose financial statements
and is effective for fiscal years beginning after December 15, 1997.
Statement of Financial Accounting Standards No. 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. The statement is effective for financial
statements for periods beginning after December 31, 1997.
Management of the Company has not yet assessed the impact of the above
Statements of Financial Accounting Standards on the Company's financial
statements.
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BUSINESS
OVERVIEW
The Company intends to become a leading provider of career-oriented,
internationally focused higher education designed to prepare students to compete
in the global marketplace. The Company operates The American College, an
international postsecondary educational institution with campuses in Atlanta,
Los Angeles, London and Dubai, United Arab Emirates serving approximately 2,800
students from the U.S. and over 100 other countries. To more accurately reflect
the international nature of the College, during the last quarter of calendar
1997 the Company intends, subject to certain regulatory approvals, to change the
name of The American College to American Intercontinental University. The
American College's curriculum includes such academic disciplines as
international business, multimedia communications and international design. To
respond to the increasingly technology-intensive workplace, the College intends
to expand its curriculum to include academic programs in the field of
information technology management. The College's Fall term enrollment has
increased from 2,209 students in 1994 to 2,815 students in 1996, and its net
revenues have increased from approximately $23.7 million for the fiscal year
ended May 31, 1995 to approximately $29.8 million on a pro forma basis for the
fiscal year ended May 31, 1997. See "Selected Consolidated Financial Data."
Originally established as a two-year institution, The American College has
grown into a diversified institution awarding associate's and bachelor's degrees
as well as an MBA in international business. Of its May 1997 graduates, 9.5%
graduated with an associate's degree, 86.4% graduated with a bachelor's degree
and 4.1% graduated with a master's degree. In 1987, The American College became
the first for-profit four-year university to be accredited by SACS, one of six
regional accrediting agencies recognized by the U.S. Department of Education.
The American College offers an authentic international educational environment
with over half of its students being non-U.S. students. Through its SAP program,
The American College provides nearly 500 students from U.S. universities the
opportunity to earn academic credit toward a degree from their home university
by studying international business, liberal arts and applied art at one of The
American College's international campuses. The Company, through EduTrek Systems,
also licenses from third parties, acquires, develops and implements corporate
education programs specifically designed to meet corporate education
requirements.
EDUCATION INDUSTRY
The National Center for Education Statistics estimates that the U.S.
education industry accounted for approximately 8% of U.S. gross domestic product
in 1995, or over $600 billion. Of that amount, the postsecondary education
market in which The American College operates accounted for approximately $211
billion, of which for-profit institutions accounted for approximately $3.5
billion. The U.S. Department of Education estimates that by 2001 the number of
students enrolled in higher education institutions will increase by more than
1.5 million to over 16 million students. The Company believes that the demand
for postsecondary career-oriented education will increase over the next several
years as a result of certain demographic, economic and social trends. The U.S.
Department of Education estimates that the number of new high school graduates
is expected to increase by approximately 20% from 2.5 million graduates in 1994
to 3.0 million graduates in 2005. In addition, the U.S. Department of Education
expects significant growth to result from increased enrollment of students over
the age of 24 seeking to enhance their skills or retrain for new technologies.
The Company believes that the industry will also benefit from increasing
recognition of the income premium attributable to postsecondary degrees, with
the Digest of Education Statistics reporting that, in 1994, individuals holding
an associate's degree earned on average approximately 28% more per year than a
comparable worker with only a high school diploma and individuals holding a
bachelor's degree earned on average approximately 56% more per year than a
comparable worker with only a high school diploma.
Two significant segments in the U.S. postsecondary education market are
international students enrolling in U.S. institutions and U.S. students studying
abroad. According to the Institute of International Education, international
student enrollment at U.S. colleges and universities reached a record high of
over 450,000 for the 1995-1996 academic year. Business and management lead as
the most popular fields of study among foreign
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students studying in the U.S., capturing approximately 20% of the international
enrollment in the U.S. and students studying fine and applied arts accounts for
approximately 6% of international enrollment in the U.S. The most popular U.S.
location for international students was Los Angeles, which hosted over 20,000
international students in the 1995-1996 academic year. One of the most popular
international locations for students was the United Kingdom, which hosted over
88,000 international students in 1992. In addition, the number of U.S. students
studying abroad has risen from approximately 48,000 in the 1985-1986 academic
year to approximately 84,000 in the 1994-1995 academic year. The leading host
country for U.S. students studying abroad is the United Kingdom, which received
approximately 23% of U.S. students studying abroad in the 1994-1995 academic
year according to the Institute for International Education.
GROWTH STRATEGY
The Company intends to become a leading provider of career-oriented,
internationally focused higher education designed to prepare students to compete
in the global marketplace. To accomplish this objective, the Company employs the
following strategies:
ENHANCING GROWTH AT EXISTING CAMPUSES. The College intends to enhance
growth at existing campuses through the following measures:
- Integrated Marketing Program. Management believes that it can
significantly increase total enrollment at The American College through its
implementation of an integrated marketing program which utilizes direct
response, direct sales to high school counselors and other referral sources
and a public relations program to increase awareness of the College among
potential applicants in a cost-effective manner. Both domestically and
internationally, the College intends to use a direct sales force to
participate in college fairs and visit guidance counselors and selected
teachers in targeted high schools as well as contact embassy and consulate
personnel who refer international students. Using direct response marketing
campaigns in its key markets, The American College also intends to develop
and target a demographic profile of students with both the motivation and
the ability to successfully complete the programs offered by the College.
In addition, the Company recently retained a public relations firm to
institute a public relations program intended to maximize media exposure to
build The American College brand as a quality educational institution.
- Retention and Job Placement. To increase student retention, The American
College plans to improve faculty training and implement a new "First Year
Experience" course to assist new students in adjusting to college life. In
addition, to improve graduate placement, management intends to integrate
job search training into the curriculum, provide placement and competency
assessments, and increase the number as well as improve the quality of its
career planning and placement staff.
- Competitive Financing Programs. Management believes that it can attract
additional students and retain more currently enrolled students by
providing comprehensive education financing programs that provide students
greater flexibility in financing their education. By providing an
institutional scholarship program targeted to selected high schools and
prospective students, management believes that it will increase total
enrollment by attracting and retaining highly motivated students. The
College also recently has obtained eligibility to participate in the
Georgia HOPE Scholarship and Tuition Equalization Grants programs (each
funded by the State of Georgia) which management believes will make the
Atlanta campus more competitive in attracting high-quality students
residing in the State of Georgia.
EXPANDING EDUCATION PROGRAM OFFERINGS. The College intends to continue to
expand program offerings through the following measures:
- Information Technology Management. To meet the increasing demand for
information technology professionals, the College plans to offer the AIT
program, which is specifically designed for university graduates from a
broad range of disciplines with little or no background in information
technology. See "-- Applied Information Technology Program." The AIT
program trains students to become proficient
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with such tools as Microsoft Office, Windows NT(R), Visual Basic(R),
PowerBuilder(R), Oracle(R), Access and the Internet. During calendar 1998,
the College plans to offer, subject to regulatory approvals and ITI's
consent, a master's degree in information technology. Management
anticipates implementing the AIT program into the College's Atlanta campus
curriculum by November 1997, the Los Angeles campus curriculum by May 1998,
the London campus curriculum by February 1999 and the Dubai campus by the
end of calendar 1999.
- Corporate Education. The Company seeks to develop corporate education
programs that add significant educational value to major corporations and
that have well-established positions in high-growth niche markets. In 1996,
the Company formed a strategic partnership with Target Marketing Systems,
Inc. ("TMS"), a leading provider of advanced corporate education programs
in sales process and sales management to high technology companies
worldwide. In addition, management plans to capitalize on its ability to
offer accredited corporate education programs for college credit and
customized degree programs for corporate clients.
- University Programs. The American College currently offers education
programs in a variety of fields and continually seeks to optimize its
program offerings to meet the needs of its students and the employment
market. During the calendar year 1998, the College intends to offer a B.S.
degree in multimedia communications and a master's degree in professional
sales.
CAPITALIZING ON THE AMERICAN COLLEGE'S INTERNATIONAL EDUCATIONAL
CAPABILITIES. The College intends to capitalize on its ability to deliver an
authentic American-style education to international students as well as an
international educational experience to U.S. students.
- International Student Recruiting. The College actively seeks
international students and management believes that expanding The American
College's international direct sales force responsible for visiting
international high schools and college fairs and contacting embassy and
consulate personnel who refer international students will result in
significant increases in international student enrollment.
- Study Abroad Program. By capitalizing on the College's international
locations, management believes that the College's SAP program is
well-positioned to capture a greater share of the growing study abroad
market. The American College intends to continue to increase enrollment in
the SAP program by increasing the number of direct sales personnel visiting
selected university professors and foreign study advisors and by
establishing alliances with targeted U.S. universities that are unable to
provide their students with campus-based education overseas. In addition,
management intends to establish alliances with international universities
in order to increase the number of locations available for the College's
SAP program students.
PROGRAMS OF STUDY
The American College delivers practical, career-oriented educational
programs for students seeking an alternative to traditional institutions.
Because the College believes that the educational needs of students are better
served through industry-relevant curricula and a learning model that promotes
problem-solving, interpersonal and team skills, each student at The American
College receives an education designed to integrate academic theory and
professional practice for practical workplace application. The College serves
students through a faculty composed primarily of working professionals, a low
student-faculty ratio and an interactive learning methodology emphasizing the
development of professional skills and competencies. Classes at the College are
scheduled throughout the year at five term start dates for the convenience of
students. The American College currently offers both associate's and bachelor's
degrees in the areas of international business administration, visual
communications, fashion design, fashion marketing, interior design and video
production, and a master's degree in business administration. Of the 463
students graduating in May 1997, 9.5% graduated with an associate's degree,
86.4% graduated with a bachelor's degree and 4.1% graduated with a master's
degree. By virtue of its Level III SACS accreditation, The American College also
is qualified to offer MBA degrees at each of its campuses. The College's
interior design program at the Atlanta
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and Los Angeles campuses is accredited by the Foundation for Interior Design
Education Research ("FIDER").
The goals of the College's program development process are to provide new
program opportunities based upon student interest and employer requirements and
to revise existing programs to be consistent with changing industry needs. Most
new programs at the College are approved on a system-wide basis and are made
available to each of the College's campuses. Faculty, industry experts, industry
literature and employers are the most common source of ideas for new program
offerings. As a part of the program development process, faculty members and
internal analysts may be retained to determine student interest in proposed new
programs and the skills and competencies required of a graduate for employment
upon program completion. In conjunction with industry experts and industry
research, faculty members from all campuses periodically review and update
curricula to be consistent with changing industry needs.
The following table indicates the number of students studying within each
academic discipline, the degrees offered, the degree programs within each
academic discipline and the number of students studying in each degree program.
Unless otherwise noted, each of the academic disciplines and their corresponding
concentrations are offered at all of The American College's campuses.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
ACADEMIC DISCIPLINE DEGREE PROGRAMS
(FALL 1996 ENROLLMENT) DEGREE OFFERED (FALL 1996 ENROLLMENT)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
International Business (816 students) A.A., B.S. International Business (785)
M.B.A. International Business* (31)
International Design (1,153 students) A.A., B.A. Fashion Design (218)
Fashion Marketing (245)
Fashion Design and Marketing (238)
Interior Design (456)
Multimedia Communications (538 A.A., B.A. Visual Communications (399)
students) Video Production** (139)
</TABLE>
- ---------------
* Offered only at The American College's campuses in London and Dubai
** Offered only at The American College's campuses in Atlanta and London
International Business. The international business program provides
students with the experience and education necessary for careers in national as
well as international organizations. The associate's degree program introduces
students to the dynamics of business and provides a thorough foundation in the
basic elements of a business environment. The bachelor's degree program provides
students with a broad exposure to business from the basic elements through the
technical and functional areas. Students may follow the general business program
or choose advanced classes leading to a concentration in such areas as computer
systems management, marketing and management. The master's degree program in
international business, which was introduced at the College's London campus in
1994 and the Dubai campus in 1995, considers the business environment on a
global scale, focusing on such areas as the multi-national and international
banking and monetary system, business ethics and international law, as well as
accounting, information technology, management, marketing and business strategy.
The College also plans to offer a master's degree in professional sales during
the calendar year 1998.
International Design. The international design program trains students in
the fields of fashion design and marketing as well as commercial and residential
interior design. The fashion design program offers students a solid foundation
in designing as well as the opportunity to develop their own line or design
collection. The fashion marketing program is designed to prepare students for
executive careers in the retail and wholesale fashion industry and related
businesses. The residential and commercial interior design programs provide
students with a thorough understanding of the fundamentals and advanced
principles of interior design.
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Multimedia Communications. The field of multimedia communications includes
such areas as production advertising art, graphic design, photography,
illustration and video production. Taught by working professionals, the
curriculum offers a balance of practical experience and theoretical concepts.
The program takes into consideration the student's need to have a firm grounding
in the business aspects of the multimedia communications industry. The video
production program, first introduced in 1993 in London and expanded to Atlanta
in 1995, has grown to an enrollment of nearly 160 students in the 1997 Spring
term and generated tuition revenues of approximately $1.5 million for the
1996-1997 academic year. Through an arrangement with Image Master Productions,
The American College opened a full-service, state-of-the-art video
postproduction facility on the Atlanta campus in March 1997. Students have
access to this facility, and many will serve as interns, working directly with
corporate clients. Management believes that this capability will further
accelerate the growth of the program in Atlanta.
APPLIED INFORMATION TECHNOLOGY PROGRAM
Recognizing the growing demand for information technology professionals, on
July 26, 1997 the Company entered into the License Agreement with ITI pursuant
to which ITI has licensed its AIT program to the Company for use in the State of
Georgia, including The American College's campus in Atlanta. The License
Agreement expires on July 31, 2007 and is renewable for one ten-year term. The
AIT program is an intensive nine month post-graduate program designed to train
and certify students in the growing field of information technology management.
The AIT program, which is specifically designed for university graduates from a
broad range of disciplines with little or no background in information
technology, trains students to become proficient with such tools as Microsoft
Office, Windows NT(R), Visual Basic(R), PowerBuilder(R), Oracle(R), Access and
the Internet. Students enrolled in the AIT program will work and study in
project teams to develop professional and problem-solving skills in situations
that reflect real workplace challenges.
Under the License Agreement, the Company will pay ITI a one-time initial
license fee and royalties of a percentage of gross revenues derived from The
American College's operation of the AIT program. Under the terms of the License
Agreement, the Company is required, among other things, to (i) pay ITI royalties
based on the higher of actual tuition levels charged students enrolled in the
AIT program or minimum tuition levels specified in the License Agreement, (ii)
expend a percentage of revenues derived from the operation of the AIT program to
advertise and promote the AIT program, (iii) purchase from ITI certain
courseware, equipment and other materials, and (iv) make such capital
investments or expenditures as may be necessary to upgrade the AIT program. The
License Agreement further grants the Company the right to implement the AIT
program in the cities of Los Angeles, London and Dubai upon payment of an
additional license fee and the execution of an additional license agreement in
substantially the form of the License Agreement for each such territory. The
Company intends to enter into license agreements for such territories over the
next two years. ITI also has agreed that until July 26, 1998, it will negotiate
exclusively with the Company for additional license agreements for the
territories of the States of California (in addition to Los Angeles), Florida,
Texas and Virginia, the District of Columbia and the United Arab Emirates (in
addition to Dubai) and has granted the Company a right of first refusal in the
event that ITI receives an offer to license its AIT program in any of such
territories during the 24-month period beginning on July 26, 1998.
The Company believes that by adding the AIT program to the College's
curriculum, The American College will be able to offer its students the training
required by employers in today's technology-intensive workplace and enable its
graduates to acquire the necessary information technology knowledge and skills
to obtain employment in industries that rely on information technology. As the
knowledge-based world economy grows and the skills gap between what employers
require and the skills university graduates currently have to offer widens,
demand for information technology professionals is rapidly increasing. Industry
experts predict that 190,000 information technology jobs in the U.S. will remain
unfilled by the end of 1997. Accordingly, management believes that by offering
the AIT program as part of its curriculum, The American College will be able to
train students for the growing number of such information technology careers as
software developers and engineers, programmers and programmer analysts,
consultants, facilitators and validation specialists. ITI has reported to the
Company that more than 95% of its AIT program graduates have found careers in
their
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chosen field within six months of completing the program and that the demand for
graduates has been so great that a number of students beginning the nine-month
program will have been pre-hired by key employers. Based on such demonstrated
success and the growing demand for information technology professionals,
management believes that implementing the AIT program will improve The American
College graduate placement rate. However, there can be no assurances that The
American College graduates from the AIT program will experience the same level
of success as ITI graduates have experienced in finding information technology
careers.
Management perceives the demand for information technology professionals in
Atlanta and Los Angeles to be particularly strong. Accordingly, the College
intends to implement the AIT program into the College's Atlanta and Los Angeles
campus curricula by November 1997 and May 1998, respectively. The College
anticipates that it will implement the AIT program into its London and Dubai
campus curricula by February 1999 and the end of calendar 1999, respectively. In
addition, during calendar 1998, the College plans to offer, subject to
regulatory approvals and ITI's consent, a master's degree in information
technology.
STUDY ABROAD PROGRAM
The SAP program provides students from U.S. universities with the
opportunity to earn a degree from their home university by studying
international business, liberal arts and applied art at The American College's
international campuses. The College's SAP program provides students with an
opportunity to study and live in a truly international environment. Students in
the SAP program typically design their own course schedules, choosing from among
nearly 300 courses, and have the ability to participate in internship programs
which provide an opportunity to obtain international work experience under the
supervision of The American College faculty with professional experience in the
field.
Over the past eight years, the number of U.S. students studying abroad has
risen from approximately 48,000 in 1985-1986 to approximately 84,000 in the
1994-1995 academic year. The American College's London campus is strategically
located in the leading host country for U.S. students studying abroad, the
United Kingdom, which received approximately 23% of U.S. students studying
abroad in the 1994-1995 academic year, according to the Institute for
International Education.
The SAP program was established through a marketing program combining
direct sales to selected university professors and foreign study advisors with
telemarketing support. Although recognizing the value now placed on an
international education, traditional universities often lack the flexibility to
offer integrated international programs. Since the program's inception in Fall
1989, nearly 300 U.S. universities have "outsourced" international education to
The American College. The U.S. institutions sending the most students to The
American College's London campus in the 1996 Fall term were: University of
Wisconsin, University of Massachusetts, Washington State University, University
of Rhode Island, Ohio State University, University of Denver, Philadelphia
College, University of California -- Santa Barbara, Western Michigan University,
Ohio University, University of Colorado and Purdue University. Participation in
the SAP program has increased by approximately 30% per year since 1994. During
fiscal 1997, the College anticipates that nearly 500 students will participate
in the SAP program. To increase student enrollment in the SAP program, the
College intends to enter into credit recognition agreements with additional
universities as well as develop relationships with international universities in
locations outside of London and Dubai where students participating in the SAP
program can study. In addition, The American College plans to hire a new SAP
program director with extensive experience in operating study abroad programs at
the university level.
CORPORATE EDUCATION
The Company licenses, acquires, develops and implements programs
specifically designed to meet corporate education requirements. The Company
seeks to develop corporate education programs that add significant educational
value to major corporations and that have well established positions in
high-growth niche markets. Unlike most corporate training firms, through The
American College, the Company has the capability to offer accredited corporate
education programs for university credit and customized degree programs for
corporate clients. Management believes that employers will increasingly require
certifica-
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tion/accreditation as a way of determining expertise in a given field. Through
its strategic partnership with TMS, the Company is licensed to market TMS's
revenue growth curriculum for three major industry groups: industrial/chemical,
consumer products and financial services. The Company's TMS programs, which are
typically delivered in hotel conference rooms or at the customer's site, range
from one to three days in length with prices ranging from between $15,000 and
$32,000. Since the program's inception in April 1996, the Company has provided
corporate education programs to six corporations, including Crown Zellerbach.
One of the Company's customers has recently committed to certify 400 of its
global sales force in the Company's licensed sales processes. The Company
intends to utilize distance learning technologies, including videoconferencing,
in offering its corporate education programs. The Company also intends to
license, acquire or develop additional corporate education curricula in
accordance with employer needs.
INTERNATIONAL ENVIRONMENT
Management believes that U.S. higher education is highly valued abroad.
According to the Institute of International Education, international enrollment
at U.S. colleges and universities reached a record high of over 450,000 for the
1995-1996 academic year. Business and management lead as the most popular fields
of study among foreign students studying in the U.S., capturing approximately
20% of the international enrollment in the U.S., and students studying fine and
applied arts accounts for approximately 6% of the international enrollment in
the U.S. The American College's campuses are strategically located in some of
the most popular locations for international students including the United
Kingdom, which hosted over 88,000 international students in 1992, and Los
Angeles, which hosted over 20,000 international students in the 1995-1996
academic year. In addition, The American College's campus in Dubai is the only
accredited American university in the United Arab Emirates, which graduates
approximately 40,000 high school students annually.
International student enrollment at The American College has increased from
1,243 in the 1994 Fall term to 1,628 in the 1996 Fall term, with students
representing over 100 countries including the United Arab Emirates, the United
Kingdom, Thailand, Turkey and India. The American College's programs accommodate
students with varying levels of preparation. For example, international students
with minimal English skills can improve their language skills in the "English as
a Second Language" program before entering as a regular student. Additionally,
the curriculum is standardized across campuses to allow a seamless transfer of
credits, providing a consistent, high-quality "American-style" education for
international students. The College's flexible admissions policy enables
students to matriculate throughout the calendar year and permits students to
change programs easily, in contrast to institutions in many foreign countries
which often force students to commit to a career track in the first year.
Management believes that its base of international students also provides
several direct economic benefits to The American College. Because international
students are not eligible to participate in U.S. government-sponsored student
loan programs, The American College is far less dependent on Title IV Programs
than its peer institutions, with only 27% of revenues derived from Title IV
Programs. See "-- Regulatory Environment." According to the Institute of
International Education, nearly two-thirds of international students enrolled in
U.S. institutions receive a majority of their funding from personal and family
resources. As a result, international students have proved less likely to
withdraw from school for financial reasons, resulting in higher retention rates.
Most international students are full-time students enrolled in four-year
programs, thus increasing the College's cash flow per student. Finally, many of
the College's international students participate in accelerated degree programs
through "overloads," which are additional courses beyond the standard course
load. Because such students occupy empty seats in a classroom in which a course
is already offered, overload tuition is almost entirely incremental profit.
Management believes that technological advances and the advent of the
global economy have resulted in increased value being placed by U.S. employers
on an international education. With campuses in London and Dubai, and students
from over 100 countries, The American College provides its U.S. students with an
integrated international curriculum in a global setting. Management views the
resulting cultural diversity as a resource for providing U.S. students with
critical international experience to benefit them in their careers and
personally. The College seeks to enhance this international experience by
attracting new international students
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to its current locations and by opening campuses in targeted international
locations. See "-- Study Abroad Program" and "-- Growth Strategy."
TUITION AND FEES
The American College's tuition is competitively priced between the tuition
levels of non-profit private universities and the comparatively lower tuition
charged resident students at public universities. The College's tuition is also
competitive with the tuition of public universities for non-resident and
international students. The American College's tuition ranges between $3,450 and
$4,125 per academic term, or $10,350 and $12,375 per full academic year,
depending on the campus location.
The American College offers a number of institutional scholarships for
selected students. The scholarships are awarded to entering and enrolled
students who meet specific eligibility standards and range from $500 to
full-tuition scholarships. In accordance with higher education custom and
practice, full tuition scholarships are available for the immediate family
members of employees. In fiscal 1997, institutional scholarships had a value of
approximately $667,000, or 2.2% of the Company's net revenues.
The College bills students for their tuition and other institutional fees
by the term of instruction, typically an academic term. The College's refund
policies must meet the requirements of the U.S. Department of Education and of
SACS as well as the requirements of each state or country in which the College's
campus is located. Generally, if a student ceases attendance prior to the
expiration of the first 60% of his or her first term, the College will refund a
portion of tuition and fees based upon the number of weeks remaining in that
term. After a student has attended 60% of that term, the College will retain
100% of tuition and fees. Following the student's first term, the College
refunds tuition and fees based upon the number of weeks attended in the term in
which the student withdraws. Generally, after six weeks of a term, the College
will retain 100% of tuition and fees for that term.
Historically, The American College has increased its tuition and fees
without resistance from the marketplace. The College increased its tuition and
fees by 5.7% and 6.7% for the 1995-1996 and the 1996-1997 academic years,
respectively, and The American College has implemented an increase in tuition
and fees of approximately 5.0% for the 1997-1998 academic year. In the past, the
Company has raised its tuition by amounts which exceeded the rate of inflation.
For the foreseeable future, the Company anticipates that tuition increases will
keep pace with inflation.
FACULTY
Faculty members are hired in accordance with criteria established by The
American College, accreditation organizations and applicable federal, state and
regulatory authorities. Faculty members are hired based on academic background,
prior educational experience and prior work experience and the College is
continually in the process of upgrading and hiring additional qualified faculty
members. Of the College's faculty members as of the 1997 Spring term, over 90%
of its 62 full-time faculty members and over 80% of its 175 part-time faculty
members hold degrees equivalent to or higher than a master's degree. An
important difference between The American College and more traditional
institutions of higher learning is reflected in the concept of education by
professionals rather than professional educators. The College recruits as a main
component of its faculty working professionals who are experts in their fields.
Management believes that such faculty members provide a valuable "real world"
perspective to the students. The American College's faculty focuses on providing
students with a practical education that can be applied directly to their chosen
careers.
Most faculty members are employed on a contractual basis with compensation
tied to the number of courses taught. Because academic research is not a
performance criteria, the faculty emphasizes practices that best serve students
in career environments. Low student-to-faculty ratios (approximately 14:1, 15:1,
15:1 and 14:1 for the 1996-1997 academic year for each of The American College's
campuses in Atlanta, Los Angeles, London and Dubai, respectively) and the
absence of a faculty tenure track promote an environment focused on the student.
Faculty members are evaluated each academic term based on student comments and
observation by the administrative staff, principally on the basis of their
teaching abilities and demonstrated technical knowledge. The average length of
employment for faculty members is approximately four and one-half years.
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STUDENT RECRUITMENT
The American College's primary source of new students are its general
reputation and referrals from current students, alumni and employers. To inform
potential students and their parents about the College's programs, The American
College has focused its marketing efforts on admissions representatives, direct
sales, and print advertising in national and international magazines and
newspapers and directories. The goal of the College's recruitment efforts is to
increase awareness of The American College and its programs among potential
applicants in a cost-effective manner.
Admissions Representatives. The College employs over 20 admissions
representatives who pursue leads generated from the College's advertising
efforts and referrals as well as make visits and presentations to various
organizations. Admissions representatives primarily pursue direct responses to
interest from potential students by arranging for interviews either at the
school or a prospective student's home and generally assist students in the
application process. The interview is designed to establish the student's
qualifications, academic background and employment goals. In fiscal 1997,
admissions representatives also made presentations at 140 high schools and the
College's marketing efforts generated approximately 42,700 inquiries. The
College's inquiry-to-application ratio was approximately 10:1, and the
application-to-new student ratio was 2:1. Recruitment policies are coordinated
centrally but are implemented at the campus level. Each campus employs a
Director of Admissions who generally reports to the Campus President. The
Director of Admissions is responsible for, among other things, coordinating the
efforts of the school to recruit qualified students, determining recruiting
policies and procedures (in accordance with Company directives) and establishing
standards for hiring and training representatives.
Direct Sales. The College seeks to attract students with both the
motivation and ability to complete the educational programs offered by The
American College. The American College is in the process of implementing a
marketing program utilizing a direct sales effort aimed at high school
counselors and other referral sources. Domestically, the direct sales force will
participate in college fairs and visit guidance counselors in high schools and
community colleges. During fiscal 1998, The American College plans to increase
the number of direct salespeople focusing on the U.S. market from one to seven
individuals. Internationally, the College's direct salespeople will recruit
students by visiting international high schools and college fairs and contacting
embassy and consulate personnel who refer students. In order to increase
international enrollment, the College intends to increase the number of direct
salespeople focused on international recruiting from two to three individuals.
Management believes that the success of the SAP program is primarily due to
continuing referrals from those that have influence over prospective students'
college selection decision. Accordingly, in marketing the SAP program, the
College currently employs one direct salesperson who visits selected university
professors and study abroad advisors. The American College also has begun
testing a direct mail campaign focused on high school students in their junior
and senior years which is designed to develop and target a demographic profile
of students with both the motivation and the ability to successfully complete
the programs offered by the College.
Print Advertising. Historically, the majority of The American College's
marketing expenditures were allocated to print advertising in national and
international magazines and newspapers in order to generate inquiries from
prospective students. Students requesting information received a brochure
describing the College and its campuses and personal telephone calls from one of
the College's representatives. In the future, The American College intends to
focus its print advertising in trade publications and other publications
directed towards individuals with influence over prospective students' college
selection in order to generate a greater number of qualified student inquiries.
In order to generate awareness of its SAP program, The American College will
continue to use print advertising in student newspapers at targeted universities
as well as mail advertising materials, including posters and brochures, to
select universities. The American College has also recently launched a general
public relations campaign that focuses on building The American College brand
and attracting recruits and referral sources to The American College's campuses.
Corporate Education. The Company utilizes the services of six direct
salespeople to market the Company's TMS corporate education programs. Utilizing
a sophisticated methodology to identify and qualify prospective corporate
customers based upon customer requirements, potential value added by the
Company's
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curriculum and account revenue potential, a salesperson calls on that entity's
senior sales executives who make the final purchasing decision. The salespeople
employ TMS's advanced sales process to develop sales strategies, track progress
and measure the results of their sales and marketing efforts.
ADMISSIONS AND STUDENT RETENTION
The College seeks to ensure that incoming students have the necessary
background to complete their chosen programs of study. Each applicant for
admission to The American College is required to have a high school diploma or a
recognized equivalent, demonstrate a satisfactory level of English competence,
and submit two letters of reference. Students interested in the MBA degree
program are required to have completed an undergraduate degree. Prospective
students are interviewed to assess their qualifications, their interest in the
degree programs offered by the College and their commitment to their education.
In addition, the curricula, student services, education cost, available
financial resources and student housing are reviewed during interviews, and
tours of the facilities are conducted for prospective students.
The American College students come from international and U.S. high schools
and community colleges. In the 1996 Fall term, approximately 30% of The American
College's enrollment were first-time freshmen coming directly from high schools,
approximately 70% were transfers from community colleges and universities, and
approximately 58% were international students. Approximately 72% of The American
College's students are full-time and approximately 28% are part-time. At May 31,
1997, 70% of the students had some prior postsecondary educational experience.
Approximately 15% of the students were under 20 years of age, 50% were between
20 and 24 years of age, and 35% were 25 years of age or older. Female students
accounted for 62% of The American College's total enrollment as of May 31, 1997.
The College recognizes that the ability to retain students until graduation
is an important indicator of a school's success and that early academic
intervention is crucial to improving student completion rates. However, as with
other postsecondary institutions, many of The American College's students fail
to complete their programs for a variety of personal, financial or academic
reasons. In the 1996-1997 academic year (excluding the Summer terms), the
College's average net quarterly persistence rate, measured as the percentage of
non-graduating students who are enrolled during an academic term and then
advance to the next, was 83.4%. To minimize student withdrawals, The American
College devotes staff and other resources to assist and advise its students
regarding academic and financial matters, part-time employment and housing.
Beginning in the 1997 Fall term, The American College also intends to implement
a program where students are assigned a guidance counselor to advise the student
during their four-years at the College. Tutoring is encouraged for students
experiencing academic difficulties. In addition, because the College bills
students for their tuition and other institutional fees by the term of
instruction, many students who have enrolled at The American College do not
matriculate because they have difficulty making the full tuition payment at the
beginning of the term. Accordingly, the College plans to implement a monthly
payment program, with initial payments beginning in advance of the beginning of
the term, which management believes will result in increased enrollment from
recruited students, while preserving the Company's cash flow.
GRADUATE PLACEMENT
Management believes that the successful placement of graduates in
occupations related to their fields of study is critical to the ability of The
American College to continue to recruit students successfully. The College seeks
to obtain data on the number of students employed following graduation and has
implemented a program to monitor students' career progression. The reliability
of such data is largely dependent on information students and employers report
to the College. Based on the information received from graduating students and
employers, management believes that 76% of U.S. students graduating from The
American College in 1996 obtained employment within approximately six months.
The approximate average starting salary of 1996 graduates of The American
College was $24,000 for students graduating with a bachelor's degree. The
American College employs a placement staff to provide placement assistance
services to students and graduates and to solicit appropriate employment
opportunities from employers. By hiring individuals with significant experience
in the field of career placement, the College
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intends to expand its career placement staff by three individuals during the
1997-1998 academic year. In addition, students receive instruction during their
program of study on basic job search skills, including the identification of
potential employment opportunities, the composition of resumes and letters of
introduction and preparation for interviews. To assist graduates in identifying
career opportunities which are compatible with their personalities and skills,
the College also intends to provide placement and competency assessments as well
as hire additional personnel at each campus to assist students in developing
individualized career plans, selecting classes to further such career plans,
obtaining internships and forming job search strategies.
OPERATING STRATEGY
The American College has centralized at its main campus in Atlanta the
administrative functions of the various campuses, including marketing,
accounting, recruiting, human resources, program development, information
systems, financial aid and regulatory compliance. The Company believes that
centralizing such functions leaves local campus management, under the direction
of a Campus President, the flexibility to react to the needs of its students and
changing job markets promptly and effectively. In addition, the Company is
implementing an integrated information system to assist in maximizing internal
efficiency and integrating acquisitions and newly established campuses into the
Company's operations. The College is implementing a total quality management
program in all areas of The American College in order to assess the current
quality of the academic programs and services at all campuses and initiate
quality improvement processes where needed.
COMPETITION
The postsecondary education market is highly fragmented and competitive
with no private or public institution having a significant market share. In the
U.S. and London, The American College competes for students primarily with
not-for-profit public and private colleges and proprietary institutions which
offer degree and/or non-degree granting programs, many of which have greater
financial and other resources than the Company. Competition among educational
institutions is believed to be based on the quality of the educational program,
the perceived reputation of the institution, the cost of the program and the
employability of graduates. Competing institutions are often able to charge
lower tuition than The American College due in part to government subsidies,
government and foundation grants, tax-deductible contributions and other
financial resources not available to proprietary institutions. Tuition at
private, non-profit institutions is, on average, higher than tuition at The
American College. The College's campus in Dubai is currently the only
U.S.-accredited postsecondary institution offering degree programs in the United
Arab Emirates and competes with numerous institutions in the Persian Gulf
region, certain of which are government sponsored and charge lower tuition than
the College.
The information technology training and the corporate education markets are
highly fragmented, with low barriers to entry and no single competitor
accounting for a dominant market share. The College's competitors in the
information technology training market include computer systems vendors, other
independent education and training companies, systems integrators and software
vendors, as well as certain of the Company's own customers that maintain
internal training departments. The Company's primary competitors in the
corporate education market include other independent education and training
companies as well as many of the Company's own customers that maintain internal
training departments. Some of these competitors offer, at lower prices, courses
and programs similar to those the Company offers in its corporate education
program as well as those that the College intends to offer in its AIT program.
In addition, some competitors have greater financial and other resources than
the Company. There can be no assurance that the Company will be successful
against such competition.
REGULATORY ENVIRONMENT
Accreditation
Accreditation is a process for evaluating educational institutions and the
professional programs offered by those institutions for a level of quality that
entitles them to the confidence of the educational community and
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the public they serve. In the United States, accreditation is a nongovernmental
process through which an institution submits itself to qualitative review by an
organization of peer institutions. The three types of accrediting agencies in
the United States are: (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 on the
basis of the overall nature of the institutions without regard to their
locations, and (iii) specialized accrediting agencies, which accredit specific
programs within an institution. Accrediting agencies primarily examine the
academic quality of the instructional programs of an institution, and a grant of
accreditation is generally viewed as certification that an institution's
programs meet generally accepted academic standards. Accrediting agencies also
review the administrative and financial operations of the institutions they
accredit to ensure that each institution has the resources to perform its
educational mission.
Accreditation is an important strength of The American College, providing
significant advantages over most other for-profit educational institutions.
College and university administrators depend on the accredited status of an
institution in evaluating transfers of credit and applications to graduate
schools. Employers rely on the accredited status of an institution 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 HEA, the U.S. Department of Education relies
on accrediting agencies to determine whether institutions' educational programs
qualify them to participate in Title IV Programs. The HEA specifies certain
standards that all recognized accrediting agencies must adopt in connection with
their review of postsecondary institutions. Accrediting agencies that meet U.S.
Department of Education standards are recognized as the arbiters of the quality
of the education or training offered by an institution. Each of The American
College's campuses is accredited by SACS, an accrediting agency recognized by
the U.S. Department of Education. In addition, The American College's interior
design programs in Atlanta and Los Angeles are accredited by FIDER.
The HEA requires each recognized accrediting agency to submit to a periodic
review of its procedures and practices by the U.S. Department of Education as a
condition of its continued recognition. SACS, the College's accreditor for
purposes of participation in Title IV Programs, has been reviewed within the
past 18 months and has had its recognition extended.
An accrediting agency may place an institution on "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. Failure
to demonstrate compliance with accrediting standards could result in the loss of
accreditation. None of The American College's campuses have been placed on
reporting status by their respective accrediting agencies. See "Risk
Factors -- Potential Adverse Effects of Regulation; Impairment of Federal
Funding -- Accreditation."
Student Financial Assistance
Students attending The American College finance their education through a
combination of family contributions, individual resources, financial aid and
tuition reimbursement from their employers. As is the case at most other
postsecondary institutions, many students enrolled at The American College must
rely, at least in part, on financial assistance to pay the cost of their
education. The largest source of such support for the College'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 The American College are
not eligible to participate in U.S. government-sponsored student loan programs,
the majority of
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their funding is derived from personal and family resources. In addition, less
than 1% of the international students enrolled at The American College receive
funding from their home government.
To provide students access to financial assistance resources available
through 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 accrediting agency recognized by the U.S. Department of
Education, and (iii) certified as an eligible institution by the U.S. Department
of Education. In addition, that school must ensure that Title IV Program funds
are properly accounted for and disbursed in the correct amounts to eligible
students. See "Risk Factors -- Potential Adverse Effects of Regulation;
Impairment of Federal Funding."
Under the HEA and its implementing regulations, The American College must
comply with certain standards on an institutional basis. For purposes of these
standards, the Regulations define an institution as a main campus and its
additional locations (formerly called branch campuses), if any. Under this
definition, all of The American College'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 who can use this support at any institution that has been certified as
eligible by the U.S. Department of Education. 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 by, among other things, providing that
students at proprietary schools are eligible for assistance under Title IV
Programs, establishing a program for loans to parents of eligible students,
opening Title IV Programs to part-time students, increasing maximum loan limits
and eliminating 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. In recent years, federal
funds appropriated for Title IV Programs have increased from $8.6 billion for
the federal fiscal year ending September 30, 1994 to $10.5 billion for the
federal fiscal year ending September 30, 1996. The volume of federally
guaranteed student loans (and, more recently, loans issued under the Direct Loan
program) has increased from $17.9 billion in the federal fiscal year ending
September 30, 1993 to $29.1 billion in the federal fiscal year ending September
30, 1996.
Students at The American College participate in the following Title IV
Programs.
Pell. The Federal Pell Grant ("Pell") program is the principle means by
which the U.S. Department of Education makes Pell 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 The
American College in fiscal 1997 under the Pell program equaled approximately
$672,000 or 2.2% 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 takes into account the size of the institution, its costs
and the income levels of its students. FSEOG awards at The American College
generally do not exceed $1,200 per eligible student per year. The Company is
required to make, at a minimum, a 25% matching contribution for all FSEOG
program funds disbursed. Resources for this institutional contribution may
include institutional grants and scholarships and, in certain states, portions
of state scholarships. In fiscal 1997, the Company's institutional match was
approximately $29,000. Amounts received by students enrolled in The American
College under the FSEOG program in fiscal 1997 equaled approximately $89,000 or
0.3% of the Company's net revenues.
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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"), pursuant to which private lenders make loans
to enable 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 U.S. Department of Education), although loans are
made on the same general terms and conditions.
Direct and FFEL Stafford Loan Program. Undergraduate students may borrow
an aggregate of $2,625 for their first undergraduate academic year, $3,500 for
their second academic year and $5,500 for their third and fourth academic years
under the FFEL Stafford Loan or Direct Stafford Loan program. Graduate students
may borrow up to $8,500 each academic year. If the student qualifies for a
subsidized loan, based on financial need, the federal government pays interest
on the loan while the student is attending school and during certain grace and
deferment periods. If the student does not qualify for a subsidized 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 1997, The American College participated in both the FFEL and
Direct Loan programs. FFEL and Direct Stafford loans amounted to approximately
$4.7 million and $1.3 million, respectively, or approximately 15.8% and 4.4%,
respectively, of the Company's net revenues in fiscal 1997.
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 made with respect to the
relevant academic year, 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 $1.2
million and $26,000, respectively, or approximately 4.0% and 0.1%, respectively,
of the Company's net revenues in fiscal 1997.
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 1997, FWS funds amounted to approximately
$27,000 or 0.1% of the Company's net revenues.
AVAILABILITY OF LENDERS
Five lending institutions currently provide over 85% of all federally
guaranteed loans to students attending The American College. 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 The American
College is a participant in the Direct Loan program, students are able to obtain
loans directly from the federal government.
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One student loan guaranty agency currently guarantees over 85% of all
federally guaranteed student loans made to students enrolled at The American
College. The Company believes that other guaranty agencies would be willing to
guarantee loans to the College's students if that agency ceased guaranteeing
those loans or reduced the volume of those loans guaranteed.
FOREIGN SOURCES OF FINANCIAL AID
In fiscal 1997, 41 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 governments
providing loans to The American College's students were Iceland and Sweden and
the foreign governments awarding grants to The American College's students were
Saudi Arabia, Bahrain, Botswana, Libya and the United Arab Emirates.
OTHER FINANCIAL ASSISTANCE SOURCES
Students at The American College participate in state grant programs,
including most recently Georgia's HOPE Scholarship and Tuition Equalization
Grant programs. In fiscal 1997, $110,805 or 0.4% of the Company's net revenues
was derived from state grant programs. In addition, certain students attending
The American College 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
U.S. Department of Education (vocational rehabilitation funding). In fiscal
1997, financial assistance from such federal programs equaled less than 0.2% of
the Company's net revenues. The American College also provides institutional
scholarships to qualified students. In fiscal 1997, institutional scholarships
had a value equal to approximately $667,000 or 2.2% of the Company's net
revenues.
FEDERAL OVERSIGHT OF TITLE IV PROGRAMS
The substantial amount of federal funds disbursed through Title IV Programs
coupled with the large numbers of students and institutions participating in
them have led to instances of fraud, waste and abuse. As a result, the United
States Congress has required the U.S. Department of Education to increase its
level of regulatory oversight of schools to ensure that public funds are
properly used. Therefore, to obtain and maintain eligibility to participate in
the Title IV Programs described above, The American College must comply with the
rules and regulations set forth in the HEA and the Regulations thereunder. An
institution must obtain certification by the U.S. Department of Education 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 U.S.
Department of Education.
The HEA provides standards for institutional eligibility to participate in
the Title IV Programs. The standards are designed, among other things, to limit
dependence on Title IV Program funds, prevent schools with unacceptable student
loan default rates from participating in Title IV Programs and, in general,
require institutions to satisfy certain criteria intended to protect the
integrity of the federal programs, including criteria regarding administrative
capability and financial responsibility. A school that has been certified as
eligible to participate in the Title IV Programs continues to remain eligible
for the period of its certification, which is generally four years. A school
must apply for a renewal of its certification prior to its expiration, and must
demonstrate compliance with the eligibility requirements in its application.
Under certain circumstances, the U.S. Department of Education may
provisionally certify a school to participate in Title IV Programs. Provisional
certification may be imposed when a school undergoes a change in ownership
resulting in a change of control or when a school is reapplying for
certification, if the school (i) does not satisfy all the financial
responsibility standards, (ii) has a cohort default rate of 25% or more in any
single fiscal year of the three most recent federal fiscal years for which data
is available, and (iii) under other circumstances determined by the Secretary of
Education. Provisional certification may last no longer than three years.
Provisional certification differs from certification in that a provisionally
certified school may be terminated from eligibility to participate in the Title
IV Programs without the same opportunity for a
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<PAGE> 50
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 U.S. Department of Education may impose such
further conditions on a provisionally certified institution's eligibility to
continue participating in the Title IV Programs as the Department deems
necessary. In connection with the Company's acquisition of American European in
October 1996 which resulted in a change of control of The American College, the
Company has been provisionally certified to participate in Title IV Programs.
See "-- Change of Control."
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 U.S. Department of Education began to impose
sanctions on institutions with cohort default rates above certain levels, more
than 600 institutions have lost their eligibility to participate in some or all
Title IV Programs for this reason. However, many institutions, including The
American College, have responded by implementing aggressive student loan default
management programs aimed at reducing the likelihood of students failing to
repay their loans in a timely manner.
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 U.S. Department of Education determines that
such institution has lost its eligibility and for the two subsequent federal
fiscal years. In addition, an institution whose FFEL 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
U.S. Department of Education, the HEA provides a formal process for the review
and appeal of the accuracy of FFEL cohort default rates before the U.S.
Department of Education 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.
The American College has had FFEL cohort default rates of less than 25% for
three consecutive federal fiscal years. The American College had a published
1994 FFEL cohort default rate and a preliminary 1995 rate below 25%. For federal
fiscal 1993 and 1994, the FFEL cohort default rate for all borrowers at The
American College 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 The American College was 18.5%.
Preliminary cohort default rates are subject to revision by the U.S. Department
of Education based on information that schools and guaranty agencies identify
and submit to the U.S. Department of Education for review, in order to correct
any errors in the data previously provided to the U.S. Department of Education.
Any such adjustment will be made by the U.S. Department of Education at the time
that final rates are officially published. In connection with The American
College's preliminary default rate issued for the federal fiscal year 1994, the
College submitted a default rate of 14.5% and received a preliminary default
rate of 18.5%. However, after submitting corrections, The American College's
default rate was adjusted to a final rate of 14.0%. Accordingly, The American
College has submitted such corrections for its 1995 preliminary cohort default
rate and anticipates that the U.S. Department of Education will reduce the
College's cohort default rate from a preliminary rate of 18.5% to a final rate
of 15.8%, although there can be no assurance that the U.S. Department of
Education will agree with the corrections submitted by the College with regard
to its 1995 preliminary cohort default rate. The Company understands that the
U.S. Department of Education anticipates issuing official 1995 FFEL cohort
default rates in October 1997, and the Company expects preliminary 1996 FFEL
cohort default rates to be issued in early calendar year 1998.
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
49
<PAGE> 51
provisional status is under closer review by the U.S. Department of Education
and may be subject to summary adverse action if it commits violations of Title
IV Program requirements. To the Company's knowledge, the U.S. Department of
Education reviews an institution's compliance with the cohort default rate
thresholds described in this paragraph only when that school is otherwise
subject to a U.S. Department of Education certification review. The American
College 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 within
that state 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 U.S.
Department of Education 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 of which the College's campuses are members
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 U.S. Department of Education to undergo comprehensive periodic
reviews by the U.S. Department of Education to ascertain whether such
accrediting agency is adhering to required standards. No accrediting agency or
association may be approved by the U.S. Department of Education for a period of
more than five years. SACS, the College's primary accrediting agency, has been
reviewed by the U.S. Department of Education under the Program Integrity Triad
provisions and reapproved for continued recognition by the U.S. Department of
Education.
Part three of the Program Integrity Triad tightened the standards to be
applied by the U.S. Department of Education in evaluating the financial
responsibility and administrative capability of institutions participating in
Title IV Programs, and mandated that the U.S. Department of Education
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 U.S. Department of
Education by 1997 and every four years thereafter. Under these standards, The
American College would be evaluated by the U.S. Department of Education more
frequently than in the past. A denial of recertification would preclude the
College 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 U.S. Department of Education's quadrennial
recertification process and also annually as each institution submits its
audited financial statements to the U.S. Department of Education. One standard
requires each institution to demonstrate an acid test ratio (defined as the
ratio of cash, cash equivalents and current accounts receivable to current
liabilities) of at least 1:1 at the end of each fiscal year. Another standard
requires that each institution have a positive tangible net worth at the end of
each fiscal year. A third standard prohibits any institution from having a
cumulative net operating loss during its two most recent fiscal years that
results in a decline of more than 10% of that institution's tangible net worth
as measured at the beginning of that two-year period. An institution that is
determined by the U.S. Department of Education not to meet the standards of
financial responsibility on the basis of failing to meet one or more of the
specified numeric indicators is nonetheless entitled to participate in Title IV
Programs if it can demonstrate to the U.S. Department of Education that it is
financially responsible on an alternative basis. An institution may do so by
demonstrating, with the support of a statement from a certified public
accountant, proof of prior compliance with the numeric standards and other
information specified in the regulations and that its continued operation is not
jeopardized by its financial condition. Alternatively, an institution may post
surety either in an amount equal to one-half of the total Title IV Program funds
received by students enrolled at such institution during the prior year or in an
amount equal to 10% of such prior year's funds and agree to disburse those funds
only on an "as-earned" basis. The U.S. Department of Education has interpreted
this surety condition to require the posting of an irrevocable letter of credit
in favor of the U.S. Department of
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<PAGE> 52
Education. See "Risk Factors -- Potential Adverse Effects of Regulation;
Impairment of Federal Funding -- Financial Responsibility Standards."
Since The American College began participating in Title IV Programs, the
U.S. Department of Education has evaluated the financial condition of The
American College on a consolidated basis at the level of the Company, and prior
to its acquisition in October 1996, at the level of American European. Based on
the consolidated financial statements of the Company as of May 31, 1997, The
American College does not satisfy either the acid test ratio or the tangible net
worth test. As of May 31, 1997, the Company's acid test ratio was .086 and the
Company had a negative tangible net worth of approximately $33.6 million.
Notwithstanding such non-compliance, the Company has maintained The American
College's eligibility to continue participating in the Title IV Programs by
posting an irrevocable letter of credit in the amount of $3.75 million in favor
of the U.S. Department of Education, which amount is approximately 50% of the
Company's 1996 Title IV Program funds received by students enrolled at The
American College. The letter of credit was posted on March 19, 1997 and will
expire on March 31, 1998. Because the size of the letter of credit is based on
the amount of Title IV Program funds received by The American College's
students, to the extent that such funds have increased during 1997, the Company
may be required to increase the letter of credit on or around March 19, 1997,
the date the U.S. Department of Education re-evaluates the College's compliance
with the financial responsibility standards.
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 U.S. Department of Education equal to
25% of the Title IV Program refunds that the institution was required to make
for the previous year. During the past two years the College has made all Title
IV Program refunds on a timely basis.
In 1996, the U.S. Department of Education proposed regulations that would
establish new measures of financial responsibility. The Department has extended
the period for comment on the proposed regulations three times because of
concerns expressed by members of the higher education community about the
proposed standards. It is not possible to predict the outcome of this rule
making proceeding at this time. See "Risk Factors -- Potential Adverse Effects
of Regulation; Impairment of Federal Funding -- Financial Responsibility
Standards."
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 U.S. Department of
Education 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 U.S. Department of Education and are subject to appeal to the Secretary of
Education, prior to any sanction taking effect. Thereafter, judicial review may
be sought in the federal courts pursuant to the federal Administrative
Procedures Act.
Restrictions on Operating Additional Campuses. The HEA generally requires
that certain institutions, including proprietary schools, be in full operation
for two years before applying to participate in Title IV Programs. However,
under the HEA and the Regulations, an institution that is certified to
participate in Title IV Programs may establish an additional location within a
state or selected territory of the United States (as
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<PAGE> 53
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 U.S.
Department of Education 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 The American College 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, The American
College 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 The American
College's campuses. If a corporation is not publicly traded but qualifies as a
closely held corporation under the laws of its state of incorporation, such as
the Company, the Regulations provide that a change in ownership resulting in a
change of control would occur (i) if any person acquires ownership or control of
more than 50% of such corporation's total outstanding voting stock, or (ii) if a
person having ownership or control of more than 50% of such corporation's total
outstanding stock ceases to hold or control more than 50% of such corporation's
total outstanding stock. If the Offering were determined to constitute a change
in ownership resulting in a change of control, the Company would be required to
reestablish the state authorization and accreditation of The American College
and apply to the U.S. Department of Education to reestablish the certification
of The American College to participate in Title IV Programs. See "Risk
Factors -- Potential Adverse Effects of Regulation; Impairment of Federal
Funding -- Regulatory Consequences of a Change in Ownership or Control."
In connection with the Company's acquisition of American European in
October 1996, The American College was required to be recertified by the U.S.
Department of Education as well as obtain the reaccreditation of SACS. In
addition, The American College's campus in Los Angeles was required to be
reauthorized by the State of California. The U.S. Department of Education has
granted The American College 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, The American College's Title IV
Program funding was not suspended during the U.S. Department of Education's
review of its recertification application. On August 5, 1996 the change of
control was approved by SACS and following a Substantive Change Visit to The
American College 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 The American College with no recommendations. On August
14, 1996, The American College's Los Angeles campus was reapproved by the State
of California's Council for Private Postsecondary and Vocational Education (the
"California Council").
The U.S. Department of Education's regulations provide that after a Company
becomes publicly-traded, a change of control occurs when a report on Form 8-K is
required to be filed with the Commission disclosing a change of control. Most
states and accrediting agencies have similar requirements, but they do not
provide a uniform definition of change of control. If the Company were to lose
its eligibility to participate in Title IV Programs for a significant period of
time pending an application to regain eligibility, or if it were determined not
to be eligible, its operations would be materially adversely effected. The
possible loss of Title IV eligibility resulting from a change of control may
also discourage or impede a tender offer, proxy contest or other similar
transaction involving control of the Company. See "Risk Factors -- Anti-Takeover
Provisions."
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The "85/15 Rule." Under a provision of the HEA commonly referred to as the
"85/15 Rule," a proprietary institution, such as The American College, 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, The American College has not derived more than 27% of its revenues from
Title IV Programs for any fiscal year, and during fiscal 1997, approximately 27%
of The American College's revenues were derived from Title IV Programs. For
fiscal 1997, the Company's independent auditors examined management's assertion
that The American College complied with these requirements and opined that such
assertion was fairly stated in all material respects. The Company regularly
monitors compliance with this requirement in order to minimize the risk that The
American College would derive more than 85% of its revenues from Title IV
Programs for any fiscal year. If The American College appears likely to approach
the 85% threshold, the Company would evaluate the appropriateness of making
changes in student funding and financing to ensure compliance. See "Risk
Factors -- Potential Adverse Effects of Regulation; Impairment of Federal
Funding -- General."
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
The American College. The College has obtained approval for all locations
required to be approved by the Regulations. Should the U.S. Department of
Education change its regulations with respect to this approval process, or delay
approvals of new locations beyond the current approval time rate, the Company's
business strategy may be impacted negatively.
Restrictions on Payment of Bonuses, Commissions or Other
Incentives. Schools participating in Title IV Programs are prohibited from
providing any commission, bonus or other incentive payment based directly or
indirectly on success in securing enrollments or financial aid to persons
engaged in any student recruitment, admission or financial aid awarding activity
(the "Incentive Compensation Rule"). The U.S. Department of Education has not
provided specific regulations with respect to this requirement. If the U.S.
Department of Education were to determine that The American College's methods of
compensation do not comply with the Incentive Compensation Rule, the College
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 The
American College's compensation policies do not violate the Incentive
Compensation Rule.
State Authorization
The American College'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 The American
College's campus located in London is operated under a corporation whose parent
corporation is organized under the laws of the District of Columbia, the London
campus is authorized to offer education programs and grant degrees or diplomas
by 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 U.S. Department of Education.
The Company believes that the College's campuses in Atlanta, Los Angeles and
London are in substantial compliance with state authorizing and licensure laws.
See
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"Risk Factors -- Potential Adverse Effects of Regulation; Impairment of Federal
Funding -- State Authorization."
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, 1997, the
College'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
The American College'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 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 The American
College'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, The American College's campus in Atlanta was
exempt from the regulatory oversight of the State of Georgia. The American
College recently 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 the College are reviewed by the Georgia Non-public
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 The American College satisfied its
requirements and issued a certificate of authorization for the period of May 1,
1997 through April 30, 1998. The College must seek renewal of this authorization
on a yearly basis. Prior to renewal of the authorization, an NPEC representative
will revisit The American College to ensure the College remains in compliance
with NPEC standards.
District of Columbia. The American College's campus in London is 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 The American College's campus in
London in November 1990 and granted the College a three year provisional license
which, due to the Licensure Commission's inability to schedule a second site
visit for permanent licensing, has been renewed through September 1998. The
Licensure Commission currently has a site visit planned for the Fall of 1997 at
which time the Licensure Commission is expected to review the College's
operations. If the Licensure Commission finds the College to be in full
compliance with its licensing requirements, the College will be granted a
permanent license which will remain in effect indefinitely, subject to periodic
review under various
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circumstances including a change in ownership and changes in accreditation
status, location, and degrees or certificates offered. The American College
anticipates being granted a permanent license in the Fall of 1997.
DUBAI CAMPUS MANAGEMENT AGREEMENT
On October 1, 1995, AEMEC entered into an Agreement with Middle East
Colleges, Ltd. ("MEC") pursuant to which AEMEC and MEC established the College's
campus in Dubai. Pursuant to the terms of the Agreement, MEC (i) provided the
cash capital contributions for the physical premises and other items necessary
for the establishment of the College's campus in Dubai, (ii) arranged for all
required government licenses and approvals and (iii) secured a leasehold of the
physical premises and facilities used by the campus. Under the terms of the
Agreement, MEC is also required to provide funds to operate and maintain the
campus and AEMEC is to have exclusive control of the operations and management
of the campus's business and the administration of its academic programs. In
return for its services, AEMEC is entitled to 35% of net operating cash flow.
However, because the Company's membership interest in AEMEC is 85%, the Company
receives approximately 30% of net operating cash flow. The Agreement has a term
of 20 years, is renewable for successive five year terms and may be terminated
by either party upon 90 days written notice for "cause," as such term is defined
in the Agreement.
FACILITIES
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, 1997:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE EXPIRATION
- -------- -------------- ----------
<S> <C> <C>
Atlanta, Georgia
-- The American College 60,800 January 31, 2009
-- Headquarters 18,400 December 31, 1999
Los Angeles, California 31,800 From September 30, 1998 to May 31,
1999
London, England 46,000 From March 1, 1998 to November 27,
2005
Dubai, United Arab Emirates 34,300 Leased by MEC
</TABLE>
Typically, the College'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. Annual rent for
school-sponsored housing arrangements range from approximately $117,000 to
$822,000, depending on the number of units and local market conditions.
The Company leases approximately 18,400 square feet of office space for its
headquarters in Atlanta, Georgia at a rate of $27,600 per month. The
headquarters lease expires on December 31, 1999.
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, the College may be required to acquire additional
space. The Company believes that it can acquire additional capacity on
acceptable terms.
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EMPLOYEES
As of July 15, 1997, the Company employed 176 persons on a full-time basis
and 158 persons on a part-time basis, including 52 full-time and 110 part-time
faculty members. No employee is party to any collective bargaining arrangement
and the Company believes its relationship with employees is good.
LEGAL PROCEEDINGS
The Company is subject to litigation in the ordinary course of its
business. While there can be no assurance as to the ultimate outcome of any
litigation involving the Company, management does not believe any pending legal
proceeding will result in a judgment or settlement that will have a material
adverse effect on the Company's financial position, results of operations or
cash flow.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning the Company's
executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Steve Bostic........................... 54 Chairman of the Board and Chief Executive
Officer
Stephen G. Franklin, Sr................ 50 President, Chief Academic Officer and
Director
Paul D. Beckham........................ 53 Director
Fred C. Davison........................ 67 Director
Gaylen D. Kemp......................... 44 Director
Donald J. Blankers..................... 58 Chief Financial Officer
Barbara S. Butterfield................. 56 Senior Vice President, Human Resources
Douglas C. Chait....................... 33 Vice President, Corporate Development and
Secretary
Eric R. Fliegel........................ 35 Chief Information Officer and General
Manager, ITI Program
Phillip J. Markert..................... 48 President, American European Corporation
</TABLE>
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 The American College's Governing Board, and since June
1997, Mr. Bostic has served as the President of The American College. 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 University 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, Dr. Franklin has also served on The
American College'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.
Paul D. Beckham has served as a Director of the Company since June 1997.
Mr. Beckham currently serves as a consultant to Wireless Communications, Inc.
and since 1993 has been the co-owner of Hope-Beckham, Inc., a sports marketing
firm. From 1970 to 1993, Mr. Beckham served in various capacities with
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<PAGE> 59
Turner Broadcasting System, Inc., including most recently, President of Turner
Cable Sales, a wholly-owned subsidiary of Turner Broadcasting System, Inc.
Fred C. Davison has served as a Director of the Company since June 1997 and
has served on The American College's Governing Board since October 1996. Dr.
Davidson has a Ph.D. in biochemistry and pathology and has served as the
President and Chief Executive Officer of the National Science Foundation,
Augusta, Georgia since 1988. From July 1967 through June 1986, Dr. Davison
served as the President of the University of Georgia. Dr. Davison is currently a
member of the Board of Trustees of Presbyterian College as well as a member of
the Board of Directors of First Union Bank of Georgia, the Augusta Chamber of
Commerce and the Business Higher Education Forum.
Gaylen D. Kemp has served as a Director of the Company since June 1997 and
has served on The American College's Governing Board since October 1996. Ms.
Kemp has been Of Counsel in the Atlanta, Georgia office of the law firm of Dow,
Lohnes & Albertson since January 1996. From 1987 to December 1995, Ms. Kemp was
a partner in the law office of Dow, Lohnes & Albertson practicing with a focus
on mergers and divestitures, financial transactions and public and private
securities offerings. Ms. Kemp has been a member of the Executive Committee of
the Corporate and Banking Law Section of the State Bar of Georgia since 1989 and
served as Chairperson of the Section from 1993 to 1994. Ms. Kemp is currently a
member of the Executive Committee of the Board of Directors of the Atlanta Legal
Aid Society of which she has been a member since 1989.
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 Officer 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,
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 Graduate
Business School at 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 and as General Manager, ITI Program since June 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 Roberto C.
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.
Phillip J. Markert has served as the President of American European since
1979.
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<PAGE> 60
CERTAIN SIGNIFICANT EMPLOYEES OF THE COMPANY AND THE AMERICAN COLLEGE
Set forth below is information with respect to certain other significant
employees of the Company and The American College:
Valarie Bridges, age 36, is the Vice President of Institutional
Effectiveness, a position she has held since March 1997. Prior to joining the
Company, from January 1996 to March 1997 Ms. Bridges worked as an independent
management consultant, and from 1995 to 1996, Ms. Bridges worked with The
Atlanta Consulting Group where she advised and educated executives, quality
councils and process improvement teams on cultural transformation and developed
a business process reengineering methodology. From 1990 to 1995, Ms. Bridges
served in various capacities with Confederation Life Insurance Company,
including most recently, Manager, Operations Support.
Cindy Crain, age 46, has served as the Vice President, Corporate Planning
since December 1996. Prior to joining the Company, Ms. Crain served as the
Director of Admissions for The American College in London, Ltd., U.S. from
February through October 1996 and the Director of College Relations for The
American College in Atlanta from 1995 to 1996 where she primarily handled alumni
relations. From 1992 to 1995, Ms. Crain served in various positions at the
University of Georgia's Terry College of Business including Director of College
Relations and Director of Development.
Lance Edward De Masi, age 47, is the Interim President of the College's
Dubai campus, a position he has held since June 1, 1997. From March 1997 to June
1997, Mr. De Masi served as the Academic Dean of the College's campus in Dubai.
Prior to joining the College, Mr. De Masi served in various capacities with BBDO
Worldwide, an international advertising agency, including most recently
Executive Vice President and Chief Operating Officer from June 1991 to March
1997.
Joseph H. Houghton, age 47, served as Campus President of The American
College's campus in London from 1981 to 1988, as the Dean and Chief Academic
Officer of the London campus from 1989 to 1995 and, since 1995, has resumed the
position of Campus President of the College's campus in London.
Rafael Lago, age 48, is the President of the College's Atlanta campus, a
position he has held since 1982. Mr. Lago has also served as the Chancellor of
the College since 1988.
Kevin L. Martin, age 41, is the President of the College's Los Angeles
campus, a position he has held since July 1996. From June 1993 to July 1996, Mr.
Martin served as the Vice President, Director of Admissions for the College's
London campus, and from May 1990 to June 1993, Mr. Martin served as the Director
of Admissions at the College's campus in Los Angeles.
BOARD OF DIRECTORS
The number of directors of the Company is currently fixed at five. The
Company's By-Laws provide that the Board of Directors shall consist of not less
than one person, the precise number to be determined from time to time by the
shareholders of the Company. The Company intends to enlarge the Board by one or
more independent directors following the Offering. The directors are elected
annually by the shareholders of the Company and serve for a term of one year, or
until their earlier resignation, removal from office or death. In addition,
under the terms of the Stratford Subordinate Loan Agreement, so long as the
Subordinate Debt remains outstanding or the holders of the warrants issued to
Stratford and GMM hold more than 5% of the Company's Common Stock, Stratford is
entitled to elect one person to the Company's Board of Directors. Also, pursuant
to the License Agreement with ITI, management is required to propose Daniel
Potter, the Chairman of ITI, as a nominee for election to the Company's Board of
Directors upon the request of ITI. The Company anticipates that the number of
directors will be increased once ITI makes such request. The individuals
currently serving on the Board of Directors will continue to serve until
thereafter reelected or replaced at the first annual meeting of shareholders of
the Company, or until their earlier resignation, removal from office or death.
The executive officers of the Company serve at the discretion of the Board of
Directors.
The Board of Directors has established the Compensation Committee and the
Audit Committee. The Compensation Committee, which is composed of Gaylen D. Kemp
and Paul D. Beckham, reviews and makes
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<PAGE> 61
recommendations to the Board of Directors regarding salaries, compensation and
benefits of executive officers and key employees of the Company. In addition,
the Compensation Committee administers the Company's 1997 Incentive Plan. The
Audit Committee is composed of Paul D. Beckham and Fred C. Davison. Among other
duties, the Audit Committee reviews the internal and external financial
reporting of the Company, reviews the scope of the independent audit and
considers comments by the auditors regarding internal controls and accounting
procedures and management's response to these comments. The Board of Directors
does not have a nominating committee.
EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
year ended May 31, 1997 concerning compensation paid or accrued by the Company
to or on behalf of the Company's Chief Executive Officer and the other executive
officers of the Company whose total annual salary and bonus exceeded $100,000
during the year ended May 31, 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1)
---------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------- -------- ----- ------------
<S> <C> <C> <C>
Steve Bostic................................................ $166,667 -- --
Chairman and Chief Executive Officer
Phillip J. Markert.......................................... $225,895 -- $7,950(2)
President, American European
</TABLE>
- ---------------
(1) For the period from July 1, 1996 to May 31, 1997.
(2) Includes $4,200 representing matching contributions paid by the Company
under The American College 401(k) Profit Sharing Plan and $3,750
representing premiums paid by the Company for term life insurance.
No stock options, stock appreciation rights, shares of restricted stock or
other forms of equity-based compensation have been granted as compensation to
the Named Executive Officers.
EMPLOYMENT AGREEMENTS
The Company and Stephen G. Franklin, Sr. have entered into an Employment
Agreement which provides that Dr. Franklin will serve as the President and Chief
Academic Officer of the Company and will be appointed to serve as a member of
the Company's Board of Directors. The Employment Agreement has a five year term
and provides for a base annual salary of $165,000. Under the terms of the
Employment Agreement, Dr. Franklin's salary for successive years may be
increased at the discretion of the Company, provided that each year Dr.
Franklin's salary must be increased by an amount not less than the percentage
increase in the consumer price index. Dr. Franklin is further entitled to
receive certain performance bonuses based on the performance of The American
College's business schools, the Company's financial performance and Dr.
Franklin's achievement of certain business objectives. The Employment Agreement
also provides that Dr. Franklin be granted an option to purchase 105,000 shares
of the Company's Class A Common Stock to vest in equal increments over a period
of five years. In addition, the Employment Agreement provides that Dr. Franklin
is to be granted options to purchase up to an additional 35,000 shares of Class
A Common Stock, the vesting of which shall be contingent on the Company's
obtaining certain financial goals.
Upon termination of the Employment Agreement (other than voluntarily by Dr.
Franklin, or by the Company for cause or upon the death, incapacity or illness
of Dr. Franklin), Dr. Franklin is entitled to continue to receive his base
salary until the earlier of (i) twelve months after the date of termination or
the second anniversary of the date of the Employment Agreement, (ii) the date of
Dr. Franklin's death or (iii) the date that Dr. Franklin breaches any
post-engagement covenants as set forth in the Employment Agreement.
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<PAGE> 62
American European and Phillip J. Markert have entered into an Employment
Agreement which provides that Mr. Markert will serve as the President of
American European. Mr. Markert's Employment Agreement has a five year term and
provides for an annual base salary of $200,000. Upon termination of his
Employment Agreement (other than voluntarily by Mr. Markert, or by the Company
for cause or upon the death, incapacity or illness of Mr. Markert), Mr. Markert
is entitled to continue to receive his salary until the earlier of (i) 24
months, (ii) the date of Mr. Markert's death or (iii) the date that Mr. Markert
breaches any post-engagement covenants as set forth in the Employment Agreement.
Each Employment Agreement contains additional provisions restricting Dr.
Franklin's and Mr. Markert's ability to compete with the Company and solicit its
employees. The Employment Agreements further obligate Dr. Franklin and Mr.
Markert to protect the confidentiality of the Company's information following
termination of their employment.
1997 INCENTIVE PLAN
On March 1, 1997, the Company's Board of Directors and shareholders adopted
the 1997 Incentive Plan, as amended (the "Incentive Plan"), designed to enable
the Company to attract and retain employees and directors who contribute to the
Company's success and to enable such employees and directors to participate in
the long-term success and growth of the Company through an equity interest in
the Company. The Incentive Plan provides for awards of up to an aggregate of
829,388 shares of Class A Common Stock which may be represented by (i) incentive
or nonqualified stock options, (ii) stock appreciation rights ("SARs"), (iii)
restricted stock or (iv) performance awards of Class A Common Stock or cash. The
Incentive Plan may be administered by the Board of Directors or the Compensation
Committee of the Board of Directors (the "Committee"). Incentive stock options
granted pursuant to the Incentive Plan are nontransferable and have an exercise
price of not less than 100% (110% in the case of a holder of 10% or more of the
Common Stock) of the fair market value of the stock on the date of the grant and
the options are exercisable by the holder thereof in full at any time prior to
their expiration in accordance with the terms of the Incentive Plan. Incentive
stock options granted pursuant to the Incentive Plan will expire on or before
(1) the date which is the tenth anniversary of the date the option is granted,
or (2) the date which is the fifth anniversary of the date the option is granted
in the event that the option is granted to an individual who owns more than 10%
of the total combined voting power of all classes of stock of the Company or any
subsidiary of the Company.
SARs may be granted under the Incentive Plan in conjunction with incentive
or nonqualified stock options or in tandem with nonqualified stock options
granted under the Incentive Plan, or may be granted alone. SARs granted in
conjunction or in tandem with stock options generally are exercisable only at
such time and to the extent that the stock options to which they relate are
exercisable. Upon exercise of an SAR, a participant shall be entitled to receive
an amount in cash or shares of Class A Common Stock equal in value to the excess
of the fair market value of one share of Class A Common Stock over the exercise
price per share specified in the related option or SAR, multiplied by the number
of shares in respect of which the SAR is exercised.
The Committee or Board of Directors may condition the grant of restricted
shares of Class A Common Stock upon the attainment of specified performance
goals. Recipients of restricted stock have the right to vote the shares and
receive dividends on such shares, but are not permitted to transfer such shares
until termination of all restrictions or six months after the date of the award,
or such longer period as may be set by the Board of Directors or the Committee.
The Incentive Plan provides that in the event of a change in control of the
Company (as defined in the Incentive Plan) any stock options or SARs awarded
under the Incentive Plan which were not previously exercisable and vested, but
which have been outstanding for at least six months, shall immediately fully
vest and become exercisable and any restrictions applicable to restricted stock
shall lapse. As of August 1, 1997, options to purchase a total of 410,550 shares
of Class A Common Stock had been granted at an exercise price of $0.77 per
share.
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<PAGE> 63
401(K) PROFIT SHARING PLAN
The Company maintains The American College 401(k) Profit Sharing Plan (the
"401(k) Plan") which is intended to be a tax-qualified defined contribution plan
under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"). In general, all employees of the Company who have completed one year of
service (six months for administrative personnel) and have attained age 21 are
eligible to participate in the 401(k) Plan. The 401(k) Plan includes a salary
deferral arrangement pursuant to which participants may contribute, subject to
certain Code limitations, a minimum of 3.0% and a maximum of 15% of their salary
on a pre-tax basis (up to $9,500 per year). Subject to certain Code limitations,
the Company may make both matching and additional contributions at the
discretion of the Board of Directors of the Company each year. The Company
presently matches 35% of the amount contributed by an employee up to 6.0% of the
employee's salary, but the Company's policy regarding matching contributions may
be changed annually in the discretion of the Board of Directors. A separate
account is maintained for each participant in the 401(k) Plan. The portion of a
participant's account attributable to his or her own contributions is 100%
vested. Distributions from the 401(k) Plan may be made in the form of a lump-sum
cash payment or in installment payments.
COMPENSATION OF DIRECTORS
Non-management Directors of the Company receive an annual retainer of
$5,000 and are entitled to receive awards under the Incentive Plan and,
effective as of the closing of this Offering, each of the non-employee Directors
of the Company will be granted an option to purchase a total of 5,000 shares of
Class A Common Stock. Directors are not separately compensated for serving on
Committees of the Board of Directors and Directors who are also employees of the
Company receive no compensation for serving on the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of Gaylen D. Kemp and Paul D.
Beckham. During the year ended May 31, 1997, the Company did not have a
Compensation Committee. Steve Bostic, the Chairman, Chief Executive Officer and
formerly the sole director of the Company, made all decisions concerning
executive compensation during the year ended May 31, 1997.
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<PAGE> 64
CERTAIN TRANSACTIONS
In connection with the College Acquisition, on October 8, 1996, the Company
paid Phillip J. Markert, a shareholder of the Company and the President of
American European, $1,369,507 for his shares of capital stock of American
European and issued 210,000 shares of Class A Common Stock as consideration for
Mr. Markert's capital stock of American College in London, Ltd., U.S. The
Company and Mr. Markert have entered into an anti-dilution rights agreement
pursuant to which the number of such shares owned by Mr. Markert is subject to
adjustment in the event that the Company grants rights or options (other than
with respect to the Company's Incentive Plan and the warrants owned by Stratford
and GMM) or issues or sells shares of Class A Common Stock for no consideration
or at a price below certain specified levels. Also in connection with the
College Acquisition, on October 8, 1996, American European entered into a
Consulting Agreement (the "Consulting Agreement") with The Phillip J. Markert
Consulting Group, Inc. ("Consultant") pursuant to which Consultant has agreed to
provide American European (i) consultation and opinions as to operational and
procedural matters with respect to the business in general and American
European's ongoing operation in particular; (ii) opinions regarding long-term
and strategic planning and direction for American European; and (iii) financial
management services. The Consulting Agreement has a five year term and provides
for a base fee of $28,000 per year. Upon termination of Consultant's services
(other than voluntarily by Consultant, or by the Company for cause or upon the
death, incapacity or illness of Mr. Markert, as the Service Provider, as such
term is defined in the Consulting Agreement), Consultant is entitled to continue
to receive its base fee until the earlier of (i) 24 months after such
termination, (ii) the date of the Service Provider's death or (iii) the date
that Consultant breaches any post-engagement covenants as set forth in the
Consulting Agreement. As of May 31, 1997, the Company had paid Consultant a
total of $16,333 for services rendered from October 8, 1996 through May 31,
1997. Mr. Markert, the President of American European, owns and controls
Consultant.
In connection with the acquisition of EduTrek Systems and in exchange for
their shares of EduTrek Systems capital stock, on October 8, 1996 the Company
issued (i) 42,000 shares of Class A Common Stock to Douglas C. Chait, the
Company's Vice President, Corporate Development and Secretary; (ii) 14,007
shares of Class A Common Stock to Donald J. Blankers, the Company's Chief
Financial Officer; (iii) 696,150 shares of Class B Common Stock to Steve Bostic,
the Company's Chairman and Chief Executive Officer; (iv) 696,150 shares of Class
B Common Stock to Mr. Bostic's wife; and (v) 602,700 shares of Class B Common
Stock to the Bostic Family Limited Partnership, of which Mr. Bostic is the
General Partner.
On October 8, 1996, Steve Bostic, the Chairman and Chief Executive Officer
of the Company, loaned $205,041 to the Company on an interest-free basis,
payable on demand. The Company utilized such funds to finance a portion of the
College Acquisition. The Company repaid this loan in full on July 18, 1997.
Mr. Bostic and Stephen G. Franklin, Sr., the President, Chief Academic
Officer and a Director of the Company, are both members of, and serve as
independent sales agents for, EduTrek Partners, LLC ("EduTrek Partners"). The
Company has engaged EduTrek Partners to assist it in marketing and selling
corporate education programs. The Company has agreed to pay EduTrek Partners or
the independent sales agents employed by EduTrek Partners, a commission ranging
from 10% to 30% of net revenues derived from corporate education program
accounts secured by EduTrek Partners or the independent sales agents on behalf
of the Company. On May 15, 1997, EduTrek Partners loaned $207,000 to the Company
on an interest free basis, payable on demand. The Company utilized such funds
for general corporate purposes. The Company intends to repay this loan in full
prior to the closing of the Offering.
The Robinson-Humphrey Company, Inc. ("Robinson-Humphrey"), one of the
Representatives of the Underwriters of this Offering, acted as the financial
advisor for the Company in connection with the College Acquisition. As
compensation for such financial advisory services and in lieu of
Robinson-Humphrey's $500,000 advisory fee, the Company issued 350,000 shares of
Class A Common Stock to Robinson-Humphrey on October 8, 1996. Robinson-Humphrey
is a subsidiary of Smith Barney Inc., the other Representative of the
Underwriters of this Offering.
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<PAGE> 65
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of shares of the Company's Class A Common Stock and Class B Common
Stock as of August 1, 1997, and as adjusted to reflect the sale of the shares
offered hereby, with respect to (i) the Selling Shareholder; (ii) each director
of the Company; (iii) each of the Named Executive Officers; (iv) each person
known by the Company to own beneficially more than 5.0% of the outstanding
shares of the Common Stock; and (v) all directors and executive officers of the
Company as a group. Unless otherwise indicated, each shareholder has sole voting
and investment power with respect to the indicated shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING AFTER THE OFFERING
-------------------------------- --------------------------------
CLASS A CLASS B CLASS A SHARES CLASS A CLASS B
COMMON COMMON TO BE SOLD IN COMMON COMMON
NAME OF BENEFICIAL OWNER(1) STOCK STOCK PERCENT(2) THE OFFERING STOCK STOCK PERCENT(2)
- --------------------------- ------- --------- ---------- -------------- ------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Steve Bostic(3)................... -- 6,335,000 87.3% -- -- 6,335,000 66.0%
Stratford Capital Partners,
L.P.(4)......................... 444,318 -- 5.8 -- 444,318 -- 4.4
The Robinson-Humphrey
Company, Inc.(5)................ 350,000 -- 4.8 -- 350,000 -- 3.6
Atlantic Equity Corporation(6).... 257,110 -- 3.5 257,110 -- -- --
Phillip J. Markert(7)............. 210,000 -- 2.9 -- 210,000 -- 2.2
GMM Investors SBIC, L.P.(8)....... 177,723 -- 2.4 -- 177,723 -- 1.8
Stephen G. Franklin, Sr.(9)....... 21,000 -- * -- 21,000 -- *
Paul D. Beckham................... -- -- -- -- -- -- --
Fred C. Davison................... -- -- -- -- -- -- --
Gaylen D. Kemp.................... -- -- -- -- -- -- --
All executive officers and
directors as a group (10
persons)(10).................... 292,607 6,335,000 91.0% -- 292,607 6,335,000 68.8%
</TABLE>
- ---------------
* Less than 1%.
(1) Pursuant to the rules of the Commission, certain shares of the Company's
Class A Common Stock or Class B Common Stock that a beneficial owner has
the right to acquire within 60 days pursuant to the exercise of stock
options or warrants are deemed to be outstanding for the purpose of
computing the percentage ownership of such owner but are not deemed
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) The percentages are based upon the aggregate number of shares of Class A
and Class B Common Stock issued and outstanding as of August 1, 1997 and as
adjusted for the Offering which amounts were 922,110 and 3,265,000 shares
of Class A Common Stock as of August 1, 1997 and as adjusted for the
Offering, respectively, and 6,335,000 shares of Class B Common Stock as of
August 1, 1997 and as adjusted for the Offering.
(3) Includes 2,866,150 shares of Class B Common Stock owned by Mr. Bostic's
wife and 602,700 shares of Class B Common Stock owned by the Bostic Family
Limited Partnership over which Mr. Bostic exercises voting and investment
power. The beneficial ownership indicated represents 100% of the Class B
Common Stock prior to and after the Offering. Mr. Bostic's business address
is 3340 Peachtree Road, Suite 2000, Atlanta, Georgia 30326.
(4) Represents shares issuable pursuant to presently exercisable warrants. The
beneficial ownership indicated represents 32.5% and 12.0% of the Class A
Common Stock prior to the Offering and after the Offering, respectively.
The business address of Stratford is 200 Crescent Court, 16th Floor,
Dallas, Texas 75201.
(5) The Company and Robinson-Humphrey have entered into an anti-dilution rights
agreement pursuant to which the number of shares owned by Robinson-Humphrey
is subject to adjustment in the event that the Company grants rights or
options (other than with respect to the Company's Incentive Plan and the
warrants owned by Stratford and GMM) or issues or sells shares of Class A
Common Stock for no consideration or at a price below certain specified
levels. The beneficial ownership indicated represents 38.0% and 10.7% of
the Class A Common Stock prior to the Offering and after the Offering,
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<PAGE> 66
respectively. The business address of Robinson-Humphrey is 3333 Peachtree
Road, Northeast, Atlanta, Georgia 30326.
(6) Atlantic Equity Corporation is a wholly-owned subsidiary of NationsBank
Corporation. The beneficial ownership indicated represents 27.9% and 0% of
the Class A Common Stock prior to the Offering and after the Offering,
respectively. The business address of Atlantic Equity Corporation is
NationsBank Corporate Center, 100 North Tryon Street, NC1-007-23-01,
Charlotte, North Carolina 28255.
(7) The Company and Mr. Markert have entered into an anti-dilution rights
agreement pursuant to which the number of shares owned by Mr. Markert is
subject to adjustment in the event that the Company grants rights or
options (other than with respect to the Company's Incentive Plan and the
warrants owned by Stratford and GMM) or issues or sells shares of Class A
Common Stock for no consideration or at a price below certain specified
levels. The beneficial ownership indicated represents 22.8% and 6.4% of the
Class A Common Stock prior to the Offering and after the Offering,
respectively. Mr. Markert's business address is 3340 Peachtree Road, Suite
2000, Atlanta, Georgia 30326.
(8) Represents shares issuable pursuant to presently exercisable warrants. The
beneficial ownership indicated represents 16.2% and 5.2% of the Class A
Common Stock prior to the Offering and after the Offering, respectively.
The business address of GMM is 70 Walnut Street, Wellesley, Massachusetts
02181.
(9) Represents shares issuable pursuant to stock options which are, by their
terms, exercisable within 60 days. The beneficial ownership indicated
represents 2.2% and 0.6% of the Class A Common Stock prior to the Offering
and after the Offering, respectively.
(10) The beneficial ownership indicated represents 100% of the Class B Common
Stock prior to and after the Offering and represents 30.8% and 8.9% of the
Class A Common Stock prior to the Offering and after the Offering,
respectively. Includes outstanding options to purchase 26,600 shares of
Class A Common Stock held by certain executive officers and directors which
are, by their terms, exercisable within 60 days.
65
<PAGE> 67
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue up to 40,000,000 shares of Class A
Common Stock and 10,000,000 shares of Class B Common Stock, and up to 5,000,000
shares of preferred stock. As of the date hereof, 922,110 shares of Class A
Common Stock and 6,335,000 shares of Class B Common Stock are issued and
outstanding, held by ten shareholders of record. No shares of preferred stock
have been issued.
CLASS A AND CLASS B COMMON STOCK
Voting. Holders of Class A Common Stock are entitled to one vote per
share. Holders of Class B Common Stock are entitled to ten votes per share. All
actions submitted to a vote of shareholders are voted on by holders of Class A
and Class B Common Stock voting together as a single class, except as otherwise
set forth below or provided by law.
Conversion. Class A Common Stock has no conversion rights. A holder of
Class B Common Stock may convert Class B Common Stock into Class A Common Stock,
in whole or in part, at any time and from time to time on the basis of one share
of Class A Common Stock for each share of Class B Common Stock. If at any time
any shares of Class B Common Stock are transferred of record or beneficially to
any person or entity other than Steve Bostic, Alice Jane Bostic, the Bostic
Family Limited Partnership or a Permitted Transferee, such shares shall
automatically be converted into an equal number of shares of Class A Common
Stock.
Dividends. 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 from funds legally available therefor. In the case of any dividend paid
in stock, holders of Class A Common Stock are entitled to receive the same
percentage dividend (payable in shares of Class A Common Stock) as the holders
of Class B Common Stock receive (payable in shares of Class B Common Stock).
Liquidation. Holders of Class A and Class B Common Stock share with each
other on a ratable basis as a single class in the net assets of the Company
available for distribution in respect of Class A and Class B Common Stock in the
event of liquidation.
Limitation on Issuances of Additional Shares of Class. The Articles of
Incorporation prohibit the Company from issuing additional Class B Common Stock
to any person or entity other than Steve Bostic, Alice Jane Bostic, the Bostic
Family Limited Partnership or a Permitted Transferee.
Limitation on Changes to Relative Rights of Shareholders. The Articles of
Incorporation limit the Company's authority to alter or change the relative
rights, preferences, restrictions, dividend rights, voting powers and other
powers given to the holders of the Class A and Class B Common Stock pursuant to
the Articles of Incorporation. Any such alteration or change may be made only
with the approval of sixty-six and two-thirds percent (66 2/3%) of the votes
entitled to be voted by the holders of each class of stock to be adversely
affected thereby, voting separately as classes. In the event that the Board of
Directors declares a dividend or distribution payable in the Common Stock and
there are an insufficient number of authorized Class B Common Stock shares
available for such stock dividend or distribution, the holders of Class B Common
Stock may vote to increase the authorized number of shares of Class B Common
Stock to the number sufficient to permit the issuance of the stock dividend or
distribution, without submitting such vote for approval by shareholders of the
Class A Common Stock.
Other Terms. Shares of the Class B Common Stock may not be subdivided,
consolidated, reclassified or otherwise changed unless contemporaneously
therewith the shares of Class A Common Stock are subdivided, consolidated,
reclassified or otherwise changed in the same proportion and in the same manner.
The rights, preferences and privileges of holders of both classes of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock which the Company may
designate and issue in the future.
66
<PAGE> 68
PREFERRED STOCK
The Board of Directors of the Company is authorized, without further action
of the shareholders of the Company, to issue up to 5,000,000 shares of preferred
stock in classes or series and to fix the voting powers, designations,
preferences or other rights of the shares of each such class or series and
qualifications, limitations and restrictions thereon. Such preferred stock may
rank prior to both classes of Common Stock as to dividend rights, liquidation
preferences or both and may have full or limited voting rights.
The Company has no present plans to issue any shares of the preferred
stock.
WARRANTS TO PURCHASE CLASS A COMMON STOCK
Pursuant to the financing provided in connection with the College
Acquisition, on October 8, 1996 the Company issued warrants to purchase an
aggregate of 622,041 shares of Class A Common Stock (the "Warrants"). The
Warrants have an exercise price of $.01 per share, are presently exercisable,
and expire five years following the date that the Subordinate Debt is repaid in
full. See "Use of Proceeds." The number of shares subject to and the exercise
price of the Warrants are subject to adjustment under certain circumstances
including, among others, stock splits, dividends, distributions and
combinations. A further adjustment is provided in the event of the granting of
rights or options (other than with respect to the Company's Incentive Plan) or
the issuance or sale by the Company of shares of Class A Common Stock for no
consideration or at a price below that specified in the Warrant agreements. The
holders of the Warrants also have certain registration rights with respect to
the shares of Class A Common Stock underlying such Warrants. See "Shares
Eligible For Future Sale -- Registration Rights."
CERTAIN PROVISIONS OF ARTICLES OF INCORPORATION AND BYLAWS
Authorized but Unissued Stock. The Articles of Incorporation provide the
Board of Directors the ability to issue additional shares of Class A Common
Stock and shares of preferred stock and to set the voting rights, preferences
and other terms of such preferred stock. This ability afforded to the Board of
Directors by the Articles of Incorporation may be deemed to have an
anti-takeover effect and may discourage takeover attempts not first approved by
the Board of Directors (including takeovers which certain shareholders may deem
to be in their best interest). To the extent takeover attempts are discouraged,
temporary fluctuations in the market price of the Class A Common Stock, which
may result from actual or rumored takeover attempts, may be inhibited.
Indemnification. The Articles of Incorporation generally provide that
directors and officers of the Company will be indemnified by the Company to the
fullest extent authorized by Georgia law, as it now exists or may in the future
be amended, against all expenses and liabilities reasonably incurred in
connection with service for or on behalf of the Company. The Articles of
Incorporation also provide that the right of directors and officers to
indemnification is not exclusive of any other right now possessed or hereafter
acquired under any statute, agreement or otherwise.
Limitation of Directors' Liability. The Company's Articles of
Incorporation eliminate, subject to certain exceptions, the personal liability
of directors to the Company or its shareholders for monetary damages for
breaches of such directors' duty of care or other duties as a director. The
Articles of Incorporation do not provide for the elimination of or any
limitation on the personal liability of a director for (i) any appropriation, in
violation of the director's duties, of any business opportunity of the Company,
(ii) acts or omissions that involve intentional misconduct or a knowing
violation of law, (iii) unlawful corporate distributions or (iv) any transaction
from which the director received an improper benefit. In addition, the Company's
Bylaws provide broad indemnification rights to directors and officers so long as
the director or officer acted in a manner believed in good faith to be in or not
opposed to the best interests of the Company, and with respect to criminal
proceedings, if the director has no reasonable cause to believe his or her
conduct was unlawful. These provisions of the Articles of Incorporation and
Bylaws will limit the remedies available to a shareholder who is dissatisfied
with a Board decision protected by these provisions.
67
<PAGE> 69
TRANSFER AGENT AND REGISTRAR
SunTrust Bank, Atlanta, Georgia, will be the Transfer Agent and Registrar
for the Class A Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
3,265,000 shares of Class A Common Stock, assuming no exercise of the
Underwriters' over-allotment option, and 6,335,000 shares of Class B Common
Stock. See "Underwriting." Of these shares, all of the 2,600,000 shares of Class
A Common Stock sold in this Offering will be freely transferable without
restriction or limitation under the Securities Act except for any shares
purchased by affiliates of the Company within the meaning of Rule 144. The
remaining 665,000 shares of Class A Common Stock (including 6,335,000 shares of
Class A Common Stock into which the Class B Common Stock is convertible) are
"restricted" shares within the meaning of Rule 144 (the "Restricted Shares").
The Restricted Shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act and may not be sold except in compliance with the registration requirements
of the Securities Act or pursuant to an exemption from registration, such as the
exemption provided by Rule 144.
Beginning 90 days after the date of this Prospectus, approximately all of
the Restricted Shares will be eligible for sale in the public market pursuant to
Rule 144. In general, under Rule 144 as currently in effect, any person (or
persons whose shares are aggregated), including an affiliate of the Company, who
has held Restricted Shares for at least one-year (as computed under Rule 144),
and any affiliate of the Company who holds non-Restricted Shares, is entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (i) 1.0% of the then outstanding shares of the Company's Class A
Common Stock (approximately 32,650 shares after giving effect to this Offering)
and (ii) the average weekly trading volume in the Company's Class A Common Stock
during the four calendar weeks immediately preceding the date on which the
notice of sale is filed with the Commission. Sales under Rule 144 are also
subject to certain provisions relating to the manner of sale, the filing of a
notice of sale and the availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed an
affiliate of the Company at any time during the 90 days immediately preceding a
sale, and who has held Restricted Shares for at least two-years (as computed
under Rule 144), would be entitled to sell such shares under Rule 144(k) without
regard to the volume limitation and other conditions described above. Rule 144A
under the Securities Act permits the immediate sale by the current holders of
Restricted Shares of all or a portion of their shares to certain qualified
institutional buyers as defined in Rule 144A.
Prior to this Offering, there has been no public market for the Class A
Common Stock, and no prediction can be made as to the effect, if any, that
market sales of shares or the availability of such shares for sale will have on
the market price of the Class A Common Stock. Nevertheless, sales of substantial
amounts of Class A Common Stock in the public market may have an adverse impact
on such market price.
The Company, the holders of warrants to purchase an aggregate of 622,041
shares of Class A Common Stock and the Company's executive officers, directors
and shareholders (who beneficially own in the aggregate 948,710 shares of Class
A Common Stock and 6,335,000 shares of Class B Common Stock) have agreed not to
(i) sell, pledge, offer to sell, solicit an offer to buy, contract to sell,
grant any option, right or warrant to purchase, sell any option or contract to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Class A Common Stock (other than the shares offered by the Company and
the Selling Shareholder in this Offering), or any securities convertible into or
exercisable or exchangeable for Class A Common Stock, (ii) enter into any swap
or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of the Class A Common Stock, or (iii)
make any demand for or exercise any right with respect to the registration of
any shares of Class A Common Stock or any securities convertible into or
exercisable or exchangeable for Class A Common Stock for a period of 180 days
after the date of this Prospectus without the prior consent of Smith Barney Inc.
(the "Lock-up Period"). Following the Lock-up Period, the shares of Class A
Common Stock will be eligible for sale in the public market, subject to the
conditions and restrictions of Rule 144, as described above.
68
<PAGE> 70
REGISTRATION RIGHTS
The holders of the Warrants and the 350,000 shares of Class A Common Stock
issued to Robinson-Humphrey (the "Robinson-Humphrey Shares") have certain rights
with respect to the registration under the Securities Act of shares of Class A
Common Stock owned by them from time to time (the "Registerable Securities").
Each holder of Registerable Securities has demand registration rights commencing
from and after the effective date of the first registration statement filed by
the Company in connection with the public offering of its securities. The
holders of a majority of each of the Robinson-Humphrey Shares and the Warrants
are entitled to request one long-form registration in which the Company pays all
registration expenses, except underwriting discounts and commissions, and an
unlimited number of short-form registrations on Form S-3 in which the holders of
Registerable Securities pay their pro-rata share of registration expenses,
provided that the Registerable Securities to be registered thereon are expected
to have an aggregate disposition price of at least $500,000. Each holder of
Registerable Securities also has piggyback registration rights, subject to
certain limitations, in the event the Company proposes to register any sale of
any of its securities for its own account or for the account of its
shareholders. The Company is obligated to bear all expenses in connection with
the registration of the Registerable Securities pursuant to its piggyback
registration obligations, except underwriting discounts and commissions.
69
<PAGE> 71
UNDERWRITING
Under the terms and subject to the conditions in the Underwriting Agreement
dated the date hereof, each Underwriter named below has severally agreed to
purchase, and the Company and the Selling Shareholder have agreed to sell to
such Underwriter, the number of shares of Class A Common Stock set forth below
opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
Smith Barney Inc. ..........................................
The Robinson-Humphrey Company, Inc. ........................
Total............................................. 2,600,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Class A Common
Stock offered hereby (other than those covered by the over-allotment option
described below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc. and Robinson-Humphrey are
acting as Representatives, propose to offer part of the shares of the Class A
Common Stock directly to the public at the public offering price set forth on
the cover page of this Prospectus and part of the shares to certain dealers at a
price that represents a concession not in excess of $ per share under
the public offering price. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other
dealers. After the initial public offering of the shares to the public, the
public offering price and such concessions may be changed by the Underwriters.
The Representatives have advised the Company that the Underwriters do not intend
to confirm sales of any shares of Class A Common Stock to any accounts over
which they exercise discretionary authority.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
Offering size, which creates a syndicate short position. Stabilizing
transactions permit bids for and purchases of the Class A Common Stock so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Class A Common Stock in the open market in
order to cover syndicate short positions. Syndicate short positions may also be
covered by exercise of the Underwriters' over-allotment option described below
in lieu of or in addition to open market purchases. Penalty bids permit the
Underwriters to reclaim a selling concession from a syndicate member when shares
of the Class A Common Stock originally sold by such syndicate member were
purchased in a stabilizing transaction or syndicate covering transaction to
cover syndicate short positions. Such stabilizing transactions, syndicate
covering transactions and penalty bids may cause the price of the Class A Common
Stock to be higher than it would otherwise be in the absence of such
transactions. These transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 390,000 additional
shares of Class A Common Stock at the price to the public set forth on the cover
page of this Prospectus minus the underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, incurred in connection with the sale of the shares of
Class A Common Stock offered hereby. To the extent such option is exercised, the
Underwriters will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares of Class A Common Stock set forth
70
<PAGE> 72
opposite such Underwriter's name in the preceding table bears to the total
number of shares of Class A Common Stock listed in such table.
Prior to this Offering, there has not been any public market for the Class
A Common Stock. The initial public offering price for the shares of Class A
Common Stock will be determined by negotiations between the Company and the
Representatives and will not be based upon any independent appraisal or
valuation of the Company. Among the factors to be considered in determining such
price are the history of, and the prospects for, the Company's business and the
industry in which it competes, an assessment of the Company's management and the
present state of the Company's development, the past and present revenues and
earnings of the Company, the prospects for growth of the Company's revenues and
earnings, the state of the economy in the United States and the level of
economic activity in the industry in which the Company competes and in related
or comparable industries at the time of the Offering, and prevailing conditions
in the securities markets at the time of the Offering, including market
valuations of publicly traded companies which the Company and the
Representatives believe to be comparable to the Company.
The Company, the holders of warrants to purchase an aggregate of 622,041
shares of Class A Common Stock and the Company's executive officers, directors
and shareholders, who beneficially own in the aggregate 948,710 shares of Class
A Common Stock and 6,335,000 shares of Class B Common Stock (approximately 39.7%
of the outstanding Class A Common Stock and 100% of the Class B Common Stock)
have agreed that, for a period of 180 days after the date of this Prospectus,
they will not, without the prior written consent of Smith Barney Inc. (i) sell,
pledge, offer to sell, solicit an offer to buy, contract to sell, grant any
option, right or warrant to purchase, sell any option or contract to purchase,
or otherwise transfer or dispose of, directly or indirectly, any shares of Class
A Common Stock (other than the shares offered by the Company and the Selling
Shareholder in this Offering), or any securities convertible into or exercisable
or exchangeable for Class A Common Stock, (ii) enter into any swap or other
arrangement that transfers all or a portion of the economic consequences
associated with the ownership of the Class A Common Stock, or (iii) make any
demand for or exercise any right with respect to the registration of any shares
of Class A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock.
From time to time in the ordinary course of their respective businesses,
Smith Barney Inc. and Robinson-Humphrey, each a Representative of the
Underwriters in this Offering, have provided and may in the future provide
investment banking or other services to the Company. Robinson-Humphrey acted as
the financial advisor for the Company in connection with the College
Acquisition. As compensation for such financial advisory services and in lieu of
Robinson-Humphrey's $500,000 advisory fee, the Company issued 350,000 shares of
Class A Common Stock to Robinson-Humphrey on October 8, 1996. Robinson-Humphrey
is a subsidiary of Smith Barney Inc.
The Company has applied for listing of the Class A Common Stock on the
Nasdaq National Market.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the Company, the
Company has been advised that in the opinion of the Commission, such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for the Company by Smith, Gambrell & Russell, LLP, Atlanta, Georgia.
Certain legal matters in connection with this Offering are being passed upon for
the Underwriters by Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The consolidated balance sheet as of May 31, 1997 and the consolidated
statements of operations, shareholders' equity and cash flows for the period
from July 1, 1996 to May 31, 1997 of the Company and the
71
<PAGE> 73
consolidated balance sheet as of May 31, 1996 and the consolidated statements of
operations, shareholders' deficit and cash flows for each of the two years ended
May 31, 1996 and for the period from June 1, 1996 to October 8, 1996 of the
Predecessor have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the Prospectus and are
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Class A Common Stock offered hereby. This Prospectus, which is part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain items of
which are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Class A
Common Stock, reference is hereby made to the Registration Statement and such
exhibits and schedules filed as a part thereof, which may be inspected, without
charge, at the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of all or any portion of the Registration Statement may be
obtained from the Public Reference Section of the Commission, upon payment of
prescribed fees. Such material also may be accessed electronically by means of
the Commission's home page on the Internet at http://www.sec.gov.
Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are necessarily summaries of such
documents. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
72
<PAGE> 74
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS FOR
EDUTREK INTERNATIONAL, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EDUTREK INTERNATIONAL, INC.:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheet at May 31, 1997.................. F-3
Consolidated Statement of Operations -- Period from July 1,
1996 (Date of Formation) to May 31, 1997.................. F-4
Consolidated Statement of Changes in Shareholders'
Equity -- Period from July 1, 1996 (Date of Formation) to
May 31, 1997.............................................. F-5
Consolidated Statement of Cash Flows -- Period from July 1,
1996 (Date of Formation) to May 31, 1997.................. F-6
Notes to Consolidated Financial Statements.................. F-7
CONSOLIDATED FINANCIAL STATEMENTS FOR AMERICAN EUROPEAN
CORPORATION AND SUBSIDIARIES:
Independent Auditors' Report................................ F-17
Consolidated Balance Sheet at May 31, 1996.................. F-18
Consolidated Statements of Operations -- Period from June 1,
1996 to October 8, 1996 and the Two Years Ended May 31,
1996...................................................... F-19
Consolidated Statements of Changes in Shareholders'
Deficit -- Period from June 1, 1996 to October 8, 1996 and
the Two Years Ended May 31, 1996.......................... F-20
Consolidated Statements of Cash Flows -- Period from June 1,
1996 to October 8, 1996 and the Two Years Ended May 31,
1996...................................................... F-21
Notes to Consolidated Financial Statements.................. F-22
</TABLE>
F-1
<PAGE> 75
INDEPENDENT AUDITORS' REPORT
Board of Directors of EduTrek International, Inc.:
We have audited the accompanying consolidated balance sheet of EduTrek
International, Inc. ("the Company") and its subsidiaries as of May 31, 1997 and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the period from July 1, 1996 (date of formation) to
May 31, 1997. 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 audit 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 audit provides 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, 1997 and the results of their operations and their
cash flows for the period from July 1, 1996 (date of formation) to May 31, 1997
in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
July 18, 1997
F-2
<PAGE> 76
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
MAY 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 677,838
Accounts receivable (less allowance for doubtful accounts
of $33,000)............................................ 272,354
Deferred income taxes..................................... 150,956
Other..................................................... 223,824
-----------
Total current assets.............................. 1,324,972
PROPERTY, PLANT, AND EQUIPMENT -- Net of accumulated
depreciation.............................................. 4,737,211
GOODWILL -- Net of accumulated amortization of $695,603..... 39,611,178
DEFERRED FINANCING COSTS -- Net of accumulated amortization
of $164,736............................................... 1,156,171
OTHER....................................................... 841,566
-----------
$47,671,098
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,500,815
Accrued expenses.......................................... 1,166,848
Value-added tax payable................................... 605,914
Unearned revenues......................................... 3,997,568
Income taxes payable...................................... 1,756,219
Current maturities -- long-term debt...................... 2,014,120
-----------
Total current liabilities......................... 11,041,484
LONG-TERM DEBT -- Less current maturities................... 27,649,239
DUE TO AFFILIATES........................................... 412,042
OTHER LIABILITIES........................................... 691,843
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY:
Common stock, Class A voting, one vote per share, without
par value, 40,000,000 shares authorized, 665,000 issued
and outstanding........................................ 1,286,744
Common stock, Class B voting, ten votes per share, without
par value, 10,000,000 shares authorized, 6,335,000
issued and outstanding................................. 4,000,000
Common stock warrants..................................... 676,946
Foreign currency translation.............................. 147,296
Retained earnings......................................... 1,765,504
-----------
Total shareholders' equity........................ 7,876,490
-----------
$47,671,098
===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 77
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997
<TABLE>
<S> <C>
NET REVENUES................................................ $23,589,904
OPERATING EXPENSES:
Cost of education and facilities.......................... 9,013,877
Selling and promotional expenses.......................... 2,427,980
General and administrative expenses....................... 5,468,215
Amortization of goodwill.................................. 695,603
-----------
Total operating expenses............................... 17,605,675
-----------
INCOME FROM CAMPUS OPERATIONS............................... 5,984,229
INCOME FROM MANAGEMENT AGREEMENT............................ 478,955
-----------
INCOME FROM OPERATIONS...................................... 6,463,184
INTEREST EXPENSE............................................ 2,498,805
OTHER INCOME -- Net......................................... 19,405
-----------
INCOME BEFORE INCOME TAXES.................................. 3,983,784
PROVISION FOR INCOME TAXES.................................. (1,981,094)
-----------
NET INCOME.................................................. $ 2,002,690
===========
NET INCOME PER SHARE........................................ $ 0.24
===========
WEIGHTED AVERAGE COMMON SHARES AND COMMON EQUIVALENTS
OUTSTANDING............................................... 8,267,033
===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 78
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK -- FOREIGN
NUMBER OF SHARES COMMON STOCK COMMON CURRENCY
------------------- ----------------------- STOCK TRANSLATION RETAINED
CLASS A CLASS B CLASS A CLASS B WARRANTS ADJUSTMENT EARNINGS TOTAL
------- --------- ---------- ---------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock --
July 1, 1996............. 2,240,000 $1,000,000 $1,000,000
Issuance of Common Stock in
connection with the
acquisition of Edutrek
Systems, Inc............. 105,000 1,995,000 ($ 237,186) (237,186)
Sale of Common Stock in
connection with
acquisition of
Predecessor.............. 2,100,000 3,000,000 3,000,000
Issuance of Common Stock in
exchange for certain
fees..................... 350,000 $ 500,000 500,000
Issuance of warrants in
connection with
acquisition of
Predecessor.............. $676,946 676,946
Issuance of Common Stock in
exchange for stock of the
Predecessor.............. 210,000 786,744 786,744
Foreign currency
translation.............. $147,296 147,296
Net income................. 2,002,690 2,002,690
------- --------- ---------- ---------- -------- -------- ---------- ----------
BALANCE -- May 31, 1997.... 665,000 6,335,000 $1,286,744 $4,000,000 $676,946 $147,296 $1,765,504 $7,876,490
======= ========= ========== ========== ======== ======== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 79
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO
MAY 31, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 2,002,690
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 1,626,054
Amortization of loan discount.......................... 145,862
Decrease in accounts receivable........................ 1,459,788
Increase in accounts payable and accrued liabilities... 796,023
Decrease in unearned revenues.......................... (6,508,492)
Decrease in value-added taxes payable.................. (322,687)
Increase in income taxes payable....................... 1,537,146
Decrease in deferred taxes............................. 224,875
Other.................................................. 394,453
------------
Net cash provided by operating activities......... 1,355,712
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment............... (681,081)
Acquisition of predecessor................................ (30,746,448)
------------
Net cash used in investing activities............. (31,427,529)
FINANCING ACTIVITIES:
Proceeds from long-term borrowings........................ 29,116,754
Principal repayments on long-term debt.................... (25,682)
Net payments -- line-of-credit............................ (938,457)
Principal payments under capital lease obligations........ (51,827)
Proceeds from issuance of Common Stock.................... 4,000,000
Increase in deferred loan costs........................... (1,320,907)
------------
Net cash provided by financing activities......... 30,779,881
Effect of exchange rate changes on cash................ (30,226)
------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 677,838
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... --
End of period............................................. $ 677,838
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION (in
$000s):
Cash paid during the period for:
Interest............................................... $ 1,690
------------
Income taxes........................................... $ 45
------------
NONCASH INVESTING AND FINANCING TRANSACTIONS (in $000s):
Assumption of debt in connection with acquisition of the
predecessor............................................ $ 3,308
============
Recording of aircraft and related assets in connection
with the acquisition of the majority interest in Flight
Enterprises LLC........................................ $ 1,511
============
Assumption of aircraft-related debt....................... $ 1,565
============
Investment banker's fees paid with Company Common Stock... $ 500
============
Stock exchanged for predecessor stock..................... $ 787
============
Equipment acquired under capital lease arrangements....... $ 209
============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 80
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 1997 AND FOR THE PERIOD FROM
JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997
1. ORGANIZATION AND BUSINESS
Formation and Acquisition -- EduTrek International, Inc. (the "Company"),
formerly known as E Holdings, Inc. was formed on July 1, 1996 for the purpose of
acquiring and operating American European Corporation ("American European") and
its affiliates and until October 1996 its operations were not significant. On
October 8, 1996, the Company acquired all of the outstanding stock of American
European, its subsidiary American College in London, Ltd. U.S., as well as 85%
of the membership interest of the American European Middle East Corporation
("AEMEC"), a Georgia limited liability company. American European, American
College in London, Ltd. U.S., and AEMEC are collectively referred to herein as
the "Predecessor." The College is an international postsecondary educational
institution with campuses in Atlanta, Los Angeles, London, and Dubai, United
Arab Emirates. The College is accredited by the Commission on Colleges of the
Southern Association of Colleges and Schools. The Atlanta and Los Angeles
campuses are approved by the U.S. Department of Education for participation in
Title IV student financial assistance programs and are approved by the U.S.
Department of Justice to accept foreign students. The College's business is
seasonal in nature with the majority of revenues being earned between October
and May. The accompanying financial statements include the operating results of
the College from the date of acquisition. On October 8, 1996, the Company also
acquired the outstanding shares of EduTrek Systems, Inc. ("EduTrek Systems"),
which owned a 50% interest in its affiliate, Flight Enterprises LLC for 105,000
and 1,995,000 shares of the Company's Class A and Class B Common Stock,
respectively. The acquisition of EduTrek Systems was accounted for in a manner
similar to a pooling-of-interests as the Company and EduTrek Systems were under
common control by virtue of ownership by the same individual. The results of
operations of the Company include losses arising from the operation of EduTrek
Systems of approximately $380,000 for the period July 1, 1996 to May 31, 1997.
Financial information for EduTrek Systems is not included prior to July 1, 1996.
In 1994, 1995, and for the period ended October 8, 1996, EduTrek Systems
incurred losses of $312,954, $584,627, and $819,430, respectively. Such amounts
are not considered to be relevant to the Company and the Predecessor because in
prior years EduTrek Systems had no revenues and existed solely to provide a
corporate structure through which its controlling shareholder could pursue a
variety of opportunities and activities. The Company, through EduTrek Systems,
now also licenses, acquires, develops, and implements corporate education
programs.
The cash portion of the purchase price of approximately $38 million
exclusive of liabilities assumed (including $1.8 million of fees and other costs
directly associated with the acquisition) was funded primarily through capital
contributions in the amount of $4.5 million, proceeds from borrowings of $21
million under a senior credit agreement and $7 million under a subordinated note
payable. Proceeds from the capital contributions and borrowings were also used
to retire existing indebtedness of the Predecessor at closing in the amount of
$2,615,416. One former shareholder of the Predecessor received 210,000 shares of
Class A Common Stock in the acquisition and certain lenders in the transaction
received an aggregate of 879,151 warrants to acquire shares of Class A Common
Stock in the future (see Note 6).
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):
<TABLE>
<S> <C>
Current assets.............................................. $ 3.9
Property, plant, and equipment.............................. 3.1
Goodwill.................................................... 40.4
Other assets................................................ 2.1
Liabilities assumed......................................... 13.0
</TABLE>
F-7
<PAGE> 81
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Also in connection with the purchase, American European entered into
consulting and employment agreements with the selling shareholders and an
officer of American European.
Edutrek Systems owned a 50% interest in Flight Enterprises LLC which was
accounted for under the equity method of accounting. On October 15, 1996, the
Company acquired the remaining 50% interest in Flight Enterprises LLC by
assuming a note payable in the amount of $1,535,000 (see Note 4). The Company,
through Flight Enterprises LLC, owns an aircraft and an interest in a
partnership which controls a hangar.
Government Regulation -- The Company and The American College are subject
to extensive regulation by federal, state, and foreign governmental agencies,
and accrediting agencies. In particular, the Higher Education Act of 1965, as
amended, (the "HEA") and the regulations promulgated thereunder by the U. S.
Department of Education (the "Regulations") set forth numerous standards that
schools must satisfy in order to participate in the various federal student
financial assistance programs under Title IV of the HEA ("Title IV Programs").
For example, the HEA and the Regulations: (i) establish certain financial
responsibility and administrative capability, (ii) establish maximum acceptable
rates of default by students on federally guaranteed or funded student loans,
(iii) restrict the ability of a school or its parent corporation to engage in
certain types of transactions that would result in a change in ownership and
control of that school or corporation, (iv) limit the proportion of school
revenues that may be derived from Title IV Programs, and (v) prohibit the
payment of certain types of incentives to personnel engaged in student
recruiting and admissions activities.
The failure by The American College to comply with applicable federal,
state, or accrediting agency requirements could result in the limitation,
suspension, or termination of the ability of The American College's campuses to
participate in Title IV Programs or the loss of state licensure or
accreditation. Given that approximately 27% of the Company's revenues are
indirectly derived from Title IV Programs, the loss of or a significant
reduction in Title IV Program funds would have a material adverse effect on the
Company's revenues and cash flow because The American College's student
enrollment would likely decline as a result of its students' inability to
finance their education without the availability of Title IV Program funds.
The financial responsibility standards are applied to the Company on a
consolidated basis in evaluating the financial condition of The American
College. Based on the consolidated financial statements of the Company as of May
31, 1997, The American College does not satisfy either the acid test ratio of
1:1 or the positive tangible net worth test, as defined. As of May 31, 1997, the
Company's acid test ratio was .086 and the Company had a negative tangible net
worth of approximately $33.6 million. Notwithstanding such noncompliance, the
Company has maintained The American College's eligibility to continue
participating in Title IV Programs by posting an irrevocable letter of credit in
the amount of $3.75 million in favor of the U.S. Department of Education, which
amount is approximately 50% of the Company's 1996 Title IV Program funds
received by students enrolled at The American College. The letter of credit was
posted on March 19, 1997, and will expire on March 31, 1998. Because the amount
of the letter of credit is based on the amount of the Title IV Program funds
received by The American College's students, to the extent that such funds have
increased during 1997, the Company may be required to increase the letter of
credit on or around March 19, 1998, the date the U.S. Department of Education
reassesses the College's compliance with the financial responsibility standards.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company, American European, the American College in
London Ltd. U.S., AEMEC (85% owned by the Company and 15% owned by an affiliate
of the Predecessor's majority shareholder), and the American College in London,
Ltd., a registered British corporation that is wholly owned by The American
College in London, Ltd. U.S. Significant intercompany accounts and transactions
have been eliminated in consolidation.
F-8
<PAGE> 82
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1997 includes approximately $442,000, which is restricted
to expenditures for scholarships and other awards to students. A corresponding
liability has been recorded for these funds until they are disbursed.
Property and Equipment -- Property and equipment is stated at cost less
accumulated depreciation. Depreciation on furniture, fixtures, and equipment is
computed using the straight-line method over the estimated useful lives of the
assets, which range from seven to ten years. Amortization of leasehold
improvements and leasehold interest is computed using the straight-line method
over the various lease terms. Amortization of capital leases, computed using the
straight-line method is included in depreciation and amortization expense.
Textbooks are amortized using the straight-line method over a three to six year
period, their anticipated useful lives. The aircraft is depreciated over 10
years on the double declining balance method.
Intangible Assets -- Goodwill is amortized over 40 years using the
straight-line method. Debt issue costs are amortized over five years. The
Company periodically assesses the recoverability of goodwill based on judgments
as to future undiscounted cash flows from operations.
Impairment of Long-Lived Assets -- The Company adopted the provisions of
Statement of Financial Accounting Standard ("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.
Unearned Revenues -- Unearned revenues represent the portion of student
tuition, fees, and dorm payments received in advance of services being
performed.
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.
Net Income Per Share -- Net income per share is computed by dividing net
income by the number of weighted average common shares outstanding. In
accordance with the rules of the Securities and Exchange Commission, all shares
of Common Stock issued prior to the Company's initial public offering and all
options and warrants outstanding are included in weighted average shares
outstanding as if they were issued at the Company's formation on July 1, 1996.
The Financial Accounting Standards Board has issued SFAS 128, "Earnings Per
Share." This statement simplifies the standards for computing earnings per share
previously found in APB 15, "Earnings Per Share." SFAS 128 replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share and requires the presentation of diluted earnings per share for all
entities with complex capital structures. The statement is not effective for the
Company until the year ended May 31, 1998.
F-9
<PAGE> 83
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation -- SFAS 123, "Accounting for Stock-Based
Compensation," establishes financial accounting and reporting standards for
stock-based compensation plans. SFAS 123 is effective for the Company's fiscal
year ending May 31, 1997 and includes fair value recognition provisions for
stock-based compensation which are elective for employee arrangements and
required for nonemployee transactions. For the employee arrangements, management
has elected to apply the intrinsic value method in accordance with APB 25 and,
accordingly, has elected to disclose net income and earnings per share as if the
fair value method of accounting defined in SFAS 123 had been applied. There are
no nonemployee arrangements.
Common Stock Warrants -- Common stock warrants are classified as a
component of permanent capital (see Note 6).
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. Foreign currency translation gains and losses are
immaterial to the accompanying financial statements.
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." Management has concluded that
substantially all of the Company's financial instruments have terms such that
their book value approximates fair value. The subordinate loan described in Note
5 has not been fair valued due to its relatively specific terms related to the
initial capitalization of the Company. Developing a fair value for the
instrument is not considered practicable by management because of the lack of
directly comparable transactions.
3. OTHER CURRENT ASSETS
Other current assets at May 31, 1997 consist of the following:
<TABLE>
<S> <C>
Prepaid rent................................................ $ 89,638
Other....................................................... 134,186
--------
$223,824
========
</TABLE>
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at May 31, 1997 is summarized as follows:
<TABLE>
<S> <C>
Furniture, fixtures, and equipment.......................... $2,325,359
Aircraft and related assets................................. 1,510,455
Leasehold improvements...................................... 1,061,304
Library and textbooks....................................... 605,808
----------
5,502,926
Less accumulated depreciation and amortization.............. 765,715
----------
$4,737,211
==========
</TABLE>
Depreciation expense for property, plant, and equipment was $765,715 for
the period from July 1, 1996 to May 31, 1997.
F-10
<PAGE> 84
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT AND REVOLVING LOAN PAYABLE
Long-term debt at May 31, 1997 is summarized as follows :
<TABLE>
<S> <C>
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................................... 603,762
Other....................................................... 25,682
-----------
29,663,359
Less current portion........................................ 2,014,120
-----------
$27,649,239
===========
</TABLE>
During October 1996, the Company entered into various borrowing
arrangements in connection with its acquisition of the Predecessor. The
principal terms of such arrangements are summarized as follows:
SENIOR CREDIT AGREEMENT
The Company has a Senior Credit Agreement with a bank which provides for
term loans of $21,000,000 and $500,000: revolving loans up to $2,500,000
(through September 1997), $1,750,000 (from October 1997 through September 1998),
and $1,000,000 (from October 1998 through October 8, 1999); and letters of
credit not to exceed the lesser of $4,000,000 or 50% of aggregate amount of U.S.
Department of Education Title IV, program funds received by the Company during
the most recent complete award year.
The term loan of $21,000,000 is payable as to interest only through July
31, 1997 and in twenty-two quarterly principal payments of $875,000 plus
interest beginning October 1997 with a final principal payment of $1,750,000
plus accrued interest due March 31, 2003. The principal payments are due on
January 31, April 30, July 31, and October 31. The principal balance of the loan
is recorded net of discount of $154,263 at May 31, 1997. The loan was discounted
at issuance date by $172,148, which represents the fair value of warrants issued
in connection with this debt (see Note 6).
The term loan of $500,000 may be funded in up to six advances of no less
than $50,000 each during the period October 8, 1996 through October 30, 1997.
The term loan is payable as to interest only on a quarterly basis through July
1997 and in twenty equal quarterly principal payments plus interest during the
period October 31, 1997 through October 31, 2002.
If certain conditions are met by the Company, the term loans are
convertible by the Company into Base Rate Loans (which bear interest at the
bank's base rate plus 1.25%) or LIBOR Loans (which bear interest at the adjusted
LIBOR rate plus 4.2%) or Treasury Rate Loans (which bear interest at the
Treasury Rate plus 4.5%). Outstanding term loans were $21,000,000 which bear
interest at 9.75% at May 31, 1997.
The Agreement provides that the Company have no outstanding revolving loans
for two periods of thirty consecutive days during each full calendar year that
the agreement is in effect. Revolving loans bear interest at the bank's rate
plus 1% payable quarterly. Revolving loan borrowings under the revolving loan
agreement at May 31, 1997 were $0.
Issued letters of credit bear usage fees of 4% per annum. As of May 31,
1997, two letters of credit were outstanding in the amount of $3,950,000.
Borrowings under the Senior Credit Agreement are secured by all assets of
the Company and all of the issued and outstanding Common Stock of the
Predecessor.
The Senior Credit Agreement contains financial covenants which include
limits on annual capital expenditures, purchase money indebtedness and operating
lease payments. Additionally, the Company is
F-11
<PAGE> 85
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
required to maintain a debt to equity ratio, a minimum total capitalization
amount and debt service coverage, and interest coverage ratios. At May 31, 1997,
the Company was not in compliance with certain provisions of its loan
agreements. Such non-compliance was subsequently waived by the lender in July
1997.
SUBORDINATE LOAN AND WARRANT PURCHASE AGREEMENT
In connection with the acquisitions discussed in Note 1, the Company
entered into a Subordinate Loan and Warrant Purchase Agreement (the "Subordinate
Loan Agreement") with a Small Business Investment Company (the "SBIC"). The SBIC
loaned $7,000,000 to the Company under a subordinated note payable by the
Company. The principal balance of the loan is recorded net of discount of
$376,822 at May 31, 1997. The loan was discounted at issuance date by $416,488,
the fair value of warrants issued in connection with this debt.
Interest on the subordinate note is payable at 13% on a quarterly basis
beginning December 1996 until October 2003 when the principal balance is payable
in full. Optional principal prepayments in multiples of $500,000 are permitted;
however, penalties are provided if such prepayments are made prior to October
2001. Mandatory prepayments are required should certain future events, as
defined, occur.
The Subordinate Loan Agreement contains financial covenants which include
limits on annual capital expenditures and operating lease payments, maximum debt
to equity ratio and minimum total capitalization amount and debt service
coverage and interest coverage ratios. At May 31, 1997, the Company was not in
compliance with certain provisions of its loan agreements. Such noncompliance
was subsequently waived by the lender in July 1997.
LOAN SECURED BY AIRCRAFT
The acquisition of the aircraft was financed via a bank note which is
payable as to interest only through January 31, 1998. Thereafter, a 5% principal
paydown is due and the balance of the note is converted to an amortizing term
loan payable in 76 monthly installments. Interest is computed at a rate based on
LIBOR plus 2.8%. The rate of interest at May 31, 1997 was 8.49%.
Future maturities of long-term debt excluding capital lease obligations for
years ending May 31 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 1,775,682
1999........................................................ 2,625,000
2000........................................................ 2,781,500
2001........................................................ 2,859,756
2002........................................................ 2,859,756
Thereafter.................................................. 16,688,988
-----------
$29,590,682
===========
</TABLE>
6. REDEEMABLE COMMON STOCK WARRANTS
In connection with the Senior Credit Agreement, a bank received warrants to
purchase 257,110 shares of the Company's Class A Common Stock. The warrants are
exercisable in whole or in part until October 2006 at an exercise price of
$.0014 per share, which is subject to adjustment should future events, as
defined, occur. A previously existing put right has been eliminated through
amendment of the loan agreement and the warrants have been classified as equity
instruments at their fair value at date of issue.
F-12
<PAGE> 86
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Similarly, the SBIC received warrants to purchase 622,041 shares of the
Company's Class A Common Stock. The warrants are exercisable in whole or in part
until October 2008 at a per share price of $.0014, which is subject to
adjustment should future events, as defined, occur. A previously existing put
right has been eliminated through amendment of the loan agreement and the
warrants have been classified as equity instruments at their fair value at date
of issue.
7. 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 $50,780 for the period
from October 8, 1996 to May 31, 1997, respectively.
8. LEASES
The Company leases office and college space, dormitories, and various items
of equipment under lease agreements with varying expiration dates through
November 2005. Many of the lease agreements contain renewal clauses with various
terms; however, none of the leases contain any significant restrictions. 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, 1997
was as follows:
<TABLE>
<S> <C>
Furniture, fixtures and equipment........................... $895,076
Less accumulated amortization............................... 52,226
--------
$842,850
========
</TABLE>
For 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:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- -----------
<S> <C> <C>
Year ending May 31, 1998.................................... $295,830 $ 2,299,360
1999........................................................ 207,904 2,177,304
2000........................................................ 150,324 1,891,838
2001........................................................ 51,050 1,576,850
2002........................................................ 1,560,375
Thereafter.................................................. 7,935,464
-------- -----------
Total minimum lease payments.............................. 705,108 $17,441,191
===========
Less amount representing interest........................... 101,346
--------
Present value of net minimum lease payments............... $603,762
========
</TABLE>
F-13
<PAGE> 87
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. CONSULTING AND EMPLOYMENT AGREEMENTS
In connection with the acquisition of the Predecessor, the Company entered
into consulting and employment agreements with the selling shareholders and
other officers of American European. For the year ended May 31, 1997, such
payments, which were charged to operations, totaled $705,000. Future payments
under these agreements for the years ending May 31 are as follows:
<TABLE>
<S> <C>
1998........................................................ $705,000
1999........................................................ 656,000
2000........................................................ 588,000
2001........................................................ 196,000
</TABLE>
Of the above amounts, approximately $121,333 of future payments relate to a
continuing officer of the Company. Amounts paid to such officer totalled
approximately $18,667 for the period from October 8, 1996 (date of formation) to
May 31, 1997.
10. INCOME TAXES
Income tax expense for the period from July 1, 1996 (date of formation) to
May 31, 1997 consists of:
<TABLE>
<S> <C>
Current:
Federal................................................... $1,423,148
State..................................................... 333,071
----------
Total current provision........................... 1,756,219
Deferred:
Federal................................................... 193,566
State..................................................... 31,309
----------
Total deferred provision.......................... 224,875
----------
Total provision................................... $1,981,094
==========
</TABLE>
The following is a reconciliation of the statutory tax rate to the
Company's effective tax rate for the period from July 1, 1996 (date of
formation) to May 31, 1997:
<TABLE>
<S> <C>
Statutory rate.............................................. 34.00%
State income taxes (net of federal benefit)................. 6.04%
Permanent differences (primarily nondeductible goodwill).... 9.69%
-----
Effective rate............................................ 49.73%
=====
</TABLE>
The effects of temporary differences which gave rise to the deferred tax
asset and liability at May 31, 1997 are as follows :
<TABLE>
<CAPTION>
CURRENT LONG-TERM
-------- ---------
<S> <C> <C>
Deferred tax assets arising from:
Unearned revenue.......................................... $112,323
Other current............................................. 69,340
Deferred rent............................................. $339,381
Deferred tax liabilities arising from:
Other..................................................... 30,707
</TABLE>
F-14
<PAGE> 88
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. 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
represent management fees from a management agreement which generates operating
profits only. Net revenues and income (loss) from campus operations by
geographic area for the period from October 8, 1996 (date of acquisition of the
predecessor) to May 31, 1997 and identifiable assets by geographic area at May
31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Net revenues:
United States............................................. $ 13,437
United Kingdom............................................ 10,153
Home Office............................................... --
-----------
Total............................................. $ 23,590
===========
Income (loss) from continuing operations:
United States............................................. $ 10,533
United Kingdom............................................ 4,385
Home Office............................................... (8,934)
Dubai, UAE................................................ 479
-----------
Total............................................. $ 6,463
===========
Identifiable assets:
United States............................................. $46,141,214
United Kingdom............................................ 1,529,884
-----------
Total............................................. $47,671,098
===========
</TABLE>
12. 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 event that the individual grantee owns more than
10% of the total voting power of all classes of stock of the Company.
In March 1997, incentive stock options to purchase an aggregate of 410,550
shares of Class A Common Stock were granted to certain officers and employees of
the Company, exercisable at $.77 per share. 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").
F-15
<PAGE> 89
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated weighted average fair value of options granted during 1997
was $.16 per share for fixed options and $0.13 for incentive options. The
Company applies APB 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 $56,989 would have been recorded.
Accordingly, the Company's net income and earnings per share for the period from
October 8, 1996 (date of formation) to May 31, 1997 would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<S> <C>
Net income available to common shareholders:
As reported............................................... $2,002,690
==========
Pro forma................................................. $1,945,701
==========
Net income per common and common equivalent share:
As reported............................................... $ 0.24
==========
Pro forma................................................. $ 0.24
==========
</TABLE>
The fair value of options granted under the Plan during the period from
October 8, 1996 (date of formation) to May 31, 1997 was estimated on the date of
grant or modification using the Black-Scholes option pricing model with the
following weighted average assumptions used: expected volatility of 0%,
risk-free interest rate of 6.16% for fixed options and 6.03% for performance
options, dividend yield of 0%, and expected lives of 3.91 years for fixed
options and 3.08 years for performance options. Annual forfeiture rates of 3%
were utilized, and the likelihood of the performance options vesting was
estimated to be 100%.
13. CONTINGENCIES
The Company is a party to lawsuits incidental to its business. Management
believes that the ultimate resolution of these matters will not have a material
adverse impact on the financial condition, operations, or cash flows of the
Company.
14. SUBSEQUENT EVENTS
Common Stock Split -- On June 17, 1997, the Board of Directors declared a
seven-for-one split of both Class A and Class B Common Stock. The number of
shares issued and outstanding after giving effect to the split was 665,000 Class
A shares and 6,335,000 Class B shares. All share and per share data, including
stock option information, has been adjusted to reflect the split. Concurrently,
the Company increased the authorized shares (on a post-split basis) from
7,000,000 Class A and 7,000,000 Class B shares to 40,000,000 and 10,000,000
Class A and B shares, respectively.
Exercise of Warrants -- On June 17, 1997, the lender under the senior
credit agreement exercised its option to acquire 257,110 shares for
approximately $367.
Repayment of Loan from Shareholder -- The Company repaid its loan from the
principal shareholder in the amount of $205,041 on July 18, 1997.
Filing of Registration Statement -- On June 20, 1997, the Company filed a
registration statement on Form S-1 under the Securities Act of 1933 in
connection with its intention to sell shares of Class A Common Stock in an
initial public offering. The proceeds of a successful offering will be used
primarily to pay off the senior and subordinated debt outstanding.
Licensing Arrangement -- In July 1997, the Company entered into a licensing
arrangement with another Company to provide certain information technology
programs. As part of this arrangement, the Company agreed to pay an initial
license fee of $450,000 (due in installments through December 1997) and
royalties based on revenues earned under the program. The programs will be
offered through the Company's campuses.
F-16
<PAGE> 90
INDEPENDENT AUDITORS' REPORT
Board of Directors of EduTrek International, Inc.:
We have audited the accompanying consolidated balance sheet of American
European Corporation (the "Predecessor") and its subsidiaries as of May 31, 1996
and the related consolidated statements of operations, changes in shareholders'
deficit, and cash flows for the period from June 1, 1996 to October 8, 1996 and
the two years ended May 31, 1996. These financial statements are the
responsibility of the Predecessor's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of American European Corporation
and its subsidiaries as of May 31, 1996 and the results of their operations and
their cash flows for the period from June 1, 1996 to October 8, 1996 and the two
years ended May 31, 1996 in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
June 18, 1997
F-17
<PAGE> 91
AMERICAN EUROPEAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
MAY 31, 1996
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 452,606
Certificates of deposit................................... 500,000
Accounts receivable (less allowance for doubtful accounts
of $21,000)............................................ 203,247
Other..................................................... 589,155
-----------
Total current assets.............................. 1,745,008
PROPERTY, PLANT, AND EQUIPMENT -- Net of accumulated
depreciation.............................................. 5,043,082
OTHER NONCURRENT ASSETS..................................... 465,028
-----------
$ 7,253,118
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable.......................................... 1,012,415
Accrued expenses.......................................... 1,339,500
Borrowings under line-of-credit arrangement............... 352,825
Value-added tax payable................................... 703,329
Unearned revenues......................................... 5,596,786
Income taxes payable...................................... 240,222
Current maturities -- long-term debt...................... 1,195,936
-----------
Total current liabilities......................... 10,441,013
LONG-TERM DEBT.............................................. 3,559,618
OTHER LIABILITIES........................................... 539,839
SHAREHOLDERS' DEFICIT:
Common stock, $1 par value, 500,000 shares authorized, 874
shares issued and outstanding.......................... 874
Paid-in capital........................................... 477,589
Foreign currency translation.............................. 102,268
Retained deficit.......................................... (3,308,642)
Shareholders notes........................................ (4,559,441)
-----------
Total shareholders' deficit....................... (7,287,352)
-----------
$ 7,253,118
===========
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE> 92
AMERICAN EUROPEAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD FROM -------------------------
JUNE 1, 1996 TO MAY 31, MAY 31,
OCTOBER 8, 1996 1996 1995
------------------ ----------- -----------
<S> <C> <C> <C>
NET REVENUES......................................... $ 6,188,915 $26,493,464 $23,695,623
OPERATING EXPENSES:
Cost of education and facilities................... 3,256,299 11,143,928 10,050,233
Selling and promotional expenses................... 1,335,081 3,614,462 3,083,231
Administrative expenses............................ 2,738,633 6,677,052 6,114,969
Rents paid to majority stockholders................ 49,496 150,000 145,000
----------- ----------- -----------
7,379,509 21,585,442 19,393,433
INCOME (LOSS) FROM CAMPUS OPERATIONS................. (1,190,594) 4,908,022 4,302,190
INCOME (LOSS) FROM MANAGEMENT AGREEMENT.............. (20,664) 127,055
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS........................ (1,211,258) 5,035,077 4,302,190
INTEREST EXPENSE..................................... 258,435 730,018 607,470
INTEREST INCOME -- Shareholder notes................. 97,554 361,000 153,400
OTHER INCOME (LOSS).................................. 66,929 72,267 24,746
----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.................... (1,305,210) 4,738,326 3,872,866
PROVISION FOR INCOME TAXES........................... 0 107,261 123,691
----------- ----------- -----------
NET INCOME (LOSS).................................... $(1,305,210) $ 4,631,065 $ 3,749,175
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE> 93
AMERICAN EUROPEAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOREIGN
COMMON PAID-IN CURRENCY STOCKHOLDERS' RETAINED
STOCK CAPITAL TRANSLATION NOTES DEFICIT TOTAL
------ -------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- June 1, 1994.............. $874 $391,256 $ 177,475 $(2,057,719) $(3,388,882) $ (4,876,996)
Distribution to shareholders....... (3,800,000) (3,800,000)
Capital contributed by
stockholder...................... 43,167 43,167
Net income......................... 3,749,175 3,749,175
Foreign currency translation....... (109,899) (109,899)
Notes receivable and advances from
shareholders..................... (1,171,910) (1,171,910)
---- -------- --------- ----------- ----------- ------------
BALANCE -- May 31, 1995.............. 874 434,423 67,576 (3,229,629) (3,439,707) (6,166,463)
Distribution to shareholders....... (4,500,000) (4,500,000)
Capital contributed by
stockholder...................... 43,166 43,166
Net income......................... 4,631,065 4,631,065
Foreign currency translation....... 34,692 34,692
Notes receivable and advances from
shareholders..................... (1,329,812) (1,329,812)
---- -------- --------- ----------- ----------- ------------
BALANCE -- May 31, 1996.............. 874 477,589 102,268 (4,559,441) (3,308,642) (7,287,352)
Distribution to shareholders....... (1,889,694) (1,889,694)
Capital contributed by
stockholder...................... 1,238,542 1,238,542
Net income......................... (1,305,210) (1,305,210)
Foreign currency translation....... (17,818) (17,818)
Notes receivable and advances from
shareholders..................... (1,015,993) (1,015,993)
---- -------- --------- ----------- ----------- ------------
BALANCE -- October 8, 1996........... $874 $477,589 $ 84,450 $(5,575,434) $(5,265,004) $(10,277,525)
==== ======== ========= =========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE> 94
AMERICAN EUROPEAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD FROM -------------------------
JUNE 1, 1996 TO MAY 31, MAY 31,
OCTOBER 8, 1996 1996 1995
--------------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,305,210) $ 4,631,065 $ 3,749,175
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 391,779 1,086,696 1,134,164
Gain (loss) on disposal of assets....................... 155,889
Foreign currency translation............................ (5,793) 26,957 (102,163)
Net increase in cash surrender value of life insurance
policies.............................................. (244,627) 33,900 18,757
(Decrease) increase in accounts receivable.............. (123,423) (31,291) (72,238)
Decrease in prepaid expenses and other assets........... (164,475) (325,580) (73,390)
Increase (decrease) in accounts payable................. (226,066) 150,722 (64,278)
Increase (decrease) in accrued liabilities.............. (233,956) 240,505 434,918
Increase in unearned revenues........................... 3,134,948 30,013 311,269
Increase in value-added taxes payable................... 189,708 13,006 54,162
Decrease in income taxes payable........................ (57,848) (23,270)
----------- ----------- -----------
Net cash provided by operating activities.......... 1,412,885 5,798,145 5,522,995
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment............... (118,387) (1,433,985) (488,958)
Disposal of property, plant, and equipment................ 53,811
Net (increase) decrease in note receivable from related
parties and former stockholders......................... (169,800) (1,228,216) (1,071,473)
----------- ----------- -----------
Net cash used in investing activities.............. (288,187) (2,662,201) (1,506,620)
FINANCING ACTIVITIES:
Proceeds from loans against life insurance cash surrender
value................................................... 120,126
Proceeds from long-term borrowings........................ 750,000 2,058,000 1,050,000
Principal repayments on long-term debt.................... (233,594) (892,961) (905,283)
Net receipts (payments) -- line-of-credit................. 150,840 (1,987) (147,325)
Principal payments under capital lease obligations........ (93,965) (148,436) (156,609)
Distributions to stockholders............................. (1,889,694) (4,500,000) (3,800,000)
Capital contribution from stockholder..................... 43,166 43,167
----------- ----------- -----------
Net cash used in financing activities.............. (1,196,287) (3,442,218) (3,916,050)
Effect of exchange rate changes on cash............ (12,025) 7,735 (7,737)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (83,614) (298,539) 92,588
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 452,605 751,144 658,556
----------- ----------- -----------
End of period............................................. $ 368,991 $ 452,605 $ 751,144
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 295,059 $ 729,947 $ 607,470
=========== =========== ===========
Income taxes............................................ $ -- $ 107,261 $ 108,174
=========== =========== ===========
NONCASH INVESTING AND FINANCING TRANSACTIONS:
In the period from June 1, 1996 to October 8, 1996, the
Company distributed property to a shareholder with a
book value of $1,640,488 subject to debts of $2,141,660.
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE> 95
AMERICAN EUROPEAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF MAY 31, 1996 AND FOR THE PERIOD
FROM JUNE 1, 1996 TO OCTOBER 8, 1996 AND
THE TWO YEARS ENDED MAY 31, 1996
1. ORGANIZATION AND BUSINESS
American European Corporation (the "Predecessor") operates a private,
coeducational, nondenominational institution, The American College, with
campuses in Atlanta, Los Angeles, and London. The College is accredited by the
Commission on Colleges of the Southern Association of Colleges and Schools. The
American College operates campuses in Atlanta, Los Angeles, and London. The
College is accredited by the Commission on Colleges of the Southern Association
of Colleges and Schools. The Atlanta and Los Angeles campuses are approved by
the U.S. Department of Education for participation in Title IV student financial
assistance programs and are approved by the U.S. Department of Justice to accept
foreign students. The Colleges' business is seasonal in nature with the majority
of revenues being earned between October and May.
In February 1995, American European Middle East Corporation, LLC was formed
and entered into a management agreement with Middle East Colleges, Ltd. U.S., a
British Virgin Island company, to establish a branch campus in Dubai, United
Arab Emirates. The school is known as the American University in Dubai.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Predecessor. The American College in London Ltd.
U.S. (79.9% owned by the Predecessor and 20.1% owned by the Predecessor's
shareholders), the American European Middle East Corporation, LLC (85% owned by
the Predecessor and 15% owned by an affiliate of the Predecessor's majority
shareholder), and the American College in London, Ltd., a registered British
corporation that is wholly owned by American College in London, Ltd. U.S.
Significant intercompany accounts and transactions have been eliminated in
consolidation. The minority ownership interest in American College in London,
Ltd. U.S. is not recorded due to the common control nature of the stock
ownership.
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 Predecessor 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, 1996 includes approximately $340,425, which is restricted
to expenditures for scholarships and other awards to students. A corresponding
liability has been recorded for these funds until they are disbursed.
Property and Equipment -- Property and equipment is stated at cost less
accumulated depreciation. Depreciation on furniture, fixtures, and equipment is
computed using the straight-line method over the estimated useful lives of the
assets, which range from seven to ten years. Amortization of leasehold
improvements and leasehold interest is computed using the straight-line method
over the various lease terms. Amortization of capital leases, computed using the
straight-line method is included in depreciation and amortization expense.
Textbooks are amortized using the straight-line method over a three to six year
period, their anticipated useful lives.
Impairment of Long-Lived Assets -- The Predecessor adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of as
of January 1, 1996." Under this method, the Predecessor is required to review
long-lived assets and certain identifiable intangibles to be held and used for
impairment whenever
F-22
<PAGE> 96
AMERICAN EUROPEAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 are reported at
the lower of carrying amount or fair value less cost to sell.
Unearned Revenues -- Unearned revenues represent the portion of student
tuition, fees, and dorm payments received in advance of services being
performed.
Income Taxes -- The Predecessor is organized under the Subchapter S
Corporation provisions of the Internal Revenue Code. Accordingly, income taxes
are provided in the Predecessor's financial statements only for income subject
to taxation in certain state jurisdictions which do not recognize Subchapter S
Corporation elections, and for The American College in London, Ltd., which is a
corporation of British registry subject to tax provisions of the United Kingdom.
Foreign Currency Translation -- Assets and liabilities of the Predecessor'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
year. Resulting translation differences are recognized as a component of
shareholders' equity. Foreign currency translation gains and losses are
immaterial to the accompanying financial statements.
Fair Value of Financial Instruments -- Management has reviewed the various
assets and liabilities of the Predecessor in accordance with SFAS 107,
"Disclosures About Fair Values of Financial Instruments." Management has
concluded that all of the Partnership's financial instruments have terms such
that their book value approximates fair value.
3. OTHER CURRENT ASSETS
Other current assets at May 31, 1996 consist of the following:
<TABLE>
<S> <C>
Prepaid rent................................................ $ 93,096
Prepaid deposit............................................. 364,563
Other....................................................... 131,496
--------
$589,155
========
</TABLE>
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at May 31, 1996 is summarized as follows:
<TABLE>
<S> <C>
Furniture, fixtures, and equipment.......................... $9,062,904
Leasehold improvements...................................... 3,301,835
Leasehold interest.......................................... 218,582
Library and textbooks....................................... 1,702,067
----------
14,285,388
Less accumulated depreciation and amortization.............. 9,242,306
----------
$5,043,082
==========
</TABLE>
Depreciation expense for property, plant, and equipment was $390,983,
$1,224,711, and $1,134,166 for the period from June 1, 1996 to October 8, 1996
and for the two years ended May 31, 1996, respectively.
Prior to the sale of the Company on October 8, 1996 (see Notes 10 and 12),
certain aircraft with a book value of $1,640,488 was transferred, subject to
debt of $2,141,660, to the selling shareholder for $737,370. The resulting
difference of approximately $1.2 million between the book value of assets
received and the debt assumed was treated as a contribution to capital.
F-23
<PAGE> 97
AMERICAN EUROPEAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTE PAYABLE -- LINE OF CREDIT
The Predecessor has an agreement with a bank which provides for a line of
credit of up to L250,000 (approximately $380,000 at May 31, 1996), through
January 1997. Interest on any outstanding balance is charged at a fluctuating
rate based on the bank's base rate plus 3%, with an effective rate of 8.75% at
May 31, 1996. This line of credit is secured by the personal guarantee of the
majority shareholder and Chief Executive Officer of the Predecessor, along with
certain of the leasehold properties owned by the Predecessor in London, England.
At May 31, 1996, L231,361 or $352,825 had been drawn on this line of credit,
respectively. The note payable was repaid in full in connection with the sale of
the Predecessor (see Note 12).
6. LONG-TERM DEBT
Long-term debt at May 31, 1996 consisted of the following:
<TABLE>
<S> <C>
Promissory note to a bank in the original principal amount
of $224,000, payable in 36 monthly installments of $6,980,
including interest at the bank's base rate plus 2.5% (8.25%
at May 31, 1996), through January 1997, when remaining
principal and accrued interest are due in full, secured by
guarantees of the majority shareholder and chief executive
officer of the Predecessor.................................. $ 73,506
Note payable to a leasing company in the original principal
amount of $210,513, payable in 60 monthly installments of
$4,444, including interest at 8%, through January 1999,
secured by certain leasehold improvements................... 126,326
Promissory note to a lending institution in the original
principal amount of $220,133, payable in 60 monthly
installments of $3,669, plus interest at the Federal
Reserve's commercial paper rate plus 2.5%, through December
1997, secured by certain computer equipment and furniture... 69,709
Note payable to a bank in the original principal amount of
$750,000, payable in monthly installments of $6,250,
including interest at prime plus 1% (an effective rate of
9.25% at May 31, 1995) through February 2000 and a balloon
payment of $381,250 at February 2000, secured by certain
property.................................................... 656,250
Note payable to a bank in the original principal amount of
$308,000, payable in monthly installments of $26,765,
including interest at the bank's base rate plus 3% (an
effective rate of 8.75% at May 31, 1996) through September
1996, secured by guarantees of the majority shareholder and
Chief Executive Officer of the Predecessor.................. 104,729
Note payable to a bank in the original principal amount of
$1,500,000 payable in quarterly principal installments of
$37,500 plus interest at prime plus 1% (an effective rate of
9.25% at May 31, 1996) until December 2000 and a balloon
payment of $787,500 at December 2000, secured by certain
property.................................................... 1,462,500
Note payable to a bank in the original principal amount of
$1,500,000 payable in monthly principal installments of
$25,000 plus interest at prime plus 1% (an effective rate of
9.25% at May 31, 1996) through January 2001, secured by
first security assignment of all Predecessor assets,
guarantees of the majority shareholder and Chief Executive
Officer of the Predecessor, student accounts receivable from
the Atlanta and Los Angeles campuses, and by certain life
insurance policies on the life of the majority
shareholder................................................. 1,400,000
</TABLE>
F-24
<PAGE> 98
AMERICAN EUROPEAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Note payable to a bank in the original principal amount of
$500,000, payable in monthly installments of $20,833, plus
interest at prime plus 1% (an effective rate of 9.25% at May
31, 1996) through November 1996, secured by first security
assignment of all Predecessor assets, guarantees of majority
shareholder and Chief Executive Officer of the Predecessor,
student accounts receivable from the Atlanta and Los Angeles
campuses, and by certain life insurance policies on the life
of the majority shareholder................................. 145,833
----------
$4,038,853
==========
Future maturities of long-term debt, excluding capital lease obligations,
for years ending May 31 are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 937,037
1998........................................................ 598,659
1999........................................................ 559,407
2000........................................................ 881,250
2001........................................................ 1,062,500
----------
$4,038,853
==========
</TABLE>
Substantially all of the aforementioned debt instruments were repaid in
full in connection with the sale of the Predecessor (see Note 11).
Interest expense incurred on the lines of credit, note payable, long-term
debt, and capital lease obligations during the period from June 1, 1996 to
October 8, 1996 and the two years ended May 1996 approximated $258,000,
$730,000, and $608,000, respectively.
7. EMPLOYEE BENEFIT PLAN
The Predecessor 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. Predecessor contributions to the Plan for
matching of employee contributions were approximately $44,000 and $47,000 for
the two years ended May 31, 1996. There was no profit sharing plan contribution
made for the two years ended May 31, 1996.
8. LEASES
The Predecessor leases office and college space, dormitories, and various
items of equipment under lease agreements with varying expiration dates through
2005. Many of the lease agreements contain renewal clauses with various terms;
however, none of the leases contain any significant restrictions. 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 Predecessor also leases various other assets under agreements which are
classified as capital leases. The net book value of these assets at May 31, 1996
was as follows:
<TABLE>
<S> <C>
Furniture, fixtures and equipment........................... $1,030,113
Less accumulated amortization............................... 244,432
----------
$ 785,681
==========
</TABLE>
F-25
<PAGE> 99
AMERICAN EUROPEAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
For the years ending May 31, future minimum lease payments and the present
value of net minimum lease payments at May 31, 1996 under capital leases and
future minimum lease payments under noncancellable operating leases are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- -----------
<S> <C> <C>
1997........................................................ $348,039 $ 2,156,164
1998........................................................ 255,616 1,844,450
1999........................................................ 157,503 1,738,334
2000........................................................ 83,016 1,605,948
2001........................................................ 50,657 1,531,179
Thereafter.................................................. 0 9,543,636
-------- -----------
Total minimum lease payments...................... 894,831 $18,419,711
===========
Less amount representing interest........................... 178,130
--------
Present value of net minimum lease payments....... $716,701
========
</TABLE>
Rent expense incurred during the period from June 1, 1996 to October 8,
1996 and each of the two years ended May 31, 1996 and 1995 under all operating
leases was approximately $1,337,000, $3,997,800, and $3,611,766, respectively.
9. INCOME TAXES
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 $3,800,000,
$4,500,000, and $1,889,694 for the fiscal years 1995 and 1996 and for the period
from June 1, 1996 through October 8, 1996, respectively.
Deferred income taxes are provided with respect to certain items in the
United Kingdom which are recognized in one period for financial reporting
purposes and another period for income tax purposes.
Significant components of the Predecessor's deferred income tax asset at
May 31, 1996 are as follows:
<TABLE>
<S> <C>
Amortization and leasehold improvements..................... $ 240,000
Depreciation................................................ (136,000)
Operating lease payments.................................... 40,000
---------
$ 144,000
=========
</TABLE>
Significant components of the provision for income taxes for the period
from June 1, 1996 to October 8, 1996 and the two years ended May 31, 1996 are as
follows:
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED MAY 31,
JUNE 1, 1996 TO -------------------
OCTOBER 1, 1996 1996 1995
--------------- -------- --------
<S> <C> <C> <C>
Domestic......................................... $ -- $ 23,361 $ 25,492
Foreign.......................................... -- 83,900 98,199
-------- -------- --------
$ -- $107,261 $123,691
======== ======== ========
</TABLE>
F-26
<PAGE> 100
AMERICAN EUROPEAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. RELATED PARTY TRANSACTIONS
The Predecessor leases office space from a partnership owned by the
shareholders of the Predecessor under a five-year lease which expires in
December 1996. During the period from June 1, 1996 to October 8, 1996 and the
two years ended May 31, 1996, the Predecessor incurred rental expenses of
approximately $49,000, $150,000, and $145,000, respectively, related to this
lease.
At May 31, 1996, the majority shareholder's indebtedness to the Predecessor
consisted of three notes payable bearing interest at 6.25% with balances of
$1,622,787, $1,393,520, and $1,018,526 maturing on May 31, 1999, May 31, 2000,
and May 31, 2001, respectively. During the two years ended May 31, 1996, the
Predecessor recognized interest income of $334,000 and $149,000 related to these
notes.
At May 31, 1996, the minority shareholder's indebtedness to the Predecessor
consisted of three notes payable bearing interest at 6.25%, with balances of
$58,487, $154,835, and $109,435 maturing on May 31, 1999, May 31, 2000, and May
31, 2001, respectively. During the two years ended May 31, 1996, the Predecessor
recognized interest income of $27,000 and $4,400 related to these notes.
During the year ended May 31, 1992, the majority shareholder of the
Predecessor acquired from the Predecessor a 20.1% interest in American College
in London, Ltd. U.S., a subsidiary of the Predecessor and the parent company of
American College in London, Ltd. The shareholder issued a $406,267 promissory
note to the Predecessor in exchange for this stock purchase. The note bears
interest at 10% and requires annual principal and interest payments beginning
October 1991 through December 1997. This note had a balance of $203,133 at May
31, 1996, and has been eliminated in combination.
Certain aircraft were sold to the majority shareholder of the Predecessor
in 1996 (see Note 4).
11. 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
represent management fees from a management agreement which generates operating
profits only. Net revenues and income (loss) from campus operations by
geographic area for the period June 1, 1996 to October 8, 1996 and the two years
ended May 31, 1996 and identifiable assets by geographic area at May 31, 1996
are as follows (in $000s):
<TABLE>
<CAPTION>
PERIOD
FROM
JUNE 1,
1996 TO YEAR ENDED
OCTOBER 8, -----------------------------
1996 1996 1995
------------ ------------- -------------
<S> <C> <C> <C>
Net revenues:
United States............................................. $ 3,431 $14,630 $13,001
United Kingdom............................................ 2,758 11,864 10,695
Home Office............................................... -- -- --
------- ------- -------
Total.................................................. $ 6,189 $26,494 $23,696
======= ======= =======
Income (loss) from campus operations:
United States............................................. $ 691 $ 5,986 $ 5,275
United Kingdom............................................ 696 4,888 4,083
Dubai, UAE................................................ (21) 127
Home Office............................................... (2,557) (6,093) (5,056)
------- ------- -------
Total.................................................. ($1,191) $ 4,908 $ 4,302
======= ======= =======
</TABLE>
F-27
<PAGE> 101
AMERICAN EUROPEAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Identifiable assets at May 31, 1996 were $5,690 and $1,563 for the United
States and the United Kingdom, respectively.
12. SALE OF THE COMPANY
On October 8, 1996 the two shareholders owning 100% of the Common Stock of
the Predecessor sold their entire interest in the Predecessor.
Among other things, the agreement provided for the sale of certain assets
of the Predecessor to one of the selling shareholders, the distribution of all
income from the operations of the Predecessor to the selling shareholders prior
to the sale, and the repayment of the outstanding balances at date of closing of
the notes receivable and advances to the selling shareholders.
F-28
<PAGE> 102
======================================================
NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY UNDERWRITER. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A
SOLICITATION OF, ANY PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH AN OFFER OR
SOLICITATION IS UNLAWFUL.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Acquisitions.......................... 8
Risk Factors.......................... 9
Use of Proceeds....................... 19
Dividend Policy....................... 19
Capitalization........................ 20
Dilution.............................. 21
Pro Forma Consolidated Financial
Data................................ 22
Selected Consolidated Financial
Data................................ 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 26
Business.............................. 34
Management............................ 57
Certain Transactions.................. 63
Principal and Selling Shareholders.... 64
Description of Capital Stock.......... 66
Shares Eligible for Future Sale....... 68
Underwriting.......................... 70
Legal Matters......................... 71
Experts............................... 71
Additional Information................ 72
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the Class A Common Stock offered hereby, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
2,600,000 SHARES
[EDUTREK LOGO]
CLASS A COMMON STOCK
------------
PROSPECTUS
, 1997
------------
SMITH BARNEY INC.
THE ROBINSON-HUMPHREY
COMPANY, INC.
======================================================
<PAGE> 103
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses expected to be incurred in
connection with the issuance and distribution of the securities being
registered, other than underwriting discounts and commissions. All of the
amounts shown are estimated except for the registration fees of the Securities
and Exchange Commission and the National Association of Securities Dealers,
Inc.:
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID BY COMPANY
---------------
<S> <C>
SEC registration fee........................................ $ 13,591
NASD filing fee............................................. 4,985
Nasdaq National Market entry fee............................ 21,325
Blue sky qualification fees and expenses.................... 10,000
Printing and engraving expenses............................. 80,000
Legal fees and expenses..................................... 175,000
Accounting fees and expenses................................ 180,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 5,099
--------
Total..................................................... $500,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As provided under Georgia law, the Company's Articles of Incorporation
provide that a Director shall not be personally liable to the Company or its
shareholders for monetary damages, for breach of duty of care or any other
fiduciary duty owed to the Company as a Director, except that such provisions
shall not eliminate or limit the liability of a Director (a) for any
appropriation, in violation of his or her duties, of any business opportunity of
the Company; (b) for acts or omissions which involve intentional misconduct or
knowing violation of law; (c) for unlawful corporate distributions; or (d) for
any transaction from which the Director received an improper personal benefit.
If applicable law is amended to authorize corporate action further eliminating
or limiting the liability of Directors, the liability of each Director of the
Company shall be eliminated or limited to the fullest extent permitted by
applicable law. Article VI of the Company's Bylaws provides that the Company
shall indemnify a Director who has been successful in the defense of any
proceeding to which he or she was a party or in defense of any claim, issue or
matter therein because he or she is or was a Director of the Company, against
reasonable expenses incurred by him or her in connection with such defense.
The Company's Bylaws also provide that the Company may indemnify any
Director, officer, employee or agent made a party to a proceeding because he or
she is or was a Director, officer, employee or agent against liability incurred
in the proceeding if he or she acted in a manner he or she believed in good
faith to be in or not opposed to the best interests of the Company and, in the
case of any criminal proceeding, he or she had no reasonable cause to believe
his or her conduct was unlawful. Determination concerning whether or not the
applicable standard of conduct has been met can be made by (a) a disinterested
majority of the Board of Directors; (b) a majority of a committee of
disinterested Directors; (c) independent legal counsel; or (d) an affirmative
vote of a majority of shares held by disinterested shareholders. No
indemnification may be made to or on behalf of a Director, officer, employee or
agent (1) in connection with a proceeding by or in the right of the Company in
which such person was adjudged liable to the Company, or (2) in connection with
any other proceeding in which such person was adjudged liable on the basis that
personal benefit was improperly received by him or her.
The Company may, if authorized by its shareholders by a majority of votes
which would be entitled to be cast in a vote to amend the Company's Articles of
Incorporation, indemnify or obligate itself to indemnify a
II-1
<PAGE> 104
Director, officer, employee or agent made a party to a proceeding, including a
proceeding brought by or in the right of the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On July 2, 1996, the Company issued 1,120,000 shares of Class B Common
Stock to each of Steve Bostic and Alice Jane Bostic for an aggregate purchase
price of $1,000,000. On October 7, 1996, incident to the merger of EduTrek
Acquisition Corporation, a wholly owned subsidiary of the Company, with and into
EduTrek Systems, the Company issued in exchange for shares of EduTrek Systems
(i) an aggregate of 105,000 shares of Class A Common Stock to four EduTrek
Systems shareholders, (ii) 696,150 shares of Class B Common Stock to R. Steven
Bostic, (iii) 696,150 shares of Class B Common Stock to Alice Jane Bostic, and
(iv) 602,700 shares of Class B Common Stock to the Bostic Family Limited
Partnership.
In addition, on October 8, 1996, the Company issued 350,000 shares of Class
A Common Stock to The Robinson-Humphrey Company, Inc. as consideration for
financial advisory services provided the Company in connection with the College
Acquisition. On October 8, 1996, the Company also issued 210,000 shares of Class
A Common Stock to Phillip J. Markert as consideration for the issued and
outstanding shares of capital stock of the American College in London, Ltd.,
U.S. owned by Mr. Markert. In a separate transaction also taking place on
October 8, 1996, the Company issued 1,050,000 shares of Class B Common Stock to
each of Steve Bostic and Alice Jane Bostic for an aggregate purchase price of
$3,000,000.
In connection with the execution of certain loan and credit agreements
between the Company and its lenders, on October 8, 1996 the Company issued
warrants to its lenders to purchase an aggregate of 879,150 shares of Class A
Common Stock. Following the exercise of a portion of such warrants by one
warrantholder, on June 17, 1997, the Company issued an aggregate of 257,110
shares of Class A Common Stock for an aggregate purchase price of $367.30. No
consideration, other than the agreement to enter into the respective loan and
credit agreements, was paid for the warrants.
Except as otherwise noted, all issuances of securities described above were
made in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933 as transactions by an issuer not involving a public
offering. All of the securities were acquired by the recipients thereof for
investment and with no view toward the resale or distribution thereof. In each
instance, the purchaser had a pre-existing relationship with the Company or its
founders, the offers and sales were made without any public solicitation, the
certificates bear restrictive legends and appropriate stop transfer instructions
have been or will be given to the transfer agent. No underwriter was involved in
the transactions and no commissions were paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<C> <C> <S>
1.1** -- Form of Underwriting Agreement
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
3(i)* -- Articles of Incorporation
3(i).1* -- Articles of Amendment to Articles of Incorporation, dated
September 6, 1996
3(i).2* -- Articles of Amendment to Articles of Incorporation, dated
June 17, 1997
3(ii)* -- Bylaws
4.1** -- Specimen Certificate of Class A Common Stock
5.1** -- Opinion of Smith, Gambrell & Russell, LLP
10.1* -- 1997 Incentive Plan
10.2* -- Amendment No. 1 to 1997 Incentive Plan
10.3* -- Form of Incentive Stock Option Agreement
10.4* -- Form of Non-qualified Stock Option Agreement
</TABLE>
II-2
<PAGE> 105
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<C> <C> <S>
10.5* -- Credit Agreement, dated October 8, 1996, by and between E
Holdings, Inc. and NationsBank, N.A. (South)
10.6* -- Subordinate Loan and Warrant Purchase Agreement, dated
October 8, 1996, by and among, E Holdings, Inc. and
Stratford Capital Partners, L.P.
10.6.1** -- First Amendment to Subordinate Loan and Warrant Purchase
Agreement, dated May 31, 1997, by and between Stratford
Capital Partners, L.P., GMM Partners SBIC, L.P. and the
Company
10.7* -- Employment Agreement, dated March 21, 1997, by and between E
Holdings, Inc. and Stephen G. Franklin, Sr.
10.8* -- Employment Agreement dated October 8, 1996 by and between
American European Corporation and Phillip J. Markert.
10.9* -- Consulting Agreement, dated October 8, 1996, by and between
the Company and The Phillip J. Markert Consulting Group,
Inc.
10.10* -- Agreement, dated October 1, 1995, by and between American
European Middle East Corporation, LLC and Middle East
Colleges, Ltd., relating to the formation and operation of
the College'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 College's campus in Dubai
10.12* -- Memorandum of Understanding, dated January 24, 1996, by and
between American European Middle East Corporation, LLC and
Middle East Colleges, Ltd.
10.13* -- Registration and Anti-Dilution Rights Agreement, dated
October 8, 1996, by and between E Holdings, Inc. and The
Robinson-Humphrey Company, Inc.
10.14* -- Anti-Dilution Rights Agreement, dated October 8, 1996, by
and between E Holdings, Inc. and Phillip J. Markert
10.15** -- Agent Agreement, dated March 13, 1996, by and between Target
Marketing Systems, Inc. and EduTrek Systems, Inc.
10.16** -- License Agreement, dated July 26, 1997, by and between ITI
Learning Systems, Inc., American European Corporation and
the Company
21.1* -- Subsidiaries of the Registrant
23.1** -- Consent of Deloitte & Touche LLP
23.2** -- Consent of Deloitte & Touche LLP
23.3** -- Consent of Smith, Gambrell & Russell, LLP (included as part
of Exhibit 5)
24.1* -- Powers of Attorney (included on the signature page of this
Registration Statement)
27.1** -- Financial Data Schedule (for SEC use only)
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
(b) The financial statements and schedules filed as a part of this
Registration Statement are as follows:
1. Financial Statements. See Index to Financial Statements on page
F-1 of the Prospectus included in this Registration Statement.
2. Financial Statement Schedules. Financial statement schedules have
been omitted because they are not applicable or are not required, as the
information required to be set forth therein is included in the
consolidated financial statements of the registrant.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions referred to in Item 14, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission
II-3
<PAGE> 106
such indemnification is against public policy as expressed in that Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE> 107
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, Georgia on August 1, 1997.
EDUTREK INTERNATIONAL, INC.
By: /s/ STEVE BOSTIC
------------------------------------
Steve Bostic
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEVE BOSTIC Chairman and Chief Executive August 1, 1997
- ----------------------------------------------------- Officer (Principal Executive
Steve Bostic Officer)
* President, Chief Academic August 1, 1997
- ----------------------------------------------------- Officer and Director
Stephen G. Franklin, Sr.
* Director August 1, 1997
- -----------------------------------------------------
Paul D. Beckham
* Director August 1, 1997
- -----------------------------------------------------
Fred C. Davison
* Director August 1, 1997
- -----------------------------------------------------
Gaylen D. Kemp
/s/ DONALD J. BLANKERS Chief Financial Officer August 1, 1997
- ----------------------------------------------------- (Principal Financial and
Donald J. Blankers Accounting Officer)
</TABLE>
*By: /s/ STEVE BOSTIC
---------------------------------
Steve Bostic, as Attorney-in-Fact
II-5
<PAGE> 108
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
4.1 -- Specimen Certificate of Class A Common Stock
5.1 -- Opinion of Smith, Gambrell & Russell, LLP
10.6.1 -- First Amendment to Subordinate Loan and Warrant Purchase
Agreement, dated May 31, 1997, by and between Stratford
Capital Partners, L.P., GMM Partners SBIC, L.P. and the
Company
10.15 -- Agent Agreement, dated March 13, 1996, by and between Target
Marketing Systems, Inc. and EduTrek Systems, Inc.
10.16 -- License Agreement, dated July 26, 1997, by and between ITI
Learning Systems, Inc., American European Corporation and
the Company
23.1 -- Consent of Deloitte & Touche LLP
23.2 -- Consent of Deloitte & Touche LLP
23.3 -- Consent of Smith, Gambrell & Russell, LLP (included as part
of Exhibit 5)
27.1 -- Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
EXHIBIT 1.1
ALSTON & BIRD DRAFT
2,600,000 Shares
EDUTREK INTERNATIONAL, INC.
Class A Common Stock
(No Par Value)
UNDERWRITING AGREEMENT
August , 1997
SMITH BARNEY INC.
THE ROBINSON-HUMPHREY COMPANY, INC.
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
EduTrek International, Inc., a Georgia corporation (the "Company"),
proposes to issue and sell an aggregate of 2,342,890 shares of its Class A
common stock, no par value ("Class A Common Stock"), to the several
Underwriters named in Schedule II hereto (the "Underwriters"), and the person
named in Schedule I hereto (the "Selling Shareholder") proposes to sell to the
several Underwriters 257,110 shares of Class A Common Stock. The Company and
the Selling Shareholder are hereinafter sometimes referred to as the "Sellers".
The Class A Common Stock and the Company's Class B common stock, no par value
("Class B Common Stock"), are hereinafter referred to collectively as the
"Common Stock," and the 2,342,890 shares of Class A Common Stock to be issued
and sold to the Underwriters by the Company and the 257,110 shares of Class A
Common Stock to be sold to the Underwriters by the Selling Shareholder are
hereinafter referred to as the "Firm Shares". The Company also proposes to
sell to the Underwriters, upon the terms and conditions set forth in Section 2
hereof, up to an additional 390,000 shares (the "Additional Shares") of Class A
Common Stock. The Firm Shares and the Additional Shares (to the extent such
Additional Shares are purchased by the Underwriters) are hereinafter
collectively referred to as the "Shares".
The Company and the Selling Shareholder wish to confirm as follows their
respective agreements with you (the "Representatives") and the other several
Underwriters on whose behalf you are acting, in connection with the several
purchases of the Shares by the Underwriters.
- 1 -
<PAGE> 2
1. Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1 (File No. 333-__________) under
the Act (the "registration statement"), including a prospectus subject to
completion, relating to the Shares. The term "Registration Statement" as used
in this Agreement means the registration statement (including all financial
schedules and exhibits), as amended at the time it becomes effective, or, if
the registration statement became effective prior to the execution of this
Agreement, as supplemented or amended prior to the execution of this Agreement.
If it is contemplated, at the time this Agreement is executed, that a
post-effective amendment to the registration statement will be filed and must
be declared effective before the offering of the Shares may commence, the term
"Registration Statement" as used in this Agreement means the registration
statement as amended by said post-effective amendment. If an abbreviated
registration statement is prepared and filed with the Commission in accordance
with Rule 462(b) under the Act ("an Abbreviated Registration Statement"), the
term "Registration Statement" as used in this Agreement includes the
Abbreviated Registration Statement. The term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement, or, if the prospectus included in the Registration Statement omits
information in reliance on Rule 430A under the Act and such information is
included in a prospectus filed with the Commission pursuant to Rule 424(b)
under the Act, the term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement as supplemented
by the addition of the Rule 430A information contained in the prospectus filed
with the Commission pursuant to Rule 424(b). The term "Prepricing Prospectus"
as used in this Agreement means the prospectus subject to completion in the
form included in the registration statement at the time of the initial filing
of the registration statement with the Commission, and as such prospectus shall
have been amended from time to time prior to the date of the Prospectus.
2. Agreements to Sell and Purchase. Subject to such adjustments as you
may determine in order to avoid fractional shares, the Company hereby agrees,
subject to all the terms and conditions set forth herein, to issue and sell to
each Underwriter and, upon the basis of the representations, warranties and
agreements of the Company and the Selling Shareholder herein contained and
subject to all the terms and conditions set forth herein, each Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of $__________ per Share (the "purchase price per share"), the number of
Firm Shares which bears the same proportion to the aggregate number of Firm
Shares to be issued and sold by the Company as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule II hereto (or such
number of Firm Shares increased as set forth in Section 12 hereof) bears to the
aggregate number of Firm Shares to be sold by the Company and the Selling
Shareholder.
Subject to such adjustments as you may determine in order to avoid
fractional shares, the Selling Shareholder hereby agrees, subject to all the
terms and conditions set forth herein, to sell to each Underwriter and, upon
the basis of the representations, warranties and agreements of the Company and
the Selling Shareholder herein contained and subject to all the terms and
conditions set forth herein, each Underwriter, severally and not jointly,
agrees to purchase from
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<PAGE> 3
the Selling Shareholder at the purchase price per share that number of Firm
Shares which bears the same proportion to the number of Firm Shares set forth
opposite the name of such Selling Shareholder in Schedule I hereto as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule II hereto (or such number of Firm Shares increased as set forth in
Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by
the Company and the Selling Shareholder.
The Company also agrees, subject to all the terms and conditions set forth
herein, to sell to the Underwriters, and, upon the basis of the
representations, warranties and agreements of the Company and the Selling
Shareholder herein contained and subject to all the terms and conditions set
forth herein, the Underwriters shall have the right to purchase from the
Company, at the purchase price per share, pursuant to an option (the
"over-allotment option") which may be exercised in whole or in part at any time
and from time to time prior to 9:00 P.M., New York City time, on the 30th day
after the date of the Prospectus (or, if such 30th day shall be a Saturday or
Sunday or a holiday, on the next business day thereafter when the New York
Stock Exchange is open for trading), up to an aggregate of 390,000 Additional
Shares from the Company. Additional Shares may be purchased only for the
purpose of covering over-allotments made in connection with the offering of the
Firm Shares. Upon any exercise of the over-allotment option, each Underwriter,
severally and not jointly, agrees to purchase from the Company the number of
Additional Shares (subject to such adjustments as you may determine in order to
avoid fractional shares) which bears the same proportion to the number of
Additional Shares to be sold by the Company as the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule II hereto (or such
number of Firm Shares increased as set forth in Section 12 hereof) bears to the
aggregate number of Firm Shares to be sold by the Company and the Selling
Shareholder.
Certificates in transferable form for the Shares which the Selling
Shareholder agrees to sell pursuant to this Agreement have been placed in
custody with the transfer agent for the Company (the "Custodian") for delivery
under this Agreement pursuant to a Custody Agreement and Power of Attorney (the
"Custody Agreement") executed by the Selling Shareholder appointing [R. Steven
Bostic, Douglas C. Chait, Donald J. Blankers and ______________] as agents and
attorneys-in-fact (the "Attorneys-in-Fact"). The Selling Shareholder agrees
that (i) the Shares represented by the certificates held in custody pursuant to
the Custody Agreement are subject to the interests of the Underwriters and the
Company, (ii) the arrangements made by the Selling Shareholder for such custody
are, except as specifically provided in the Custody Agreement, irrevocable, and
(iii) the obligations of the Selling Shareholder hereunder and under the
Custody Agreement shall not be terminated by any act of such Selling
Shareholder or by operation of law, whether by the dissolution of the Selling
Shareholder or the occurrence of any other event. If the Selling Shareholder
shall be dissolved or if any other event shall occur before the delivery of the
Shares hereunder, certificates for the Shares of such Selling Shareholder shall
be delivered to the Underwriters by the Attorneys-in-Fact in accordance with
the terms and conditions of this Agreement and the Custody Agreement as if such
dissolution or other event had not occurred, regardless of whether or not the
Attorneys-in-Fact or any Underwriter shall have received notice of such
dissolution or other event. Each Attorney-in-Fact is authorized, on behalf of
the Selling Shareholder, to execute this Agreement and any other documents
necessary
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<PAGE> 4
or desirable in connection with the sale of the Shares to be sold hereunder by
such Selling Shareholder, to make delivery of the certificates for such Shares,
to receive the proceeds of the sale of such Shares, to give receipts for such
proceeds, to pay therefrom any expenses to be borne by such Selling Shareholder
in connection with the sale and public offering of such Shares, to distribute
the balance thereof to such Selling Shareholder, and to take such other action
as may be necessary or desirable in connection with the transactions
contemplated by this Agreement. Each Attorney-in-Fact agrees to perform his
duties under the Custody Agreement.
3. Terms of Public Offering. The Sellers have been advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable and initially to offer the
Shares upon the terms set forth in the Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M., New
York City time, on August __, 1997 (the "Closing Date"). The place of closing
for the Firm Shares and the Closing Date may be varied by agreement among you,
the Company and the Attorneys-in-Fact.
Delivery to the Underwriters of and payment for any Additional Shares to
be purchased by the Underwriters shall be made at the aforementioned office of
Smith Barney Inc. at such time on such date (the "Option Closing Date"), which
may be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor earlier than two nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a
written notice from you on behalf of the Underwriters to the Company and the
Attorneys-in-Fact of the Underwriters' determination to purchase a number,
specified in such notice, of Additional Shares. The place of closing for any
Additional Shares and the Option Closing Date for such Shares may be varied by
agreement among you, the Company and the Attorneys-in-Fact.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the Closing Date or the Option Closing Date, as the
case may be. The certificates evidencing the Firm Shares and any Additional
Shares to be purchased hereunder shall be delivered to you on the Closing Date
or the Option Closing Date, as the case may be, against payment of the purchase
price therefor in immediately available funds.
5. Covenants of the Company. The Company covenants and agrees with the
several Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Company will endeavor to cause the Registration Statement or such
post-effective amendment to become effective as soon as possible and will
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<PAGE> 5
advise you promptly and, if requested by you, will confirm such advice in
writing, when the Registration Statement or such post-effective amendment has
become effective.
(b) The Company will advise you promptly and, if requested by you, will
confirm such advice in writing: (i) of any request by the Commission for
amendment of or a supplement to the Registration Statement, any Prepricing
Prospectus or the Prospectus or for additional information; (ii) of receipt of
any comments or other communications from the Commission; (iii) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any proceeding for
such purpose; and (iv) within the period of time referred to in paragraph (f)
below, of any change in the Company's condition (financial or other), business,
prospects, properties, net worth or results of operations, or of the happening
of any event, which makes any statement of a material fact made in the
Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or supplemented) in
order to state a material fact required by the Act or the regulations
thereunder to be stated therein or necessary in order to make the statements
therein not misleading, or of the necessity to amend or supplement the
Prospectus (as then amended or supplemented) to comply with the Act or any
other law. If at any time the Commission shall issue any stop order suspending
the effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible time.
(c) The Company will furnish to you, without charge, three (3) signed
copies of the registration statement as originally filed with the Commission
and of each amendment thereto, including financial statements and all exhibits
thereto, and will also furnish to you, without charge, such number of conformed
copies of the registration statement as originally filed and of each amendment
thereto, but without exhibits, as you may request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which you
shall not previously have been advised or to which you shall object after being
so advised or (ii) so long as, in the opinion of counsel for the Underwriters,
a Prospectus is required to be delivered in connection with sales by any
Underwriter or dealer, file any information, documents or reports pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act") without
delivering a copy of such information, documents or reports to you, as
Representatives of the Underwriters, prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the Company has
delivered to you, without charge, in such quantities as you have requested,
copies of each form of the Prepricing Prospectus. The Company consents to the
use, in accordance with the provisions of the Act and with the securities or
Blue Sky laws of the jurisdictions in which the Shares are offered by the
several Underwriters and by dealers, prior to the date of the Prospectus, of
each Prepricing Prospectus so furnished by the Company.
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<PAGE> 6
(f) As soon after the execution and delivery of this Agreement as possible
and thereafter from time to time for such period as in the opinion of counsel
for the Underwriters a prospectus is required by the Act to be delivered in
connection with sales by any Underwriter or dealer, the Company will
expeditiously deliver to each Underwriter and each dealer, without charge, as
many copies of the Prospectus (and of any amendment or supplement thereto) as
you may request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of the Act
and with the securities or Blue Sky laws of the jurisdictions in which the
Shares are offered by the several Underwriters and by all dealers to whom
Shares may be sold, both in connection with the offering and sale of the Shares
and for such period of time thereafter as the Prospectus is required by the Act
to be delivered in connection with sales by any Underwriter or dealer. If
during such period of time any event shall occur that in the judgment of the
Company or in the opinion of counsel for the Underwriters is required to be set
forth in the Prospectus (as then amended or supplemented) or should be set
forth therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
to supplement or amend the Prospectus to comply with the Act or any other law,
the Company will forthwith prepare and, subject to the provisions of paragraph
(d) above, file with the Commission an appropriate supplement or amendment
thereto, and will expeditiously furnish to the Underwriters and dealers a
reasonable number of copies thereof. In the event that the Company and you, as
Representatives of the several Underwriters, agree that the Prospectus should
be amended or supplemented, the Company, if requested by you, will promptly
issue a press release announcing or disclosing the matters to be covered by the
proposed amendment or supplement.
(g) The Company will cooperate with you and with counsel for the
Underwriters in connection with the registration or qualification of the Shares
for offering and sale by the several Underwriters and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided
that in no event shall the Company be obligated to qualify to do business in
any jurisdiction where it is not now so qualified or to take any action which
would subject it to service of process in suits, other than those arising out
of the offering or sale of the Shares, in any jurisdiction where it is not now
so subject. The Company will, from time to time, prepare and file such
statements, reports and other documents, as are or may be required to continue
such qualifications in effect for so long a period as you may reasonably
request for distribution of the Shares.
(h) The Company will make generally available to its security holders a
consolidated earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as
practicable after the end of such period, which consolidated earnings statement
shall satisfy the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company will furnish to
you (i) as soon as available, a copy of each report of the Company mailed to
shareholders or filed with the Commission or the Nasdaq National Market, and
(ii) from time to time such other information concerning the Company as you may
request.
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<PAGE> 7
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 12 hereof or by notice given by you terminating
this Agreement pursuant to Section 12 or Section 13 hereof) or if this
Agreement shall be terminated by the Underwriters because of any failure or
refusal on the part of the Company or the Selling Shareholder to comply with
the terms or fulfill any of the conditions of this Agreement, the Company
agrees to reimburse the Representatives for all out-of-pocket expenses
(including fees and expenses of counsel for the Underwriters) incurred by you
in connection herewith.
(k) The Company shall apply the net proceeds from the sale of the Shares
to be sold by it hereunder substantially in accordance with the description set
forth in the Prospectus and shall file such reports with the Commission with
respect to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 under the Act.
(l) If Rule 430A of the Act is employed, the Company will timely file the
Prospectus pursuant to Rule 424(b) under the Act and will advise you of the
time and manner of such filing.
(m) Except as provided in this Agreement, the Company will not (i) sell,
pledge, offer to sell, solicit an offer to buy, contract to sell, grant any
option, right or warrant to purchase, sell any option or contract to purchase,
or otherwise transfer or dispose of, directly or indirectly, any shares of
Class A Common Stock (other than the Shares to be sold by it), or any
securities convertible into or exercisable or exchangeable for Class A Common
Stock, (ii) enter into any swap or other arrangement that transfers all or a
portion of the economic consequences associated with the ownership of the Class
A Common Stock or any securities convertible into or exercisable or
exchangeable for Class A Common Stock, or (iii) make any demand for or exercise
any right with respect to the registration of any shares of Class A Common
Stock or any securities convertible into or exercisable or exchangeable for
Class A Common Stock, for a period of 180 days after the date of the
Prospectus, without the prior written consent of Smith Barney Inc., except that
the Company may grant options and other awards to its employees pursuant to the
Company's 1997 Incentive Plan, as such plan exists on the date of the
Prospectus, and may issue shares of Common Stock issuable upon the exercise of
options and other awards granted under such plan which are outstanding on the
date of the Prospectus.
(n) The Company has furnished to you "lock-up" letters, in form and
substance satisfactory to you, signed by each of its current officers and
directors and each of its shareholders designated by you.
(o) Except as stated in this Agreement and in the Prepricing Prospectus
and Prospectus, the Company has not taken, nor will it take, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
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<PAGE> 8
(p) The Company will use its best efforts to have the Class A Common Stock
listed, subject to notice of issuance, on the Nasdaq National Market
concurrently with the effectiveness of the registration statement.
6. Agreements of the Selling Shareholder. The Selling Shareholder agrees
with the several Underwriters as follows:
(a) The Selling Shareholder will cooperate to the extent necessary to
cause the registration statement or any post-effective amendment thereto to
become effective at the earliest possible time.
(b) The Selling Shareholder will pay all Federal and other taxes, if any,
on the transfer or sale of the Shares being sold by the Selling Shareholder to
the Underwriters.
(c) The Selling Shareholder will do or perform all things required to be
done or performed by the Selling Shareholder prior to the Closing Date to
satisfy all conditions precedent to the delivery of the Shares pursuant to this
Agreement.
(d) The Selling Shareholder has executed or will execute a "lock-up"
letter as provided in Section 5(n) above and will not sell, contract to sell or
otherwise dispose of any Common Stock, except for the sale of Shares to the
Underwriters pursuant to this Agreement, prior to the expiration of 180 days
after the date of the Prospectus, without the prior written consent of Smith
Barney Inc.
(e) Except as stated in this Agreement and in the Prepricing Prospectus
and the Prospectus, the Selling Shareholder will not take, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(f) The Selling Shareholder will advise you promptly, and if requested by
you, will confirm such advice in writing, within the period of time referred to
in Section 5(f) hereof, of any change in the Company's condition (financial or
other), business, prospects, properties, net worth or results of operations or
of any change in information relating to the Selling Shareholder or the Company
or any new information relating to the Company or relating to any matter stated
in the Prospectus or any amendment or supplement thereto which comes to the
attention of the Selling Shareholder that suggests that any statement made in
the Registration Statement or the Prospectus (as then amended or supplemented,
if amended or supplemented) is or may be untrue in any material respect or that
the Registration Statement or Prospectus (as then amended or supplemented, if
amended or supplemented) omits or may omit to state a material fact or a fact
necessary to be stated therein in order to make the statements therein not
misleading in any material respect, or of the necessity to amend or supplement
the Prospectus (as then amended or supplemented, if amended or supplemented) in
order to comply with the Act or any other law.
(g) In order to document the Underwriters' compliance with the reporting
and withholding provisions of the Tax Equity and Fiscal Responsibility Act of
1982, as amended, with respect to the transactions contemplated herein, the
Selling Shareholder agrees to deliver to
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<PAGE> 9
you prior to or on the Closing Date a properly completed and executed United
States Treasury Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
7. Representations and Warranties of the Company. The Company represents
and warrants to each Underwriter that:
(a) Each Prepricing Prospectus included as part of the registration
statement as originally filed or as part of any amendment or supplement
thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in
all material respects with the provisions of the Act. The Commission has not
issued any order preventing or suspending the use of any Prepricing Prospectus.
(b) The registration statement in the form in which it became or becomes
effective and also in such form as it may be when any post-effective amendment
thereto shall become effective, and the prospectus and any supplement or
amendment thereto when filed with the Commission under Rule 424(b) under the
Act, complied or will comply in all material respects with the provisions of
the Act and did not or will not at any such times contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, except that
this representation and warranty does not apply to statements in or omissions
from the registration statement or the prospectus made in reliance upon and in
conformity with information relating to any Underwriter furnished to the
Company in writing by or on behalf of any Underwriter through you expressly for
use therein.
(c) The authorized and outstanding capital stock of the Company is as set
forth under the caption "Capitalization" in the Prospectus. All the
outstanding shares of Common Stock of the Company have been duly authorized and
validly issued, are fully paid and nonassessable and are free of any preemptive
rights, co-sale rights, rights of first refusal or other similar rights that
entitle or will entitle any person to acquire any capital stock of the Company
upon the issuance of the Shares by the Company; the Shares to be issued and
sold to the Underwriters by the Company hereunder have been duly authorized
and, when issued and delivered to the Underwriters against payment therefor in
accordance with the terms hereof, will be validly issued, fully paid and
nonassessable and free of any preemptive rights, co-sale rights, rights of
first refusal or other similar rights; and the capital stock of the Company
conforms to the description thereof in the Registration Statement and the
Prospectus. All securities issued by the Company prior to the date hereof were
issued pursuant to valid exemptions from registration under the Act and all
applicable state securities laws, and all securities issuable by the Company
upon the conversion, exercise or exchange of presently outstanding securities
of the Company will be issued pursuant to valid exemptions from registration
under the Act and applicable state securities laws.
(d) The Company is a corporation duly organized and validly existing in
good standing under the laws of the State of Georgia with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Registration
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<PAGE> 10
Statement and the Prospectus, and is duly registered and qualified to conduct
its business and is in good standing in each jurisdiction or place where the
nature of its properties or the conduct of its business requires such
registration or qualification, except where the failure so to register or
qualify does not have a material adverse effect on the condition (financial or
other), business, properties, net worth or results of operations of the Company
and the Subsidiaries (as hereinafter defined) taken as a whole (a "Material
Adverse Effect").
(e) All the Company's subsidiaries (as defined in the Act) are listed in
an exhibit to the Registration Statement and are referred to herein
individually as a "Subsidiary" and collectively as the "Subsidiaries". As used
herein, the term "Subsidiary" also includes the American Intercontinental
University (the "University"), unless the context otherwise requires. Each
Subsidiary is a corporation or limited liability company, as the case may be,
duly organized, validly existing and in good standing in the jurisdiction of
its incorporation or formation, with full corporate power and authority to own,
lease and operate its properties and to conduct its business as described in
the Registration Statement and the Prospectus, and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify does not have a Material Adverse Effect; all the
outstanding shares of capital stock or other ownership interests of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and are wholly owned by the Company directly, or indirectly
through one of the other Subsidiaries, free and clear of any lien, adverse
claim, security interest, equity or other encumbrance, except as disclosed in
the Registration Statement and the Prospectus (or any amendment or supplement
thereto). No options, warrants or other rights to purchase, agreements or
other obligations to issue or other rights to convert any obligations into
shares of capital stock or other ownership interests in the Subsidiaries are
outstanding.
(f) There are no legal or governmental proceedings pending or, to the
knowledge of the Company, threatened, against the Company or any of the
Subsidiaries, or to which the Company or any of the Subsidiaries, or to which
any of their respective properties, is subject, that are required to be
described in the Registration Statement or the Prospectus but are not described
as required, and there are no agreements, contracts, indentures, leases or
other instruments that are required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the Act.
(g) Neither the Company nor any of the Subsidiaries is or with the giving
of notice or lapse of time or both, will be, in violation of its certificate or
articles of incorporation or by-laws, or other organizational documents, or,
except as disclosed in the Registration Statement and the Prospectus (or any
amendment or supplement thereto) with respect to the Higher Education Act of
1965, as amended (the "HEA"), and the regulations promulgated thereunder, of
any law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries or of any decree of any
court or governmental agency or body having jurisdiction over the Company or
any of the Subsidiaries, or in default in any material respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture,
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<PAGE> 11
note or any other evidence of indebtedness or in any material agreement,
indenture, lease or other instrument to which the Company or any of the
Subsidiaries is a party or by which any of them or any of their respective
properties may be bound.
(h) Neither the issuance and sale of the Shares, the execution, delivery
or performance of this Agreement by the Company nor the consummation by the
Company of the transactions contemplated hereby (i) requires any consent,
approval, authorization or other order of or registration or filing with, any
court, regulatory body, administrative agency or other governmental body,
agency or official (except such as may be required for the registration of the
Shares under the Act and the Exchange Act and compliance with the securities or
Blue Sky laws of various jurisdictions, all of which have been or will be
effected in accordance with this Agreement) or accrediting agency or conflicts
or will conflict with or constitutes or will constitute a breach of, or a
default under, the certificate or articles of incorporation or bylaws, or other
organizational documents, of the Company or any of the Subsidiaries; (ii)
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, any agreement, indenture, lease, mortgage or other
instrument to which the Company or any of the Subsidiaries is a party or by
which any of them or any of their respective properties may be bound, or
violates or will violate any statute, law, regulation or filing or judgment,
injunction, order or decree applicable to the Company or any of the
Subsidiaries or any of their respective properties, including, without
limitation, the HEA and the regulations promulgated thereunder, or will result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of the Subsidiaries pursuant to the
terms of any agreement or instrument to which any of them is a party or by
which any of them may be bound or to which any of the property or assets of any
of them is subject; or (iii) will require a review of the accreditation of the
University by the Commission of Colleges of the Southern Association of
Colleges and Schools, reauthorization or recertification of the University by
the Georgia Nonpublic Postsecondary Education Commission, the [California
Council] or District of Columbia Education Licensure Commission, the [UK and/or
London regulatory agency], the [Dubai regulatory agency] or recertification of
the University by the United States Department of Education. The issuance and
sale of the Shares or consummation of the transactions contemplated by this
Agreement will not constitute a change in ownership resulting in a "change in
control" of the Company as defined in the HEA.
(i) The accountants, Deloitte & Touche LLP, who have certified the
financial statements included in the Registration Statement and the Prospectus
(or any amendment or supplement thereto), are independent public accountants as
required by the Act.
(j) The financial statements, together with related schedules and notes,
included in the Registration Statement and the Prospectus (and any amendment or
supplement thereto) present fairly the consolidated financial position, results
of operations and changes in financial position of the Company and the
Subsidiaries on the basis stated in the Registration Statement at the
respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods involved, except as disclosed therein; the pro forma financial
statements and other pro forma financial information included in the
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<PAGE> 12
Registration Statement and the Prospectus present fairly the information shown
therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial information (including Article
11 of Regulation S-X), have been properly computed on the basis described
therein, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein, and all adjustments necessary for a fair presentation of results for
such periods have been made; and the other financial and statistical
information and data included in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) are accurately presented and prepared
on a basis consistent with such financial statements and the books and records
of the Company and the Subsidiaries. All financial statements, together with
related schedules and notes, required by the Act to be included in the
Registration Statement and the Prospectus have been included therein.
(k) The Company has all requisite power and authority to execute, deliver
and perform its obligations under this Agreement. The execution and delivery
of, and the performance by the Company of its obligations under, this Agreement
have been duly and validly authorized by the Company, and this Agreement has
been duly executed and delivered by the Company and constitutes the valid and
legally binding agreement of the Company, enforceable against the Company in
accordance with its terms.
(l) Except as disclosed in the Registration Statement and the Prospectus
(or any amendment or supplement thereto), subsequent to the respective dates as
of which such information is given in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), neither the Company nor
any of the Subsidiaries has incurred any liability or obligation, direct or
contingent, or entered into any transaction, not in the ordinary course of
business, that is material to the Company and the Subsidiaries taken as a
whole, and there has not been any change in the capital stock, or material
increase in the short-term debt or long-term debt, of the Company or any of the
Subsidiaries, or any material adverse change, or any development involving or
which may reasonably be expected to involve, a prospective material adverse
change, in the condition (financial or other), business, net worth or results
of operations of the Company and the Subsidiaries taken as a whole.
(m) Each of the Company and the Subsidiaries has good and marketable title
to all property (real and personal) described in the Prospectus as being owned
by it, free and clear of all liens, claims, security interests or other
encumbrances except such as are described in the Registration Statement and the
Prospectus or in a document filed as an exhibit to the Registration Statement,
and all the property described in the Prospectus as being held under lease by
each of the Company and the Subsidiaries is held by it under valid, subsisting
and enforceable leases.
(n) The Company has not distributed and, prior to the later to occur of
(i) the Closing Date and (ii) completion of the distribution of the Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prepricing
Prospectus, the Prospectus or other materials, if any, permitted by the Act and
state securities or Blue Sky laws.
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<PAGE> 13
(o) The Company and each of the Subsidiaries has such permits, licenses,
franchises and authorizations of governmental or regulatory authorities
("Permits"), including, without limitation, all permits required for
participation in Federal financial aid programs ("Title IV Programs") under
Title IV of the HEA, as are necessary to own its respective properties and to
conduct its business in the manner described in the Prospectus, subject to such
qualifications as may be set forth in the Prospectus. The Company and each of
the Subsidiaries has fulfilled and performed all its material obligations with
respect to such Permits, and no event has occurred which allows, or after
notice or lapse of time would allow, revocation or termination thereof or
results in any other material impairment of the rights of the holder of any
such Permit, subject in each case to such qualification as may be set forth in
the Prospectus; and, except as described in the Prospectus, none of such
Permits contains any restriction that is materially burdensome to the Company
or any of the Subsidiaries. Except as described in the Prospectus, the Company
has no knowledge that the student loan default rate of any educational
institution operated by the Company and the Subsidiaries is in excess of 20%,
and the Company has no knowledge of any existing or threatened restriction or
termination of any such institution's participation in the student loan
programs administered by the U.S. Department of Education. Except as described
in the Prospectus, the Company and the Subsidiaries are duly qualified under
and in full compliance with all applicable laws and regulations in each
jurisdiction in which such entity participates in student financial aid
programs, with such exceptions that would not and could not be expected,
individually or in the aggregate, to have a Material Adverse Effect, and no
proceedings for the suspension, limitation or termination of any such entity's
participation in any financial aid programs have been initiated or, to the
Company's knowledge, threatened by any federal, state or foreign regulatory
agency. Except as described in the Prospectus, each of the Company and the
Subsidiaries (including any individual institution within any such entity)
meets all applicable fiscal tests and/or bonding requirements imposed by United
States Federal and state regulatory authorities. The Company and the
Subsidiaries possess the accreditations set forth in the Prospectus and are
licensed by the D.C. Education Licensure Commission, the Georgia Nonpublic
Postsecondary Education Commission, the [California Council] and [others
licensing agencies] to operate and to grant degrees and diplomas to students in
the respective jurisdiction of each such licensing agency, and the Company has
no knowledge of any threatened review, suspension, revocation or termination of
such accreditations or licenses other than such reviews as may occur in the
ordinary course in connection with the periodic renewal of such accreditations
and licenses.
(p) Neither the Company nor any of the Subsidiaries has received or is
aware of any communication (written or oral) relating to the termination or
modification or threatened termination or modification of any of the agreements
described in or referred to in the Prospectus, nor is it aware of any
communication (written or oral) relating to any determination not to renew or
extend any agreement described or referred to in the Prospectus at the end of
the current term of any such agreement.
(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
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<PAGE> 14
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has
made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in the
Prospectus.
(s) The Company and each of the Subsidiaries have filed all federal,
state, local and foreign tax returns and tax forms required to be filed; such
returns and forms are complete and correct in all material respects; and all
taxes shown by such returns or otherwise assessed that are due and payable have
been paid, except such taxes as are being contested in good faith and as to
which adequate reserves have been provided. All payroll withholdings required
to be made by the Company or any of the Subsidiaries with respect to employees
have been made. The charges, accruals and reserves on the books of the Company
and the Subsidiaries in respect of any tax liability for any year not finally
determined are adequate to meet any assessments or reassessments for additional
taxes; and there have been no tax deficiencies asserted and, to the best
knowledge of the Company, no tax deficiency might be reasonably asserted or
threatened against the Company or any of the Subsidiaries that could,
individually or in the aggregate, have a Material Adverse Effect.
(t) No holder of any security of the Company has any right, which has not
been satisfied or validly waived, to require registration of shares of Common
Stock or any other security of the Company because of the filing of the
registration statement or consummation of the transactions contemplated by this
Agreement, and except as disclosed in the Prospectus, no person has the right
to require subsequent registration under the Act of any shares of Common Stock
or other securities of the Company. No person has the right, contractual or
otherwise, to cause the Company to permit such person to underwrite the sale of
any of the Shares. Except as described in or contemplated by the Prospectus,
there are no outstanding options, warrants or other rights calling for the
issuance of, and there are no commitments, plans or arrangements to issue, any
shares of capital stock of the Company or any of the Subsidiaries or any
security convertible into or exchangeable for capital stock of the Company or
any of the Subsidiaries.
(u) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registrations, service marks, service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectus as being owned by them or any of them or necessary
for the conduct of their respective businesses, and the Company is not
infringing upon the rights of any other person with respect to the foregoing.
(v) The Company is not now, and after sale of the Shares to be sold by it
hereunder and application of the net proceeds from such sale as described in
the Prospectus under the
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<PAGE> 15
caption "Use of Proceeds" will not be, an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
(w) The Company and each of its Subsidiaries is insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as is customary in the businesses in which each is engaged; all
policies of insurance insuring the Company and each of the Subsidiaries or
their respective businesses, assets, employees, officers and directors are in
full force and effect; the Company and each of its Subsidiaries is in
compliance with the terms of such policies and instruments in all material
respects; and there are no claims by the Company or any of its Subsidiaries
under any such policy or instrument as to which any insurance company is
denying liability or defending under a reservation of rights.
8. Representations and Warranties of the Selling Shareholder. The Selling
Shareholder represents and warrants to each Underwriter that:
(a) The Selling Shareholder now has, and on the Closing Date will have,
valid and marketable title to the Shares to be sold by the Selling Shareholder,
free and clear of any lien, claim, security interest or other encumbrance,
including, without limitation, any restriction on transfer or other defect in
title.
(b) The Selling Shareholder now has, and on the Closing Date will have,
full legal right, power and authorization, and any approval required by law, to
sell, assign transfer and deliver such Shares in the manner provided in this
Agreement, and upon delivery of and payment for such Shares hereunder, the
several Underwriters will acquire valid and marketable title to such Shares
free and clear of any lien, claim, security interest, or other encumbrance.
(c) This Agreement and the Custody Agreement have been duly authorized,
executed and delivered by or on behalf of the Selling Shareholder and are the
valid and binding agreements of the Selling Shareholder enforceable against the
Selling Shareholder in accordance with their terms, except as enforcement of
rights to indemnity and contribution hereunder may be limited by Federal or
state securities laws or principles of public policy and subject to the
qualification that the enforceability of the Selling Shareholder's obligations
hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and by general equitable principles.
(d) Neither the execution and delivery of this Agreement or the Custody
Agreement by or on behalf of the Selling Shareholder nor the consummation of
the transactions herein or therein contemplated by or on behalf of the Selling
Shareholder requires any consent, approval, authorization or order of, or
filing or registration with, any court, regulatory body, administrative agency
or other governmental body, agency or official (except such as may be required
under the Act or such as may be required under state securities or Blue Sky
laws governing the purchase and distribution of the Shares) or conflicts or
will conflict with or constitutes or will constitute a breach of, or default
under, or violates or will violate, any agreement, indenture or other
instrument to which the Selling Shareholder is a party or by which the Selling
Shareholder is or may be bound or to which any of the Selling Shareholder's
property or assets is subject, or any statute, law, rule, regulation, ruling,
judgment, injunction, order or
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<PAGE> 16
decree applicable to the Selling Shareholder or to any property or assets of
the Selling Shareholder.
(e) The Registration Statement and the Prospectus, insofar as they relate
to the Selling Shareholder, do not and will not contain an untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading.
(f) The Selling Shareholder does not have any knowledge or any reason to
believe that the Registration Statement or the Prospectus (or any amendment or
supplement thereto) contains any untrue statement of a material fact or omits
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading.
(g) The representations and warranties of the Selling Shareholder in the
Custody Agreement are, and on the Closing Date and any Option Closing Date will
be, true and correct.
(h) The Selling Shareholder has not taken, directly or indirectly, any
action designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares, except for the lock-up arrangements described
in the Prospectus.
9. Indemnification and Contribution. (a) The Company agrees to indemnify
and hold harmless each of you and each other Underwriter and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act
or Section 20(a) the Exchange Act from and against any and all losses, claims,
damages, liabilities and expenses (including reasonable costs of investigation)
arising out of or based upon any untrue statement or alleged untrue statement
of a material fact contained in any Prepricing Prospectus or in the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, except insofar as such losses,
claims, damages, liabilities or expenses arise out of or are based upon any
untrue statement or omission or alleged untrue statement or omission which has
been made therein or omitted therefrom in reliance upon and in conformity with
the information relating to such Underwriter furnished in writing to the
Company by or on behalf of any Underwriter through you expressly for use in
connection therewith; provided, however, that the indemnification contained in
this paragraph (a) with respect to any Prepricing Prospectus shall not inure to
the benefit of any Underwriter (or to the benefit of any person controlling
such Underwriter) on account of any such loss, claim, damage, liability or
expense arising from the sale of the Shares by such Underwriter to any person
if a copy of the Prospectus shall not have been delivered or sent to such
person within the time required by the Act and the regulations thereunder, and
the untrue statement or alleged untrue statement or omission or alleged
omission of a material fact contained in such Prepricing Prospectus was
corrected in the Prospectus, provided that the Company has delivered the
Prospectus to the several Underwriters in requisite quantity on a timely basis
to permit such delivery or sending. The foregoing indemnity agreement shall be
in addition to any liability which the Company may otherwise have.
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<PAGE> 17
(b) If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company, such Underwriter or such
controlling person shall promptly notify the parties against whom
indemnification is being sought (the "indemnifying parties"), and such
indemnifying parties shall assume the defense thereof, including the employment
of counsel and payment of all fees and expenses. Such Underwriter or any such
controlling person shall have the right to employ separate counsel in any such
action, suit or proceeding and to participate in the defense thereof, but the
fees and expenses of such counsel shall be at the expense of such Underwriter
or such controlling person unless (i) the indemnifying parties have agreed in
writing to pay such fees and expenses, (ii) the indemnifying parties have
failed to assume the defense and employ counsel, or (iii) the named parties to
any such action, suit or proceeding (including any impleaded parties) include
both such Underwriter or such controlling person and the indemnifying parties
and such Underwriter or such controlling person shall have been advised by its
counsel that representation of such indemnified party and any indemnifying
party by the same counsel would be inappropriate under applicable standards of
professional conduct (whether or not such representation by the same counsel
has been proposed) due to actual or potential differing interests between them
(in which case the indemnifying party shall not have the right to assume the
defense of such action, suit or proceeding on behalf of such Underwriter or
such controlling person). It is understood, however, that the indemnifying
parties shall, in connection with any one such action, suit or proceeding or
separate but substantially similar or related actions, suits or proceedings in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of only one
separate firm of attorneys (in addition to any local counsel) at any time for
all such Underwriters and controlling persons not having actual or potential
differing interests with you or among themselves, which firm shall be
designated in writing by Smith Barney Inc., and that all such fees and expenses
shall be reimbursed as they are incurred. The indemnifying parties shall not
be liable for any settlement of any such action, suit or proceeding effected
without their written consent, but if settled with such written consent, or if
there be a final judgment for the plaintiff in any such action, suit or
proceeding, the indemnifying parties agree to indemnify and hold harmless any
Underwriter, to the extent provided in the preceding paragraph, and any such
controlling person from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
(c) The Selling Shareholder agrees to indemnify and hold harmless each of
you and each other Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, the Company, its directors, its officers who sign the
Registration Statement, and any person who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act to the
same extent as the foregoing indemnity from the Company to each Underwriter,
but only with respect to the information furnished in writing by or on behalf
of the Selling Shareholder expressly for use in the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto. If any action, suit or proceeding shall be brought against any
Underwriter, any such controlling person of any Underwriter, the Company, any
of its directors, any such officer, or any such controlling person of the
Company, based on the Registration Statement, the Prospectus or any Prepricing
Prospectus or any amendment or supplement thereto, and in respect
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<PAGE> 18
of which indemnity may be sought against the Selling Shareholder pursuant to
this paragraph (c), the Selling Shareholder shall have the rights and duties
given to the Company by paragraph (b) above (except that if the Company shall
have assumed the defense thereof the Selling Shareholder shall not be required
to do so, but may employ separate counsel therein and participate in the
defense thereof, but the fees and expenses of such counsel shall be at the
Selling Shareholder's expense), and each Underwriter, each such controlling
person of any Underwriter, the Company, its directors, any such officer, and
any such controlling person of the Company shall have the rights and duties
given to the Underwriters by paragraph (b) above. The foregoing indemnity
agreement shall be in addition to any liability which the Selling Shareholder
may otherwise have.
(d) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the
Registration Statement, the Selling Shareholder, and any person who controls
the Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, to the same extent as the foregoing indemnity from the Company
and the Selling Shareholder to each Underwriter, but only with respect to
information relating to such Underwriter furnished in writing by or on behalf
of such Underwriter through you expressly for use in the Registration
Statement, the Prospectus or any Prepricing Prospectus, or any amendment or
supplement thereto. If any action, suit or proceeding shall be brought against
the Company, any of its directors, any such officer, the Selling Shareholder,
or any such controlling person based on the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto, and in respect of which indemnity may be sought against any
Underwriter pursuant to this paragraph (d), such Underwriter shall have the
rights and duties given to the Company by paragraph (b) above (except that if
the Company shall have assumed the defense thereof such Underwriter shall not
be required to do so, but may employ separate counsel therein and participate
in the defense thereof, but the fees and expenses of such counsel shall be at
such Underwriter's expense), and the Company, its directors, any such officer,
the Selling Shareholder, and any such controlling person shall have the rights
and duties given to the Underwriters by paragraph (b) above. The foregoing
indemnity agreement shall be in addition to any liability which any Underwriter
may otherwise have.
(e) If the indemnification provided for in this Section 9 is unavailable
to an indemnified party under paragraphs (a), (c) or (d) hereof in respect of
any losses, claims, damages, liabilities or expenses referred to therein, then
an indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company and
the Selling Shareholder on the one hand and the Underwriters on the other hand
from the offering of the Shares, or (ii) if the allocation provided by clause
(i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Shareholder on
the one hand and the Underwriters on the other in connection with the
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the Selling
Shareholder on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds
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<PAGE> 19
from the offering (before deducting expenses) received by the Company and the
Selling Shareholder bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus; provided that, in the event that the Underwriters
shall have purchased any Additional Shares hereunder, any determination of the
relative benefits received by the Company, the Selling Shareholder or the
Underwriters from the offering of the Shares shall include the net proceeds
(before deducting expenses) received by the Company and the Selling
Shareholder, and the underwriting discounts and commissions received by the
Underwriters, from the sale of such Additional Shares, in each case computed on
the basis of the respective amounts set forth in the notes to the table on the
cover page of the Prospectus. The relative fault of the Company and the
Selling Shareholder on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Shareholder on the one hand or by the Underwriters on the other hand
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
(f) The Company, the Selling Shareholder and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined by a pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation that does
not take account of the equitable considerations referred to in paragraph (e)
above. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in paragraph (e)
above shall be deemed to include, subject to the limitations set forth above,
any legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 9, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price of the Shares underwritten by it and distributed to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to
this Section 9 are several in proportion to the respective numbers of Firm
Shares set forth opposite their names in Schedule II hereto (or such numbers of
Firm Shares increased as set forth in Section 12 hereof) and not joint.
(g) No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
(h) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the
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<PAGE> 20
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred. The indemnity and contribution
agreements contained in this Section 9 and the representations and warranties
of the Company and the Selling Shareholder set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or the Selling
Shareholder or any person controlling the Company, (ii) acceptance of any
Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter or any person controlling any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 9.
(i) Notwithstanding any other provision of this Section 9, the total liability
of the Selling Shareholder for indemnification or contribution under this
Section 9 shall not exceed an amount equal to the number of Shares sold by such
Selling Shareholder hereunder multiplied by the purchase price per share set
forth in Section 2 hereof.
10. Conditions of Underwriters' Obligations. The several obligations of
the Underwriters to purchase the Firm Shares hereunder are subject to the
following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
registration statement or such post-effective amendment shall have become
effective not later than 5:30 P.M., New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall have been
timely made; no stop order suspending the effectiveness of the registration
statement shall have been issued and no proceeding for that purpose shall have
been instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for additional
information (to be included in the registration statement or the prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall not
have occurred (i) any change, or any development involving a prospective
change, in or affecting the condition (financial or other), business,
properties, net worth, or results of operations of the Company or the
Subsidiaries not contemplated by the Prospectus, which in your opinion, as
Representatives of the several Underwriters, would materially adversely affect
the market for the Shares, or (ii) any event or development relating to or
involving the Company or any officer or director of the Company or the Selling
Shareholder which makes any statement made in the Prospectus untrue or which,
in the opinion of the Company and its counsel or the Underwriters and their
counsel, requires the making of any addition to or change in the Prospectus in
order to state a material fact required by the Act or any other law to be
stated therein or necessary in order to make the statements therein not
misleading, if amending or supplementing the Prospectus to reflect such event
or development would, in your opinion, as Representatives of the several
Underwriters, materially adversely affect the market for the Shares.
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<PAGE> 21
(c) You shall have received on the Closing Date an opinion of Smith,
Gambrell & Russell, LLP, counsel for the Company and the Selling Shareholder,
dated the Closing Date and addressed to you, as Representatives of the several
Underwriters, to the effect that:
(i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Georgia with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto), and is duly registered
and qualified to conduct its business and is in good standing in each
jurisdiction or place where the nature of its properties or the conduct of its
business requires such registration or qualification, except where the failure
so to register or qualify would not have a Material Adverse Effect;
(ii) Each of the Subsidiaries is a corporation or limited
liability company, as the case may be, duly organized and validly existing in
good standing under the laws of the jurisdiction of its organization or
formation, with full corporate power and authority to own, lease, and operate
its properties and to conduct its business as described in the Registration
Statement and the Prospectus (and any amendment or supplement thereto); each
Subsidiary is duly registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature of its properties
or the conduct of its business requires such registration or qualification,
except where the failure so to register or qualify would not have a Material
Adverse Effect; all the outstanding shares of capital stock or other ownership
interests of each of the Subsidiaries have been duly authorized and validly
issued, are fully paid and nonassessable, and are wholly owned by the Company
directly, or indirectly through one of the other Subsidiaries, free and clear
of any perfected security interest, or, to the best knowledge of such counsel
after reasonable inquiry, any other security interest, lien, adverse claim,
equity or other encumbrance, except as disclosed in the Registration Statement
and the Prospectus (or any amendment or supplement thereto); and no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into any shares of capital stock or
other ownership interests in the Subsidiaries are outstanding;
(iii) The authorized and outstanding capital stock of the
Company is as set forth under the caption "Capitalization" in the Prospectus;
and the authorized capital stock of the Company conforms in all material
respects as to legal matters to the description thereof contained in the
Prospectus under the caption "Description of Capital Stock;"
(iv) All the shares of Common Stock of the Company outstanding
prior to the issuance of the Shares to be issued and sold by the Company
hereunder have been duly authorized and validly issued, are fully paid and
nonassessable and are free of any preemptive or similar rights that entitle or
will entitle any person to acquire any capital stock of the Company upon the
issuance of the Shares by the Company. All securities issued by the Company
prior to the Closing Date or the Option Closing Date, as the case may be, were
issued pursuant to valid exemptions from registration under the Act and all
applicable state securities laws, and valid exemptions from registration under
the Act and all applicable state securities laws exist for all securities
issuable by the Company upon the conversion, exercise or exchange
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<PAGE> 22
of securities of the Company outstanding on the Closing Date or the Option
Closing Date, as the case may be;
(v) The Shares to be issued and sold to the Underwriters by
the Company hereunder have been duly authorized and, when issued and delivered
to the Underwriters against payment therefor in accordance with the terms
hereof, will be validly issued, fully paid and nonassessable and free of any
preemptive or, to the best knowledge of such counsel after reasonable inquiry,
co-sale rights, rights of first refusal or other similar rights that entitle or
will entitle any person to acquire any Shares upon the issuance thereof by the
Company;
(vi) The form of certificate for the Shares conforms to the
requirements of the Georgia Business Corporation Code;
(vii) The Registration Statement and all post-effective
amendments, if any, have become effective under the Act and no stop order
suspending the effectiveness of the Registration Statement has been issued and,
to the best knowledge of such counsel after reasonable inquiry, no proceedings
for that purpose are pending before or contemplated by the Commission; and any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
accordance with Rule 424(b);
(viii) The Company has corporate power and authority to enter
into this Agreement and to issue, sell and deliver the Shares to be sold by it
to the Underwriters as provided herein. This Agreement has been duly
authorized, executed and delivered by the Company and, assuming that the laws
of the State of New York are the same as the laws of the State of Georgia, is a
valid, legal and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except as enforcement of rights to
indemnity and contribution hereunder may be limited by Federal or state
securities laws or principles of public policy and subject to the qualification
that the enforceability of the Company's obligations hereunder may be limited
by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium,
and other laws relating to or affecting creditors' rights generally and by
general equitable principles;
(ix) Neither the Company nor any of the Subsidiaries is, or
with the giving of notice or lapse of time or both, will be, in violation of
its respective certificate or articles of incorporation or bylaws, or other
organizational documents or, to the best knowledge of such counsel after
reasonable inquiry, in default in the performance of any obligation, agreement
or condition contained in any bond, debenture, note or other evidence of
indebtedness or in any material agreement, indenture, lease or other instrument
to which the Company or any of the Subsidiaries is a party or by which any of
them or any of their respective properties may be bound, except as may be
disclosed in the Prospectus;
(x) Neither the offer, sale or delivery of the Shares, the
execution, delivery or performance of this Agreement, compliance by the Company
with the provisions hereof, nor consummation by the Company of the transactions
contemplated hereby conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or
- 22 -
<PAGE> 23
articles of incorporation or bylaws, or other organizational documents, of the
Company or any of the Subsidiaries or any agreement, indenture, lease, mortgage
or other instrument to which the Company or any of the Subsidiaries is a party
or by which any of them or any of their respective properties is bound that is
an exhibit to the Registration Statement, or which is otherwise known to such
counsel after reasonable inquiry, or will result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of the Company
or any of the Subsidiaries, nor will any such action result in any violation of
any existing statute, law, regulation, ruling (assuming compliance with all
applicable state securities and Blue Sky laws), judgment, injunction, order or
decree known to such counsel after reasonable inquiry, applicable to the
Company, the Subsidiaries or any of their respective properties;
(xi) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency, or official is required on the part of the
Company (except as have been obtained under the Act and the Exchange Act or
such as may be required under state securities or Blue Sky laws governing the
purchase and distribution of the Shares) for the valid issuance and sale of the
Shares to the Underwriters as contemplated by this Agreement;
(xii) The Registration Statement and the Prospectus and any
supplements or amendments thereto (except for the financial statements and the
notes thereto and the schedules and other financial and statistical data
included therein, as to which such counsel need not express any opinion) comply
as to form in all material respects with the requirements of the Act;
(xiii) To the best knowledge of such counsel after reasonable
inquiry, (A) other than as described or contemplated in the Prospectus (or any
supplement thereto), there are no legal or governmental proceedings pending or
threatened against the Company or any of the Subsidiaries, or to which the
Company or any of the Subsidiaries, or any of their property, is subject, which
are required to be described in the Registration Statement or Prospectus (or
any amendment or supplement thereto) and (B) there are no agreements,
contracts, indentures, leases or other instruments that are required to be
described in the Registration Statement or the Prospectus (or any amendment or
supplement thereto) or to be filed as an exhibit to the Registration Statement
that are not described or filed as required, as the case may be;
(xiv) To the best knowledge of such counsel after reasonable
inquiry, neither the Company nor any of the Subsidiaries is in violation of any
law, ordinance, administrative or governmental rule or regulation applicable to
the Company or any of the Subsidiaries or of any decree of any court or
governmental agency or body having jurisdiction over the Company or any of the
Subsidiaries;
(xv) The statements in the Registration Statement and
Prospectus, insofar as they are descriptions of contracts, agreements or other
legal documents, or refer to statements of law or legal conclusions, are
accurate and present fairly the information required to be shown (except with
respect to statements in the Prospectus under the captions "Risk Factors --
Potential Adverse Effects of Regulation; Impairment of Federal Funding," "Risk
Factors -- Risks
- 23 -
<PAGE> 24
Associated with Possible Expansion and Acquisition Plans" (second paragraph
only) and "Business -- Regulatory Environment" and other references therein to
the regulation of educational institutions, as to which such counsel need not
express an opinion);
(xvi) To the best knowledge of such counsel after reasonable
inquiry, each of the Company and the Subsidiaries has all necessary Permits
(other than those Permits specifically required to participate in Title IV
Programs or pursuant to which the Company or any of the Subsidiaries must be
authorized by applicable states to engage in rendering educational services, as
to which such counsel need not express an opinion) to own its properties and to
conduct its business as now being conducted as described in the Registration
Statement and the Prospectus, except where the failure to so have any such
Permits, individually or in the aggregate, would not have a Material Adverse
Effect;
(xvii) Except as described in the Prospectus, such counsel
does not know of any person who has the right, as a result of the filing of the
Registration Statement or otherwise, to require the Company to register under
the Act any shares of Common Stock or other securities of the Company in
connection with the offering contemplated hereby, and any registration rights
in connection with the offering contemplated hereby have been validly waived;
and
(xviii) The Company is not now, and after sale of the Shares
to be sold by it hereunder and application of the net proceeds from such sale
as described in the Prospectus under the caption "Use of Proceeds" will not be,
an "investment company" within the meaning of the Investment Company Act of
1940, as amended.
(xix) Upon delivery of the Shares to be sold by the Company
pursuant to this Agreement and payment therefor as contemplated herein, the
Underwriters will acquire good, valid and marketable title to such Shares free
and clear of any lien, claim, security interest, or other encumbrance,
restriction on transfer or other defect in title.
(xx) This Agreement and the Custody Agreement have each been
duly executed and delivered by or on behalf of the Selling Shareholder and are
valid and binding agreements of the Selling Shareholder enforceable against the
Selling Shareholder in accordance with their terms, except as enforcement of
rights to indemnity and contribution hereunder may be limited by Federal or
state securities laws or principles of public policy and subject to the
qualification that the enforceability of the Company's obligations hereunder
may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium, and other laws relating to or affecting creditors'
rights generally and by general equitable principles;
(xxi) To the knowledge of such counsel, the Selling Shareholder
has full legal right, power and authorization, and any approval required by
law, to sell, assign, transfer and deliver good and marketable title to the
Shares which the Selling Shareholder has agreed to sell pursuant to this
Agreement;
(xxii) The execution and delivery of this Agreement and the
Custody Agreement by the Selling Shareholder and the consummation of the
transactions contemplated
- 24 -
<PAGE> 25
hereby and thereby will not conflict with, violate, result in a breach of or
constitute a default under the terms or provisions of any agreement, indenture,
mortgage or other instrument known to such counsel to which the Selling
Shareholder is a party or by which it or any of its assets or property is
bound, or any court order or decree or any law, rule, or regulation applicable
to the Selling Shareholder or to any of the property or assets of the Selling
Shareholder; and
(xxiii) Upon delivery of the Shares to be sold by the Selling
Shareholder pursuant to this Agreement and payment therefor as contemplated
herein, the Underwriters (assuming that they are bona fide purchasers within
the meaning of the Uniform Commercial Code as adopted in the State of Georgia)
will acquire good, valid and marketable title to such Shares free and clear of
any lien, claim, security interest, or other encumbrance, restriction on
transfer or other defect in title.
Such opinion shall include a statement that, although such counsel has not
undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy or
completeness of the statements in the Registration Statement, such counsel has
participated in the preparation of the Registration Statement and the
Prospectus, including review and discussion of the contents thereof, and
nothing has come to the attention of such counsel that has caused them to
believe that the Registration Statement, at the time the Registration Statement
became effective, or the Prospectus, as of its date and as of the Closing Date
or the Option Closing Date, as the case may be, contained an untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that any
amendment or supplement to the Prospectus, as of its respective date, and as of
the Closing Date or the Option Closing Date, as the case may be, contained any
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no opinion with respect to the financial
statements and the notes thereto and the schedules and other financial and
statistical data included in the Registration Statement or the Prospectus).
In rendering their opinion as aforesaid, such counsel may rely as to
factual matters (i) upon certificates of officers of the Company and
certificates of the Selling Shareholder and (ii) the representations of the
Company contained herein and the representations of the Selling Shareholder
contained herein and in the Custody Agreement. In rendering their opinion as
aforesaid, such counsel may also rely upon an opinion or opinions, each dated
the Closing Date, of other counsel retained by them or the Company as to laws
of any jurisdiction other than the United States or the States of Georgia and
Delaware, provided that (1) each such local counsel is acceptable to the
Representatives, (2) such reliance is expressly authorized by each opinion so
relied upon and a copy of each such opinion is delivered to the Representatives
and is, in form and substance, satisfactory to them and their counsel, and (3)
counsel shall state in their opinion that they believe that they and the
Underwriters are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of Cohn and
Marks, special regulatory counsel for the Company, dated the Closing Date and
addressed to you, as Representatives of the several Underwriters, to the effect
that:
- 25 -
<PAGE> 26
(i) The statements in the Prospectus under the captions "Risk
Factors -- Potential Adverse Effects of Regulation; Impairment of Federal
Funding," "Risk Factors -- Risks Associated With Possible Expansion and
Acquisition Plans" (second paragraph only) and "Business -- Regulatory
Environment" and other references therein to the regulation of educational
institutions, insofar as such statements constitute a summary of applicable
federal and state laws and regulations, a summary of accreditation matters or a
summary of judicial or administrative proceedings, are accurate and present
fairly the information purported to be shown;
(ii) Based on the determination made by the United States
Department of Education and communicated to the Company by letter dated _______
__, 1997, consummation of the offering contemplated hereby will not constitute
a change in ownership of the University resulting in a "change in control" as
defined in the HEA or the regulations promulgated thereunder; and
(iii) To the best of such counsel's knowledge after reasonable inquiry,
each of the Company and the Subsidiaries has all necessary Permits required for
each of the Company and the Subsidiaries to participate in Title IV Programs or
pursuant to which the Company or any Subsidiary must be authorized by
applicable states to engage in rendering educational services as described in
the Registration Statement and the Prospectus. The Company and each of the
Subsidiaries has fulfilled and performed all its material obligations with
respect to such Permits, and no event has occurred which allows, or after
notice or lapse of time would allow, revocation or termination thereof or
results in any other material impairment of the rights of the holder of any
such Permit, subject in each case to such qualification as may be set forth in
the Prospectus. Except as described in the Prospectus, to the best of such
counsel's knowledge after reasonable inquiry, the student loan default rate of
any educational institution operated by the Company and the Subsidiaries is not
in excess of 20%, and, to the best of such counsel's knowledge after reasonable
inquiry, there are no existing or threatened restrictions or terminations of
any such institution's participation in the student loan programs administered
by the U.S. Department of Education. Except as described in the Prospectus,
the Company and the Subsidiaries are duly qualified under and in full
compliance with all applicable laws and regulations in each jurisdiction in
which such entity participates in student financial aid programs, with such
exceptions that would not and could not be expected, individually or in the
aggregate, to have a Material Adverse Effect, and no proceedings for the
suspension, limitation or termination of any such entity's participation in any
financial aid programs have been initiated or, to the best of such counsel's
knowledge after reasonable inquiry, threatened by any federal, state or foreign
regulatory agency. Except as described in the Prospectus, each of the Company
and the Subsidiaries (including any individual institution within any such
entity) meets all applicable fiscal tests and/or bonding requirements imposed
by United States Federal and state regulatory authorities. The Company and the
Subsidiaries possess the accreditations set forth in the Prospectus and are
licensed by the D.C. Education Licensure Commission, the Georgia Nonpublic
Postsecondary Education Commission, the [California Council] and [others
licensing agencies] to operate and to grant degrees and diplomas to students in
the respective jurisdiction of each such licensing agency, and, to the best of
such counsel's knowledge after reasonable inquiry, there is no threatened
review, suspension, revocation or termination of such
- 26 -
<PAGE> 27
accreditations or licenses other than such reviews as may occur in the ordinary
course in connection with the periodic renewal of such accreditations and
licenses.
Such opinion shall also include a statement to the effect that such
counsel have no actual knowledge that lead them to believe that the information
contained in the Registration Statement and the Prospectus forming a part
thereof under the captions "Risk Factors -- Potential Adverse Effects of
Regulation; Impairment of Federal Funding," "Risk Factors -- Risks Associated
With Possible Expansion and Acquisition Plans" (second paragraph only) and
"Business -- Regulatory Environment", as of the time the Registration Statement
became effective and as of the Closing Date and the Option Closing Date, as
applicable, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading;
(e) You shall have received on the Closing Date an opinion of Alston &
Bird LLP, counsel for the Underwriters, dated the Closing Date and addressed to
you, as Representatives of the several Underwriters, with respect to the
matters referred to in clauses (v), (vii), (viii) and (xii) of the foregoing
paragraph (c) and such other matters as you may request, and a statement from
Alston & Bird LLP with respect to the matters referred to in the penultimate
subparagraph of the foregoing paragraph (c) and such other related matters as
you may request. In rendering their opinion as aforesaid, such counsel may
rely as to factual matters upon certificates of officers of the Company and the
representations of the Company contained herein.
(f) You shall have received letters addressed to you, as Representatives
of the several Underwriters, and dated the date hereof and the Closing Date
from Deloitte & Touche, LLP, independent certified public accountants,
substantially in the forms heretofore approved by you.
(g)(i) The Registration Statement shall have become effective under the
Act and no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been taken or, to the best knowledge of the Company after reasonable inquiry,
shall be contemplated by the Commission at or prior to the Closing Date; (ii)
there shall not have been any change in the capital stock of the Company nor
any material increase in the short-term or long-term debt of the Company (other
than in the ordinary course of business) from that set forth or contemplated in
the Registration Statement or the Prospectus (or any amendment or supplement
thereto); (iii) there shall not have been, since the respective dates as of
which information is given in the Registration Statement and the Prospectus (or
any amendment or supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectus (or any amendment or supplement thereto),
any material adverse change in the condition (financial or other), business,
prospects, properties, net worth or results of operations of the Company and
the Subsidiaries taken as a whole; (iv) the Company and the Subsidiaries shall
not have any liabilities or obligations, direct or contingent (whether or not
in the ordinary course of business), that are material to the Company and the
Subsidiaries, taken as a whole, other than those reflected in the Registration
Statement or the Prospectus (or any amendment or supplement thereto); (v) all
filings required to have been made pursuant to
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<PAGE> 28
Rule 424 or 430A under the Act shall have been made; and (vi) all the
representations and warranties of the Company and the Selling Shareholder
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), to the effect set
forth in this Section 10(g) and in Section 10(h) hereof.
(h) The Company shall not have failed at or prior to the Closing Date to
have performed or complied with any of its agreements herein contained and
required to be performed or complied with by it hereunder at or prior to the
Closing Date.
(i) All the representations and warranties of the Selling Shareholder
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by or on behalf of the Selling Shareholder, to the effect set forth in
this Section 10(i) and in Section 10(j) hereof.
(j) The Selling Shareholder shall not have failed at or prior to the
Closing Date to have performed or complied with any of its agreements herein
contained and required to be performed or complied with by them hereunder at or
prior to the Closing Date.
(k) The Shares shall have been listed or approved for listing upon
notice of issuance on the Nasdaq National Market.
(l) The Sellers shall have furnished or caused to be furnished to you
such further certificates and documents as you shall have requested.
(m) The lockup agreements referenced in Section 5(n) shall be in full
force and effect.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the Company or any
Attorney-in-Fact or the Selling Shareholder and delivered to you, as
Representatives of the Underwriters, or to counsel for the Underwriters, shall
be deemed a representation and warranty by the Company or the Selling
Shareholder, as the case may be, to each Underwriter as to the statements made
therein.
The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the satisfaction on and as of any Option Closing Date
of the conditions set forth in this Section 10, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (c) through (g) shall be dated the Option
Closing Date and the opinions called for by paragraphs (c), (d) and (e) shall
be revised to reflect the sale of Additional Shares.
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<PAGE> 29
If any of the conditions hereinabove provided for in this Section 10 shall
not have been fulfilled when and as required by this Agreement to be fulfilled,
the obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company and the Selling Shareholder of such
termination in writing or by telecopy at or prior to the Closing Date or the
Option Closing Date, as the case may be.
In such event, the Company, the Selling Shareholder and the Underwriters
shall not be under any obligation to each other (except to the extent provided
in Sections 9 and 11 hereof).
11. Expenses. The Company agrees to pay the following costs and expenses
and all other costs and expenses incident to the performance by the Sellers of
their obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, the Prospectus, and all amendments or supplements to any
of them as may be reasonably requested for use in connection with the offering
and sale of the Shares; (iii) the preparation, printing, authentication,
issuance and delivery of certificates for the Shares, including any stamp taxes
in connection with the original issuance and sale of the Shares; (iv) the
printing (or reproduction) and delivery of this Agreement, the preliminary and
supplemental Blue Sky Memoranda and all other agreements or documents printed
(or reproduced) and delivered in connection with the offering of the Shares;
(v) the registration of the Shares under the Exchange Act and the listing of
the Shares on the Nasdaq National Market; (vi) the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of the several states as provided in Section 5(g) hereof (including the
reasonable fees, expenses and disbursements of counsel for the Underwriters
relating to the preparation, printing or reproduction, and delivery of the
preliminary and supplemental Blue Sky Memoranda and such registration and
qualification); (vii) the filing fees and the fees and expenses of counsel for
the Underwriters in connection with any filings required to be made with the
National Association of Securities Dealers, Inc.; (viii) the transportation and
other expenses incurred by or on behalf of Company representatives in
connection with presentations to prospective purchasers of the Shares; and (ix)
the fees and expenses of the Company's accountants and the fees and expenses of
counsel (including local and special counsel) for the Company and the Selling
Shareholder.
12. Effective Date of Agreement. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if,
at the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective
amendment has been released by the Commission. Until such time as this
Agreement shall have become effective, it may be terminated by the Company, by
notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company and the Selling Shareholder.
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<PAGE> 30
If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing Date
or the Option Closing Date, and the aggregate number of Shares which such
defaulting Underwriter or Underwriters are obligated but fail or refuse to
purchase is not more than one-tenth of the aggregate number of Shares which the
Underwriters are obligated to purchase on the Closing Date or the Option
Closing Date, as the case may be, each non-defaulting Underwriter shall be
obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule II hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in accordance with Section 20 of
the Master Agreement Among Underwriters of Smith Barney Inc., to purchase the
Shares which such defaulting Underwriter or Underwriters are obligated, but
fail or refuse, to purchase. If any one or more of the Underwriters shall fail
or refuse to purchase Shares which it or they are obligated to purchase on the
Closing Date or the Option Closing Date and the aggregate number of Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Shares which the Underwriters are obligated to purchase on the
Closing Date or the Option Closing Date, as the case may be, and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Underwriters or other party or parties approved by you and
the Company are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Underwriter
or the Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date or the Option Closing Date, as the case may be, but in no event
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any such
default of any such Underwriter under this Agreement. The term "Underwriter"
as used in this Agreement includes, for all purposes of this Agreement, any
party not listed in Schedule II hereto who, with your approval and the approval
of the Company, purchases Shares which a defaulting Underwriter is obligated,
but fails or refuses, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be subject to
termination: (A) in your absolute discretion, without liability on the part of
any Underwriter to the Company or the Selling Shareholder, by notice to the
Company, if prior to the Closing Date or any Option Closing Date (if different
from the Closing Date and then only as to the Additional Shares), as the case
may be, (i) trading in securities generally on the New York Stock Exchange,
American Stock Exchange or the Nasdaq National Market shall have been suspended
or materially limited, (ii) a general moratorium on commercial banking
activities in New York or Georgia shall have been declared by either federal or
state authorities, or (iii) there shall have occurred any outbreak or
escalation of hostilities or other international or domestic calamity, crisis
or change in political, financial or economic conditions, the effect of which
on the financial markets of the United States is such as to make it, in your
judgment, impracticable or inadvisable to commence or continue the offering of
the Shares at the offering price to the public set forth on the cover
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<PAGE> 31
page of the Prospectus or to enforce contracts for the resale of the Shares by
the Underwriters or (B) as otherwise provided in this Agreement. Notice of
such termination may be given to the Company by telegram, telecopy or telephone
and shall be subsequently confirmed by letter.
14. Information Furnished by the Underwriters. The statements set forth
in the last paragraph on the cover page, the stabilization legend on the inside
front cover page, and the statements in the first and third paragraphs under
the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus,
constitute the only information furnished by or on behalf of the Underwriters
through you as such information is referred to in Sections 7(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in Sections 5, 12 and 13
hereof, notice given pursuant to any provision of this Agreement shall be in
writing and shall be delivered (i) if to the Company, at the office of the
Company at 3340 Peachtree Road, Suite 2000, Atlanta, Georgia 30326, Attention:
Steve Bostic, Chairman and Chief Executive Officer; or (ii) if to the Selling
Shareholder, at NationsBank Corporate Center, 100 North Tryon Street,
NC1-007-23-01, Charlotte, North Carolina 28255, Attention: ___________________;
or (iii) if to you, as Representatives of the several Underwriters, care of
Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention:
[Charles Hall], Investment Banking Division.
This Agreement has been and is made solely for the benefit of the several
Underwriters, the Company, its directors and officers, the Selling Shareholder
and the other controlling persons referred to in Section 9 hereof and their
respective successors and assigns, to the extent provided herein, and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Underwriter of any of the
Shares in his status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
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<PAGE> 32
Please confirm that the foregoing correctly sets forth the agreement among
the Company, the Selling Shareholder and the several Underwriters.
Very truly yours,
EDUTREK INTERNATIONAL, INC.
By ______________________________
Chairman and Chief Executive Officer
ATLANTIC EQUITY CORPORATION
as the Selling Shareholder
named in Schedule I hereto
By ______________________________
Attorney-in-Fact
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule II
hereto.
SMITH BARNEY INC.
THE ROBINSON-HUMPHREY COMPANY, INC.
As Representatives of the Several Underwriters
By: SMITH BARNEY INC.
By: _____________________________
Managing Director
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<PAGE> 33
SCHEDULE I
EDUTREK INTERNATIONAL, INC.
<TABLE>
<CAPTION>
Number of
Selling Shareholder Firm Shares
------------------- -----------
<S> <C>
Atlantic Equity Corporation 257,110
</TABLE>
- 33 -
<PAGE> 34
SCHEDULE II
EDUTREK INTERNATIONAL, INC.
<TABLE>
<CAPTION>
Number of
Underwriter Number of Firm Shares Underwriter Firm Shares
- ----------- ------------------------- ----------- -------------
<S> <C> <C> <C>
Smith Barney Inc. .........................
The Robinson-Humphrey Company, Inc.
_____________
Total..... _____________
</TABLE>
- 34 -
<PAGE> 1
EXHIBIT 4.1
NUMBER NUMBER
[CA ] [ ]
[EDUTREK
CLASS A INTERNATIONAL, INC. LOGO] CLASS A
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF GEORGIA
THIS CERTIFICATE IS TRANSFERABLE CUSIP 28164K 10 8
IN THE CITY OF ATLANTA, GEORGIA SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
SPECIMEN
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF CLASS A COMMON STOCK OF
EDUTREK INTERNATIONAL, INC.
transferable on the books of the Corporation by the holder hereof, in person or
by duly authorized attorney, upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Douglas C. Chait [EDUTREK INTERNATIONAL, INC. SEAL] /s/ S. Bostic
Secretary Chairman
Countersigned and Registered:
SUNTRUST BANK, ATLANTA
Atlanta, Georgia
Transfer Agent and Registrar
By
AUTHORIZED SIGNATURE
<PAGE> 2
EduTrek International, Inc.
The following abbreviations, when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-________Custodian_______
(Cust) (Minor)
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act
___________________________
JT TEN - as joint tenants with right (State)
of survivorship and not as
tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
/ /______________________________________________________________
________________________________________________________________________________
(NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
________________________________________________________________________________
________________________________________________________________________________
______________________________________________________________ Shares of the
capital stock represented by the within Certificate and do hereby irrevocably
constitute and appoint
______________________________________________________________, Attorney to
transfer the said stock on the books of the within named Corporation with full
power of substitution in the premises.
Dated:
--------------------------------
--------------------------------------
--------------------------------------
NOTICE: THE SIGNATURE OF THIS
ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT ON
ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
---------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION,
(Banks, Stockbrokers, Savings and Loan
Associations and Credit Unions) WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM PURSUANT
TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 5.1
[SMITH, GAMBRELL & RUSSELL, LLP LETTERHEAD]
Arthur J. Schwartz
(404) 264-2632
E-Mail: [email protected]
August 1, 1997
Board of Directors
EduTrek International, Inc.
3340 Peachtree Road, Suite 2000
Atlanta, Georgia 30326
Re: EduTrek International, Inc.
Registration Statement on Form S-1
Registration Number 333-29603
2,990,000 Shares
Ladies and Gentlemen:
We have acted as counsel for EduTrek International, Inc. (the
"Company") in connection with the proposed public offering of 2,990,000 Shares
of Class A Common Stock, without par value (the "Common Stock"), covered by the
above-described Registration Statement.
In connection therewith, we have examined the following:
(1) The Articles of Incorporation, as amended, of the Company,
certified by the Secretary of State of the State of Georgia;
(2) The By-Laws of the Company, certified as complete and correct
by the Secretary of the Company;
(3) The minute book of the Company, certified as correct and
complete by the Secretary of the Company;
(4) Certificate of Good Standing with respect to the Company,
issued by the Secretary of State of the State of Georgia; and
(5) The Registration Statement.
<PAGE> 2
Board of Directors
EduTrek International, Inc.
August 1, 1997
Page 2
Based upon such examination and upon examination of such other
instruments and records as we have deemed necessary, we are of the opinion
that:
(A) The Company has been duly incorporated under the laws of the
State of Georgia and is validly existing and in good standing
under the laws of that state;
(B) The 2,732,890 shares of Common Stock covered by the
Registration Statement to be sold by the Company have been
legally authorized and, when issued and sold in accordance with
the terms described in the Registration Statement, will be
legally issued, fully paid and non-assessable; and
(C) The 257,110 shares of Common Stock covered by the Registration
Statement to be sold by the selling shareholder referenced
therein have been legally authorized by the Company and, when
sold in accordance with the terms described in said
Registration Statement, will be validly issued, fully paid and
nonassessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus contained in said Registration Statement. In
giving this consent, we do not thereby admit that we come within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933, or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
SMITH, GAMBRELL & RUSSELL, LLP
/s/ Arthur Jay Schwartz
----------------------------------------
Arthur Jay Schwartz
AJW/CWH/ml
2
<PAGE> 1
EXHIBIT 10.6.1
FIRST AMENDMENT
TO
SUBORDINATE LOAN AND WARRANT PURCHASE AGREEMENT
This First Amendment ("Amendment") to the Subordinate Loan and Warrant
Purchase Agreement, dated as of October 8, 1996 (the "Loan Agreement"), by and
among Stratford Capital Partners, L.P., a Texas limited partnership
("Stratford"), GMM Partners SBIC, L.P., a Delaware limited partnership ("GMM",
and together with Stratford, the "Investors") and EduTrek International, Inc.
(formerly known as E Holdings, Inc.), a Georgia corporation (the "Company"), is
made and entered into as of May 31, 1997.
RECITALS
WHEREAS, the Company and Stratford entered into the Loan Agreement,
pursuant to which (a) Stratford made and subordinate loan ("Loan") to the
Company in the original principal amount of $7,000,000 and (b) Stratford
purchased and the Company sold and issued 88,863 warrants to purchase shares of
Class A Common Stock, without par value of the Company (the "Warrants"); and
WHEREAS, the Company, Stratford and GMM entered into an Assignment and
Assumption Agreement, effective as of October 8, 1996, pursuant to which
Stratford sold and assigned to GMM (a) $2,000,000 of the principal balance of
the Loan and (b) 25,389 warrants; and
WHEREAS, the Company and the Investors have agreed to amend the Loan
Agreement as specifically set forth herein.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the adequacy, receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
1. Definitions. Unless otherwise specified herein, all capitalized
terms herein shall have the same meaning as those terms have in the Agreement.
2. Amendments.
(a) Section 1.1 of the Loan Agreement is hereby amended by deleting
the following definitions from such section: "Book Value", "Consolidated
Assets", "Consolidated Liabilities", "Formula Value", "Put" and "Put Price"
(b) Section 1.1 of the Loan Agreement is hereby further amended by
deleting from the definition of "Market Value" the clause which reads "For
purposes of determining the Put Value, the Market Value shall be determined
pursuant to the Appraisal Procedure" from the second sentence of such
definition.
(c) Section 9.5 of the Loan Agreement is hereby amended by deleting
such section in its entirety and replacing it with the following new Section
9.5 which shall read as follows:
"SECTION 9.5. [intentionally omitted]"
<PAGE> 2
(d) Section 9.7 of the Loan Agreement is hereby amended by
deleting the clause which reads "to the Company's obligations with respect the
Put" from the second sentence of such section.
(e) Section 11.1(a) of the Loan Agreement is hereby amended by
deleting the clause which reads "or any amount payable upon an exercise of the
Put" from such section.
3. Counterparts. This Amendment may be executed in any number
of counterparts, each of which shall be considered an original for all
purposes, and all of which when taken together shall constitute a single
counterpart instrument. Executed signature pages to any counterpart instrument
may be detached and affixed to a single counterpart, with such single
counterpart with multiple executed signature pages affixed thereto constituting
the original counterpart instrument. All of those counterpart pages shall be
read as though one, and they shall have the same force and effect as if all the
signers had executed a single signature page.
4. Reaffirmation. Except as amended hereby, the Agreement shall
remain in full force and effect, the parties hereto hereby restate and reaffirm
all of the terms and provisions of the Agreement.
The undersigned have executed this Amendment as of the date first set
forth above.
STRATFORD:
---------
STRATFORD CAPITAL PARTNERS, L.P.
By: Stratford Capital GP Associates,
L.P., its General Partner
By: Stratford Capital Corporation,
its General Partner
By:/s/ John Farmer
-----------------------------------
Name: John Farmer
---------------------------------
Title: Managing Director
--------------------------------
GMM:
---
GMM PARTNERS SBIC, L.P.
By: GMM Investors Corp., its General
Partner
By:/s/ James J. Goodman
-----------------------------------
Name: James J. Goodman
---------------------------------
Title: Manager
--------------------------------
-2-
<PAGE> 3
COMPANY:
EDUTREK INTERNATIONAL, INC.
By:/s/ Steve Bostic
----------------------------
Name: Steve Bostic
--------------------------
Title: Chairman and Chief Executive Officer
------------------------------------
-3-
<PAGE> 1
EXHIBIT 10.15
AGENT AGREEMENT
THIS AGENT AGREEMENT (this "Agreement"), made this 13th day of March,
1996, by and between Target Marketing Systems, Inc., a Georgia corporation
having its principal place of business at 3525 Piedmont Road, Six Piedmont
Center, Suite 606, Atlanta, Georgia 30305 ("TMS"), and EduTrek Systems, Inc.,
a Georgia corporation having its principal place of business at One Buckhead
Plaza, 3060 Peachtree Road, N.W., Suite 1420, Atlanta, Georgia 30305 ("AGENT"),
W I T N E S S E T H:
WHEREAS, Target Marketing International, Inc., a Georgia corporation
("TMI") is the owner of certain proprietary materials; and
WHEREAS, TMS has represented to AGENT that it is the exclusive North
American agent of TMI and desires to increase the sales of such materials; and
WHEREAS, AGENT desires to market, sell and otherwise distribute such
materials and conduct certain training and other services related to such
materials; and
WHEREAS, TMS is willing to appoint AGENT and AGENT is willing to accept
such appointment as TMS's agent upon the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual premises and covenants
hereinafter set forth, the parties hereto, intending to be legally bound, hereby
agree as follows:
ARTICLE 1
DEFINITIONS
For purposes of this Agreement, the following words, terms and phrases
shall have the meanings assigned to them in this Article 1 unless the context
otherwise requires:
1.1 Affiliate. "Affiliate" shall mean any Person or entity that
directly or indirectly controls or is controlled by, or is under common control
with, such Person. As used in this definition of "Affiliate," the term "control"
means possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of an entity whether through ownership
of voting securities, by contract or otherwise.
1.2 Agent's Customers. "Agent's Customers" shall mean the customers of
Agent within the "Agent's Protected Industries" or part of the "Protected
Accounts" of Agent as set forth
<PAGE> 2
on Exhibit A, attached hereto and made a part hereof, as amended from time to
time as contemplated therein.
1.3 Agent Information. "Agent Information" shall mean all information
which is directly or indirectly disclosed to TMS regardless of the form in which
it is disclosed or whether such information was or is disclosed prior to, on or
after the date of this Agreement, relating in any way to AGENT's markets,
customers, materials, patents, inventions, procedures, methods, designs,
strategies, plans, assets, liabilities, costs, revenues, profits, organization,
employees, agents, distributors or business in general. Agent Information shall
not include information (a) already or subsequently in the public domain through
no breach of this Agreement, (b) TMS can demonstrate was within its possession
prior to the time of disclosure by TMS, (c) developed independently by TMS
(and/or a third party) without any reliance upon confidential proprietary
information of AGENT disclosed hereunder, (d) disclosed under requirement of
law, after notice to AGENT, (e) which TMS, after due inquiry, receives or
acquires from a third party without restriction as to use or (f) expressly
designated by AGENT as non-confidential.
1.4 Recommended Customer Price List. "Recommended Customer Price List"
shall mean the current list of prices that TMS publishes as set forth on Exhibit
B, attached hereto and made a part hereof, as amended from time to time.
1.5 Person. "Person" shall mean any natural person, corporation,
general or limited partnership, limited liability company, joint venture, trust,
association, unincorporated entity of any kind or a government or any department
or agency thereof.
1.6 Materials. "Materials" shall mean those materials owned by TMI and
described on Exhibit C, attached hereto and made a part hereof, as that exhibit
may be amended from time to time by mutual agreement of the parties, and all
enhancements, improvements and other alterations thereto, including, without
limitation, the addition of New Materials (as defined below) pursuant to Section
2.2 hereof.
1.7 Quota. "Quota" shall mean the minimum billings for Materials and
the Agent's Services which AGENT shall be required to sell in accordance with
the terms and conditions of Article 6 of this Agreement.
1.8 TMS Information. "TMS Information" shall mean all information which
is directly or indirectly disclosed to AGENT or embodied in the Materials
provided hereunder, regardless of the form in which it is disclosed or whether
such information was or is disclosed prior to, on or after the date of this
Agreement, relating in any way to TMS's markets, customers, materials, patents,
inventions, procedures, methods, designs, strategies, plans, assets,
liabilities, costs, revenues, profits, organization, employees, agents,
distributors or business in general. TMS Information shall not include
information (a) already or subsequently in the public domain through no breach
of this Agreement, (b) AGENT can demonstrate was within its possession prior to
the time of disclosure by AGENT, (c) developed independently by AGENT (and/or a
third party) without any reliance upon confidential proprietary information of
TMS disclosed hereunder, (d)
-2-
<PAGE> 3
disclosed under requirement of law, after notice to TMS, (e) which AGENT, after
due inquiry, receives or acquires from a third party without restriction as to
use or (f) expressly designated by TMS as non-confidential.
1.9 Term. "Term" shall mean the term of this Agreement pursuant to
Section 12.1 hereof.
1.10 Territory. "Territory" shall mean the geographical areas
specifically described in Exhibit D, attached hereto and made a part hereof, as
that exhibit may be amended from time to time by mutual agreement of the
parties.
ARTICLE 2
APPOINTMENT AND ACCEPTANCE
2.1 Scope. TMS hereby appoints AGENT, and AGENT hereby accepts
appointment, as TMS's agent during the Term with the exclusive right to market,
sell and otherwise distribute the Materials in the Territory to Agent's
Customers and conduct training seminars and other related services as set forth
on Exhibit E, attached hereto and made a part hereof, as amended from time to
time (the "Agent's Services"), using TMS's name, logos, service marks,
trademarks and other similar intellectual property, subject to the terms and
conditions of this Agreement.
2.2 New Materials. TMS and AGENT hereby covenant and agree that, in
connection with new materials or other products of TMS which are similar in
nature to the Materials, but not merely enhancements, improvements or
alterations thereto (the "New Materials"), TMS shall notify AGENT of their
availability and, upon the request of AGENT, shall appoint AGENT as TMS's agent
during the Term with the exclusive right to sell or otherwise distribute the New
Materials in the Territory to Agent's Customers, using TMS's name, logos,
service marks, trademarks and other similar intellectual property, subject to
all the terms and conditions of this Agreement. "Materials" shall be deemed to
include any "New Materials" for which AGENT receives the exclusive right to sell
or otherwise distribute in accordance with this Section 2.2.
2.3 Representatives. TMS acknowledges and agrees that AGENT may
directly or indirectly fulfill its duties and obligations hereunder through its
employees, Affiliates, agents and other representatives; provided, however, that
any such representative, other than an employee of AGENT, must be approved by
TMS, which approval shall not be unreasonably withheld or delayed.
2.4 Warranty and Indemnification. Each party to this Agreement
warrants and represents that it is free to enter into and fully perform this
Agreement, and neither party hereto has entered into another agreement, its
obligations under which would conflict with its performance under this
Agreement. Each party hereto shall indemnify and hold the other, its successors
and permitted assigns and the officers, directors, employees and agents of each
of them harmless, from and against any and all claims, damages, liabilities,
costs and expenses of any kind, including, without limitation, reasonable
attorneys' fees and expenses, arising out of the breach by the indemnifying
party of any representation, warranty or other term or provision of this
Agreement.
-3-
<PAGE> 4
The warranties, representations and indemnification obligations herein shall
survive the expiration or termination of this Agreement.
2.5 Instructors. AGENT acknowledges and agrees that the Materials may
only be distributed for use in training seminars that are conducted by an
instructor that is certified by TMS pursuant to an Instructor Agreement,
substantially in the form attached hereto as Exhibit F and made a part hereof.
AGENT may not train or certify any Person as an instructor in the use of the
Materials or the conduct of the Agent's Services, unless specifically authorized
in writing by TMS.
ARTICLE 3
GENERAL OBLIGATIONS OF AGENT
3.1 Marketing. AGENT shall have the following obligations with
respect to the marketing, sales and distribution of the Materials and delivery
of the Agent's Services:
(a) To use its reasonable best efforts to further the marketing, sale
and other distribution of the Materials and delivery of the
Agent's Services in the Territory to the Agent's Customers;
(b) To represent TMS in a professional and ethical manner, as
described in TMS's published Code of Professional Conduct, a copy
of which is attached hereto as Exhibit G and made a part hereof
(the "Code of Professional Conduct");
(c) To market and promote the Materials and the Agent's Services in a
manner consistent with TMS's standard marketing practices;
(d) To enter into TMS's standard customer contract (or a written
approved alternative) with all of the Agent's Customers placing
orders for the Materials and the Agent's Services, which standard
contract forms shall be provided by TMS in reasonable quantities
to AGENT upon AGENT's request at no expense to AGENT; and
(e) To provide to TMS a copy of the roster listing each of the
Agent's Customers and the number of participants in each Agent's
Customer's program conducted by AGENT using the Materials and,
within seven business days of the completion of such training
program, an original of a program evaluation, in a form mutually
agreeable to TMS and AGENT from time to time, of each participant
in such training program which complies with AGENT's request to
complete such evaluation (the "Program Evaluations").
3.2 Marketing or Distribution of Competitive Materials or Services.
AGENT shall not market or distribute in the Territory any materials or services
which infringe upon TMS processes, tools or intellectual property or which are
substantially similar to TMS processes, tools
-4-
<PAGE> 5
or intellectual property during the Term without prior written consent of TMS.
In addition, AGENT shall not market or sell in the Territory any competitive
products (i) the content of which can be substituted for the Materials or the
Agent's Services or (ii) which are developed, marketed and distributed by the
companies listed on Exhibit H during the Term and for a one-year period after
the termination of this Agreement, unless such termination is caused by the
bankruptcy of TMS or a material breach of this Agreement by TMS, as provided for
in Section 12.2.
3.3 Expenses. Unless otherwise expressly stated to the contrary
herein, AGENT assumes full responsibility for all costs, fees and other expenses
which it incurs in carrying out its obligations under this Agreement, including
but not limited to all business license, advertising, demonstration, travel and
accommodation expenses, without the right to reimbursement for any portion
thereof from TMS.
ARTICLE 4
GENERAL OBLIGATIONS OF TMS
4.1 Provision, Enhancement, Support and Development of Materials. TMS
will provide adequate supplies of the Materials to AGENT pursuant to the terms
and conditions of this Agreement, and TMS will use its reasonable best efforts
to enhance and support the Materials, and/or to develop New Materials, so that
TMS's products are and remain competitive in the marketplace. For purposes of
this Agreement, TMS and AGENT acknowledge and agree that TMS's failure to supply
the Materials to AGENT pursuant to the terms and conditions of this Agreement
would constitute a material breach of this Agreement by TMS.
4.2 Customization of Materials. Upon the reasonable request of AGENT,
TMS will provide certain customization services in connection with the Materials
pursuant to customer specifications, for which services TMS will be reimbursed
in full, based upon the reasonable cost of all time and materials necessary to
perform such services, as approved by the parties in advance.
4.3 Sales Support. TMS will provide AGENT with marketing, sales and
distribution support, at no cost to AGENT, in the manner provided to TMS's other
agents, including, without limitation, the provision of reasonable, ongoing
quantities of TMS's sales brochures, pamphlets and other collateral materials.
In addition, TMS will use its reasonable best efforts to provide AGENT with
customized marketing, sales and distribution support relating to Agent's
Customers at the hourly rate reflected on the Recommended Customer Price List.
4.4 Sales Training. Upon reasonable request of AGENT, TMS will
provide to AGENT and its employees, agents and other representatives training in
connection with the sale and other distribution of the Materials and the Agent's
Services at no cost to AGENT.
4.5 Qualified Leads. TMS will provide qualified leads developed or
received by TMS to AGENT for accounts in the Agent's Protected Industries (as
defined below), at no cost to AGENT.
-5-
<PAGE> 6
4.6 Protection of Materials. TMS will diligently protect the goodwill
and commercial reputation of the Materials and, in furtherance thereof, will use
its reasonable best efforts to cause its employees, agents and other
distributors to adhere to the Code of Professional Conduct.
4.7 Program Evaluation Summaries. TMS will provide AGENT with
written summaries of the Program Evaluations within 21 days of receipt of such
Program Evaluations from AGENT pursuant to Section 3.1.
ARTICLE 5
ORDERS FOR MATERIALS
5.1 Orders. AGENT shall submit orders for Materials by Agent's
Customers to TMS in writing by mail, confirmed facsimile transmission or express
courier in accordance with TMS's standard ordering processes. AGENT shall ensure
that orders relating to Agent's Customers are received by TMS at least ten days
prior to the delivery dates requested in such orders, and TMS shall ensure
delivery of the ordered Materials upon the requested delivery dates.
5.2 Delivery Terms. All delivery charges relating to the Materials
shall be invoiced to Agent's Customers.
5.3 Modification of Orders. AGENT may request in writing, and TMS
shall acknowledge, changes in orders placed with TMS if such changes are
received by TMS no later than two days prior to the requested delivery dates in
the case of a decrease in ordered Materials and no fewer than five days in all
other cases. Except as set forth in the foregoing sentence, no order shall be
modified or canceled except upon the mutual agreement of the parties. AGENT's
change orders shall be subject to all provisions of this Agreement, whether or
not such change orders so state.
5.4 Changes to Materials. TMS reserves the right, in its reasonable
discretion, to:
(a) Alter the form of any of the Materials; or
(b) Commence the production and sale of New Materials.
Notwithstanding the above, TMS shall use its reasonable best efforts to provide
AGENT with prompt, written notice of such decisions and shall fill all orders
from AGENT for any such altered or discontinued Materials, deliveries of which
have been commenced.
5.5 Sales Activities Reports. AGENT agrees to use its reasonable
good faith efforts to provide TMS with a written forecast of monthly sales of
the Materials and the Agent's Services for the subsequent three-month period in
a mutually agreed upon format within 15 business days after the end of each
month during the Term; provided, however, that TMS acknowledges and
-6-
<PAGE> 7
agrees that such forecasts are only AGENT's estimate of such monthly sales and
that AGENT does not represent or warrant as to the accuracy of such forecasts.
ARTICLE 6
MINIMUM SALES REQUIREMENT
The first six months of the Term will be AGENT's start up phase (the
"Initial Phase"), and AGENT will not be required to meet a Quota. After the
Initial Phase, AGENT will be required to meet the following Quotas:
(a) For the first 12-month period after the Initial Phase,
$3,000,000 in total billings to Agent's Customers based upon
annualized, quarterly billings during the final quarter of
such 12-month period (the "Initial Quota");
(b) For the second 12-month period after the Initial Phase,
$4,500,000 in total billings to Agent's Customers based upon
annualized, quarterly billings during the final quarter of
such 12-month period or actual billings during such 12-month
period; and
(c) For subsequent periods, such amount as may be mutually agreed
upon by the parties following the second 12-month period.
If TMS and AGENT cannot agree upon a Quota for subsequent periods, as provided
in (c) above, then the Quota for the subsequent five 12-month periods of the
Term shall be no more than $5,400,000, unless otherwise mutually agreed. If (a)
AGENT does not fulfill its Quota during any given 12-month period, or (b) AGENT
does not have, as of September 30, 1996, a minimum of five representatives to
market and sell the Materials and the Agent's Services related to the "Target
Account Selling" program described in Section B of Exhibit B, at least three of
which are certified to deliver such program, then, upon 90 days written notice
to AGENT from TMS, unless AGENT shall have cured any such failure within such
90-day period, AGENT will no longer have the exclusive right to market and
distribute the Materials and the Agent's Services to the Agent's Protected
Industries, and thereafter all customer accounts of AGENT within the Agent's
Protected Industries shall be treated as Protected Accounts (as defined in
Exhibit A).
ARTICLE 7
PRICES AND COMMISSIONS
7.1 Prices. The prices recommended by TMS to be charged for the
Materials and the Agent's Services purchased pursuant to this Agreement shall be
the applicable price reflected on the Recommended Customer Price List. AGENT,
however, will set, in its discretion, the prices to be charged to Agent's
Customers for the Materials and the Agent's Services. TMS's recommended prices
for the Materials and the Agent's Services as reflected on the Recommended
Customer Price List shall not exceed the prices offered by TMS to others for the
Materials and similar services. If while this Agreement is in effect, TMS offers
lower prices for the Materials and similar services,
-7-
<PAGE> 8
then the Recommended Customer Price List will be amended to reflect such lower
prices as of the date such prices were offered to other similarly situated
agents of TMS.
7.2 Commissions. In consideration of the Agent's Services pursuant
to this Agreement, AGENT will earn the following commissions for billings in
connection with the sale of the Materials and the Agent's Services:
(a) For the first 12 months of the Term (or until AGENT reaches
the Initial Quota, whichever occurs first), TMS will be
responsible for invoicing and receiving payments from Agent's
Customers for the TMS products and services described in
Exhibit B and will pay to AGENT the following sums within five
business days of receipt by TMS of such sums from Agent's
Customers:
(i) 75% of all receipts from $0-$2,999,999;
(ii) 80% of all receipts from $3,000,000-$5,999,999; and
(iii) 85% of all receipts from $6,000,000 and above.
In addition, during the time period that TMS is responsible
for invoicing and receiving payments from Agent's Customers,
AGENT will be responsible for collection efforts required in
connection with all billings to Agent's Customers.
Accordingly, TMS will forward to AGENT copies of all invoices
and other records relating to Agent's Customers required by
AGENT in connection with its collection efforts.
(b) After the first 12 months of the Term, pending the agreement
of TMS, which shall not be unreasonably withheld, for the
balance of the Term, AGENT will be responsible for
invoicing, receiving and collecting all billings to Agent's
Customers. For purposes of this subsection (b), TMS and
AGENT agree that it would be unreasonable for TMS to
withhold its agreement if AGENT has fulfilled the Initial
Quota and, accordingly, that it would be reasonable for TMS
to withhold its agreement if AGENT has not fulfilled the
Initial Quota. Notwithstanding anything to the contrary
contained herein, if AGENT fulfills the Initial Quota prior
to the expiration of the first 12 months of the Term, then
AGENT will be responsible for invoicing, receiving and
collecting all billings to Agent's Customers at such time.
AGENT will retain its commission from such collections and
will pay to TMS the following sums within five business days
of receipt by AGENT of such sums from Agent's Customers:
(i) 25% of all receipts from $0-$2,999,999;
-8-
<PAGE> 9
(ii) 20% of all receipts from $3,000,000-$5,999,999; and
(iii) 15% of all receipts from $6,000,000 and above.
Notwithstanding anything to the contrary contained herein, AGENT shall retain at
all times during the Term, 100% of all billings to Agent's Customers which
relate to any customized consulting services provided by AGENT (the "Non-TMS
Matters"), and AGENT shall be responsible, at all times during the Term, for
invoicing, receiving and collecting all billings to the Agent's Customers for
any Non-TMS Matters.
7.3 Collections. AGENT will make commercially reasonable efforts
to collect billings from Agent's Customers. AGENT shall not be obligated to use
any extraordinary efforts to collect any of such billings. AGENT shall not incur
liability to TMS or any other Person for any uncollected billings, unless AGENT
shall have engaged in willful misconduct or gross negligence in the collection
of such billings. So long as AGENT is performing such collection services, TMS
will not make any direct solicitation of Agent's Customers for collection
purposes.
7.4 Instructor Training Fees. AGENT will pay TMS a $7,500 per
Person fee, with the first Person being free (the "Training Fee"), for leader
certification training of AGENT's employees, Affiliates, agents and other
representatives as instructors certified to conduct the Agent's Services related
to the Materials. During any period during the Term that TMS is responsible for
the invoicing and collection of billings pursuant to Section 7.2, TMS shall not
invoice AGENT for any Training Fees due TMS hereunder, but shall deduct such
Training Fees from TMS's payments to AGENT of its commissions pursuant to
Section 7.2, which deductions shall be made at the end of the third month
following the accrual of such Training Fees. During each 12-month period that
AGENT meets its Quota as set forth in Section 6, TMS will refund to AGENT any
Training Fees paid to TMS during such 12-month period.
ARTICLE 8
LIMITATION OF WARRANTY AND LIABILITY
BOTH PARTIES ACKNOWLEDGE AND AGREE THAT THE MATERIALS, BY THEIR NATURE,
CANNOT BE WARRANTED AS TO EFFECTIVENESS. BOTH PARTIES ACKNOWLEDGE AND AGREE THAT
IN NO EVENT SHALL THE OTHER PARTY'S LIABILITY OF ANY KIND INCLUDE ANY SPECIAL,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES, EVEN IF SUCH PARTY
SHALL HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH POTENTIAL LOSS OR DAMAGE.
ARTICLE 9
CONFIDENTIALITY
AGENT acknowledges and agrees that TMS Information is confidential and
proprietary to TMS. AGENT agrees not to use any TMS Information for any purposes
other than as permitted or required for performance by AGENT hereunder. AGENT
further agrees not to
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<PAGE> 10
disclose or provide any TMS Information to any third party and to take
all commercially reasonable measures to prevent any such disclosure by its
employees, agents, contractors or consultants. TMS acknowledges and agrees that
Agent Information is confidential and proprietary to AGENT. TMS agrees not to
use any Agent Information for any purposes other than as permitted or required
for performance by TMS hereunder. TMS further agrees not to disclose or provide
any Agent Information to any third party and to take all commercially reasonable
measures to prevent any such disclosure by its employees, agents, contractors or
consultants. TMS Information and Agent Information that does not constitute a
trade secret, as defined under applicable law, shall not be considered
confidential and proprietary information for purposes of this Agreement after
one year from the date of the termination of this Agreement. The obligations of
AGENT and TMS with regard to TMS Information and Agent Information,
respectively, that constitutes a trade secret, as defined under applicable law,
shall survive the termination of this Agreement.
ARTICLE 10
TRADEMARKS AND COPYRIGHTED MATERIALS
10.1 Property Rights of TMS. TMS represents and warrants that (a)
it is the exclusive North American agent of TMI with regard to the Materials and
all related intellectual property rights, (b) TMI is the exclusive owner of the
Materials, (c) TMI possesses all copyright, trade secret and other similar
property rights in the Materials, (d) TMS has all necessary rights to grant the
rights and license granted to AGENT in Section 10.2 and (e) TMS will use its
reasonable best efforts to protect TMS's and TMI's trademarks and copyrighted
materials relating to the Materials.
10.2 Use of Trademarks and Copyrighted Materials of TMS. TMS hereby
grants to AGENT a non-exclusive, non-transferable, and royalty-free right and
license to use TMS's and TMI's trademarks and copyrighted materials (the "TMS
Intellectual Property") that are specified in Exhibit I attached hereto and made
a part hereof, as such exhibit may be modified from time to time during the Term
by mutual agreement of the parties, in connection with the marketing, sale and
other distribution, promotion and advertising of the Materials for so long as
such trademarks and copyrighted materials are used by AGENT in accordance with
the terms and conditions of this Agreement and the Standard Marketing Practices,
but in no event beyond the Term. AGENT shall afford TMS, upon prior notice to
AGENT by TMS and without interfering with AGENT's business, reasonable
opportunities during the Term to inspect the activities of AGENT in order to
ensure that AGENT's use of the trademarks and copyrighted materials is in
accordance with the terms and conditions of this Agreement and the Standard
Marketing Practices. AGENT shall acquire no right, title or interest in TMS's or
TMI's trademarks or copyrighted materials other than the foregoing limited
license, and AGENT shall at all times recognize TMS's and TMI's right to total
ownership of any and all trademarks and copyrighted materials in connection with
the Materials. AGENT shall not use any of TMS's or TMI's trademarks or
copyrighted materials as part of AGENT's corporate or trade name or permit any
third party to do so without the prior written consent of TMS.
10.3 Indemnification. TMS agrees to indemnify and hold AGENT and
its successors and permitted assigns and the officers, directors, employees and
agents of each of them
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<PAGE> 11
harmless from and against any and all claims, damages, liabilities, costs and
expenses of any kind, including, without limitation, reasonable attorneys' fees
and expenses, in connection with or relating to any claim that the Materials
infringe a copyright, trade secret or similar proprietary right of a third
party. If any such claim is asserted, or in TMS's reasonable judgment is likely
to be asserted, with respect to any of the Materials, AGENT agrees to allow TMS,
at TMS's reasonable option, to (a) procure the right for AGENT to continue to
sell such Materials or (b) replace or modify them in a functionally similar
manner so they become noninfringing. If neither of the foregoing remedies is
available on terms that are reasonable in TMS's judgment, AGENT, upon written
request by TMS, shall return all copies, if any, of the Materials held by AGENT
or under AGENT's control to TMS.
10.4 Markings. AGENT shall not, without the prior written consent
of TMS, remove or alter any trade names, trademarks, notices, serial numbers,
labels or other identifying marks, symbols or legends affixed to any of the
Materials or packages containing the Materials.
10.5 Infringements. AGENT shall notify TMS as soon as practicable
of any use by any third party of TMS's trademarks or copyrighted material of
which AGENT's officers, directors, employees or agents have actual knowledge.
TMS reserves the right in its sole discretion to institute and defend any
litigation or other legal proceedings involving infringement of TMS Intellectual
Property. AGENT agrees to cooperate fully with TMS in any action taken by TMS
against such third parties; provided, however, that all expenses of AGENT
relating to or arising from such action shall be borne by TMS.
10.6 Termination of Use. Upon termination of this Agreement, AGENT
shall cease and desist from use of TMS's trademarks or unauthorized use of its
copyrighted materials in any manner.
10.7 Use of Trademarks and Copyrighted Materials of AGENT. AGENT
does not hereby grant to TMS a license or any other right to use, now or in the
future, any of AGENT's current or future trademarks or copyrighted materials,
including, without limitation, "Revenue Operating System," "Quality Revenue
Process," "Chief Revenue Officer" or "CRO."
ARTICLE 11
TAXES
11.1 AGENT's Taxes. AGENT shall be solely responsible for and shall
pay, or reimburse TMS for, all taxes, assessments and other governmental
charges, however designated, which are now or hereafter imposed under or by any
governmental authority or agency of the Territory, that are associated with the
performance by AGENT of its obligations hereunder or the payment of any amount
by TMS to AGENT pursuant to the terms and conditions of this Agreement. AGENT
shall remit promptly any and all taxes, duties, import deposits, assessments and
other governmental charges collected from TMS or Agent's Customers to the
appropriate taxing authorities.
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<PAGE> 12
11.2 TMS's Taxes. TMS shall be solely responsible for and shall
pay, or reimburse AGENT for, all taxes, assessments and other governmental
charges, however designated, which are now or hereafter imposed under or by any
governmental authority or agency, that are associated with the performance by
TMS of its obligations hereunder or the payment of any amount by AGENT to TMS
pursuant to the terms and conditions of this Agreement. TMS shall remit promptly
any and all taxes, duties, import deposits, assessments and other governmental
charges collected from AGENT or Agent's Customers to the appropriate taxing
authorities.
11.3 Agent's Customers' Taxes. Any and all taxes, duties, import
deposits, assessments and other governmental charges, however designated, which
are now or hereafter imposed under or by any governmental authority or agency,
that are associated with the ordering of Materials on behalf of Agent's
Customers shall be invoiced to and paid by Agent's Customers.
ARTICLE 12
TERM AND TERMINATION
12.1 Term. This Agreement shall take effect with respect to each
geographical area comprising the Territory (as set forth in Exhibit D) as of the
date first above written and shall continue in force until terminated pursuant
to Section 12.2.
12.2 Termination. This Agreement may be terminated in accordance
with the following provisions:
(a) The parties hereto may terminate this Agreement upon the
mutual written agreement of the parties;
(b) Either party hereto may terminate this Agreement at any time
by giving notice in writing to the other party, which notice
shall be effective upon dispatch upon the insolvency of either
party or any action causing such party to avail itself of laws
for the protection of debtors including, without limitation,
the appointment of a receiver or the like, a complete or
partial moratorium on the payment of debt, a petition in
bankruptcy or the like filed by or against such party, or an
assignment of all or any substantial portion of the assets of
such party for the benefit of its creditors;
(c) Unless a specific alternative remedy is set forth herein for
any such material breach, either party may terminate this
Agreement by giving notice in writing to the other party in
the event that the other party is in material breach of this
Agreement and shall have failed to cure such breach within 30
days of receipt of written notice thereof from the
nonbreaching party; or
(d) This Agreement will automatically terminate and all rights and
obligations of TMS and AGENT hereunder shall cease if AGENT
enters into any transaction in the Territory with any company
listed on Exhibit H.
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12.3 Rights and Obligations on Termination. In the event of the
termination of this Agreement pursuant to Section 12.2, neither party shall be
released from the obligation to make payment of all amounts then or thereafter
due and payable pursuant to the terms and conditions of this Agreement with
respect to performance by the parties prior to the effective date of
termination.
12.4 No Compensation. If either party terminates this Agreement for
any reason in accordance with the terms and conditions hereof, the parties
hereby agree that, subject to the provisions of Section 12.3(a) hereof and
without prejudice to any other remedies which either party may have in respect
of any breach of this Agreement, neither party shall be entitled to any
compensation or like payment from the other as a result of such termination.
ARTICLE 13
FORCE MAJEURE
13.1 Definition. "Force Majeure" shall mean any event or
condition, not existing as of the date of signature of this Agreement, not
reasonably foreseeable as of such date and not reasonably within the control
of either party, which prevents in whole or in material part the performance by
one of the parties of its obligations hereunder or which renders the
performance of such obligations so difficult or costly as to make such
performance commercially unreasonable. Without limiting the foregoing, the
following shall constitute events or conditions of Force Majeure: acts of State
or other governmental action, riots, civil disturbance, war, strikes, lockouts,
slowdowns, prolonged shortage of energy supplies, epidemics, fire, flood,
hurricane, typhoon, earthquake, lightning and explosion.
13.2 Notice. Upon giving notice to the other party, a party
affected by an event of Force Majeure shall be released without any liability on
its part from the performance of its obligations under this Agreement, except
for the obligation to pay any amounts due and payable pursuant to the terms and
conditions hereof, but only to the extent and only for the period that its
performance of such obligations is prevented by the event of Force Majeure. Such
notice shall include a description of the nature of the event of Force Majeure,
and its cause and possible consequences. The party claiming Force Majeure shall
promptly notify the other party of the termination of such event.
13.3 Suspension of Performance. During the period that the
performance by one of the parties of its obligations under this Agreement has
been suspended by reason of an event of Force Majeure, the other party may
likewise suspend the performance of all or part of its obligations hereunder to
the extent that such suspension is commercially reasonable.
ARTICLE 14
MISCELLANEOUS
14.1 Governing Law. This Agreement shall be governed by, and
interpreted and construed in accordance with, the laws of the State of Georgia,
without regard to its conflict of laws provisions.
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14.2 Assignment. Neither party shall have the right to assign or
otherwise transfer its rights and obligations under this Agreement except with
the prior written consent of the other party; provided, however, either party
shall be entitled to assign any or all of its rights and obligations hereunder
to any of its Affiliates, as long as such Affiliate agrees in writing to be
fully liable for the performance of all of the assigning party's obligations
hereunder. Any dissolution, merger, consolidation or other reorganization of
either party, the sale or other transfer of all or substantially all of the
assets of either party or the sale or other transfer of a controlling percentage
of the capital stock of either party (either in one or a series of sales to the
same or related Persons), shall constitute an assignment of this Agreement for
all purposes of this Section 14.2. Any prohibited assignment shall be null and
void.
14.3 Notices. Notices permitted or required to be given hereunder
shall be deemed sufficient if pre-paid and delivered personally or by express
mail, confirmed facsimile transmission or certified mail, return receipt
requested, addressed to the respective addresses of the parties as first above
written or at such other addresses as the respective parties may designate by
like notice from time to time. Notices so given shall be effective upon (a)
receipt by the party to which notice is given or (b) on the third day following
the date such notice was mailed, whichever occurs first.
14.4 ENTIRE AGREEMENT. THIS AGREEMENT, INCLUDING EXHIBITS A THROUGH
J ATTACHED HERETO AND INCORPORATED AS AN INTEGRAL PART OF THIS AGREEMENT,
CONSTITUTES THE ENTIRE AGREEMENT OF THE PARTIES WITH RESPECT TO THE SUBJECT
MATTER HEREOF, AND SUPERSEDES ALL PREVIOUS AGREEMENTS BY AND BETWEEN TMS AND
AGENT, AS WELL AS ALL PROPOSALS, ORAL OR WRITTEN, AND ALL NEGOTIATIONS,
CONVERSATIONS OR DISCUSSIONS HERETOFORE HAD BETWEEN THE PARTIES RELATED TO THIS
AGREEMENT.
14.5 Amendment. This Agreement shall not be deemed or construed to
be modified, amended, rescinded, canceled or waived, in whole or in part, except
by written amendment signed by the parties hereto.
14.6 Severability. If any of the terms of this Agreement are in
conflict with any rule of law or statutory provision or are otherwise
unenforceable under the laws or regulations of any applicable government or
subdivision thereof, such terms shall be deemed stricken from this Agreement,
but such invalidity or unenforceability shall not invalidate any of the other
terms of this Agreement, and this Agreement shall continue in force, unless the
invalidity or unenforceability of any such provisions hereof does substantial
violence to, or where the invalid or unenforceable provisions comprise an
integral part of, or are otherwise inseparable from, the remainder of this
Agreement.
14.7 Counterparts. This Agreement may be executed in one or more
counterparts, and each such counterpart shall be deemed an original hereof.
14.8 Waiver. No failure by either party to take any action or
assert any right hereunder shall be deemed to be a waiver of such right in the
event of the continuation or repetition
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of the circumstances giving rise to such right, and no waiver shall be construed
as a continuing waiver.
14.9 Approvals. Whenever under the provisions of this Agreement any
approval or consent is required, such approval or consent shall not be
unreasonably withheld (unless otherwise expressly provided herein) or delayed
and shall be deemed granted (a) unless the party requested to grant its approval
or consent gives written notice of its disapproval or the withholding of its
approval or consent, and the reasons therefor, within five business days after
receipt of a written request for such approval or consent or (b) unless
otherwise expressly provided.
14.10 Non-Solicitation. During the Term, the parties agree not to
solicit any employee or other representative of the other party (or any of its
Affiliates) without the written consent of such party, for a period of one year
from the date such employee, agent or other representative ends its employment
or affiliation with the other party. Neither party shall induce or recommend to
any employee or other representative of the other party that such employee or
other representative should end its employment or affiliation with the other
party. This provision shall survive the termination of this Agreement for a
period of six months.
14.11 Construction of Agreement. Both parties acknowledge and agree
that they have been represented by legal counsel in connection with the
preparation of this Agreement. Accordingly, it is the intention and agreement of
the parties that the language, terms and conditions of this Agreement are not to
be construed in any way against or in favor of any party by reason of the
responsibilities in connection with the preparation of this Agreement.
14.12 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
14.13 Access to Information. Each party hereto covenants and agrees
to allow the other party and its authorized representatives reasonable access at
such other party's expense during normal business hours to the employees and
staff of the other party and its books, accounts, records, files and other
documents relating to the Materials and the Agent's Services for the purpose of
audit and inspection, and each party will furnish or cause to be furnished all
information with respect to the Materials and the Agent's Services as the other
party may reasonably request and agrees to cooperate fully with the other party
and its representatives in connection with such audit and inspection.
14.14 Attorneys' Fees. If any litigation is initiated by either
party against the other relating to this Agreement or the subject matter hereof,
the party prevailing in such litigation shall be entitled to recover, in
addition to all damages allowed by law and other relief, all court costs and
reasonable attorneys' fees incurred in connection therewith.
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14.15 No Third-Party Beneficiaries. The parties hereto do not, by
executing this Agreement, confer any benefit upon any Person other than the
parties hereto and their permitted successors and assigns.
14.16 Relationship of the Parties. The relationship between TMS and
AGENT shall be solely as described herein. AGENT shall have no authority to act
on behalf of TMS in any manner except in the manner and to the extent set forth
herein or as TMS may expressly agree in writing. Persons retained by AGENT as
dealers, employees, representatives or agents shall not by reason thereof be
deemed to be employees or agents of TMS.
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IN WITNESS WHEREOF, the parties hereto, intending to be legally bound,
hereby cause this Agreement to be executed on the date first above written.
TARGET MARKETING SYSTEMS, INC. EDUTREK SYSTEMS, INC.
By: /s/ Alston Gardner By:/s/R. Steven Bostic
-------------------------------- ------------------------------
Alston Gardner, Chief Executive Officer R. Steven Bostic, President
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EXHIBIT 10.16
THIS LICENSE AGREEMENT dated July 26, 1997.
BETWEEN:
ITI LEARNING SYSTEMS INC., a body corporate,
incorporated under the laws of Delaware, USA
(hereinafter referred to as "ITI")
- and -
AMERICAN EUROPEAN CORPORATION, a body corporate,
incorporated under the laws of Georgia, USA
(hereinafter referred to as the "Licensee")
- and -
EDUTREK INTERNATIONAL, INC., a body corporate,
incorporated under the laws of Georgia, USA
(hereinafter referred to as the "Guarantor")
WHEREAS ITI has developed the ITI System for use in the Institutes;
AND WHEREAS the ITI System is being licensed to others to conduct business at
institutes pursuant to the ITI System;
AND WHEREAS Licensee desires a license of the ITI System with the right to
operate one or more Institutes under the Licensed Marks within the Territory;
NOW THEREFORE, in consideration of the above premises, and of the additional
mutual covenants and valuable consideration recited below, the parties agree as
follows:
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2. License of the ITI System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Confidential Operations Manual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
3. The Territory and Site Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1 Sites Mutually Agreed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.2 Institutes by Licensee Within Territory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4. Protection of ITI's Proprietary Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.1 Trade Secrets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
4.2 Licensed Marks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5. Obligations of ITI; Supervision, Assistance and Services . . . . . . . . . . . . . . . . . . . . . . . 9
5.1 Obligations Included in License Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.1.1 Confidential Operations Manual . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.1.2 Action Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.1.3 Assistance Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.1.4 Advertising Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.1.5 Quality Assurance Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.1.6 Latest Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.1.7 Site Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.1.8 Training Materials and Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.1.9 Training and Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.2 Additional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.2.1 Consultation Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.2.2 Ongoing Assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.2.3 Training Sessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.2.4 Periodic Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.1 Initial License Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.2 Monthly Royalty Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.3 Monthly Royalty Payment Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.4 Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.5 Establishment of Tuition Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.6 Records, Inspection and Auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.7 Licensee to Pay Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.8 Payment of Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7. Licensee's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE> 3
<TABLE>
<S><C> <C>
7.1 Compliance with Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.2 Other IT Instruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.3 Expense of Upgrades . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.4 Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.5 Credentialed Instructors/Facilitators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.6 Advertising To Promote the ITI System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.7 Licensee to Obtain Permits and Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.8 Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
7.9 Use of Designated Computer Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.10 Advertising Expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.11 Quality Assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.12 Compliance with Educational Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.13 Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.14 Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.15 Non Competition Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.16 Confidentiality Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8. Transfer and Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.1 Transfer or Assignment by ITI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.2 Assignment by Licensee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.3 Approval of Transferees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
8.4 Record of Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
8.5 Right of First Refusal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
9. Term and Renewal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
9.1 Expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
9.2 Renewal of License Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
9.3 Month-To-Month License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.4 Termination Before Expiration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.5 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10.1 Default and Termination Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10.2 Material Breaches That May Be Cured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10.3 Material Breaches That Cannot Be Cured . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
10.4 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
10.5 Licensee's Notice of Breach by ITI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
11. Relationship After Expiration or Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
11.1 Obligations of Licensee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
11.2 Settlement of Outstanding Contracts with Students . . . . . . . . . . . . . . . . . . . . . . 28
11.3 Cessation of Sales Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.4 Payment of All Obligations Due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.5 Licensee and Principals Not to Compete . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
11.6 Assignment of Territory Upon Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
12. Injunctive Relief and Liquidated Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
13. Hold Harmless, Indemnification and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
13.1 Hold Harmless and Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
13.2 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
14. Parties as Independent Contractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
15. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
16. Attorney Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
17. Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
18. Time is of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
19. Jurisdiction and Venue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
20. Most Favoured Nations Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
21. Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
22. Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
23. Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
24. Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
25. Vested Right to Additional Territories in Addition to the Territory . . . . . . . . . . . . . . . . . . 34
25. Binding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
25. Best Efforts Negotiations and Right of First Refusal . . . . . . . . . . . . . . . . . . . . . . . . . 35
</TABLE>
<PAGE> 5
1. INTERPRETATION
1.1 DEFINITIONS. In this Agreement, unless the context requires
otherwise:
1.1.1 "Agreement" means this License Agreement;
1.1.2 "Annualized Full Time Equivalent Basis" when used in relation
to the number of students, means the number of students
multiplied by the number of months of study for such
students, divided by twelve months;
1.1.3 "Confidential Operations Manual" means the confidential
operations manual or manuals produced by ITI, whether in
printed or electronic form, as amended from time to time,
describing the policies, rules and procedures to be used in
the operation of Institutes by the Licensee and other
licensees pursuant to the ITI System;
1.1.4 "Director of Program Delivery" means an employee or employees
of the Licensee dedicated (unless otherwise agreed in writing
by ITI, acting reasonably) to perform the tasks of the
Director of Program Delivery at the Institute as specified in
the Confidential Operations Manual, such employee maintaining
the credentials specified in the Confidential Operations
Manual;
1.1.5 "Director of Recruiting" means an employee or employees of the
Licensee dedicated (unless otherwise agreed in writing by ITI,
acting reasonably) to perform the tasks of the Director of
Recruiting at the Institute as specified in the Confidential
Operations Manual, such employee maintaining the credentials
specified in the Confidential Operations Manual;
1.1.6 "Fee Schedule" means the schedule of fees included in the
Confidential Operations Manual for services which ITI may
perform from time to time for the Licensee, which schedule ITI
may amend from time to time upon 30 days notice to the
Licensee;
1.1.7 "Gross Revenues" means the aggregate gross amount of all
revenues from whatever source derived (based on the cash
method of accounting), which arise from or are derived,
whether by cash, credit or otherwise, by Licensee from
business conducted or which originated in, on, from, or
through the Institute, or from the sale of any products or
services associated with the use of the Licensed Marks,
whether such business is conducted in compliance with or in
violation of the terms of this Agreement, including, without
limitation, tuition (in accordance with sections 6.5 and
7.2.3), corporate training revenue, revenue from the sale,
rental or otherwise of student computers, accessories, books
and materials, and the proceeds of any business interruption
insurance received by the Licensee with respect to revenues
deemed to have been lost by the Licensee as a result of the
interruption of business at the Institute, minus:
(a) any sums collected by the Licensee on behalf of any
duly constituted governmental authority and paid out
to such authority on account of sales taxes, goods
and services taxes and other like taxes imposed
<PAGE> 6
2
upon the sale or provision of goods and services by
the Licensee from or through the Institute;
(b) the amount of any refund or credit paid to any
student; and
(c) the cost of goods sold for promotional items using
the Licensed Marks not required by ITI to be sold
under this Agreement such as caps, T-shirts, pens,
bags, screen savers or pencils;
1.1.8 "Guarantor" means EduTrek International, Inc., a body
corporate, incorporated under the laws of Georgia, USA;
1.1.9 "Institute" or "Institutes" means information technology
institutes or places of delivery of the ITI System, whether
physical, virtual or otherwise, operated under the License in
accordance with the terms of this Agreement whether at
American European Corporation, American Intercontinental
University or otherwise;
1.1.10 "Instructor" means an instructor/facilitator who is qualified
in accordance with section 7.5 and the Confidential Operations
Manual to provide the classroom and/or other instruction and
team facilitation which is part of the ITI Program Delivery at
the Institute;
1.1.11 "In-Territory Services" means Program Delivery under the ITI
System within the Territory pursuant to federal
government-sponsored or funded contracts and/or national or
multinational corporate contracts, which require the delivery
or performance of ITI System services both outside and within
the Territory;
1.1.12 "ITI" means ITI Learning Systems Inc., a body corporate,
incorporated under the laws of Delaware, USA;
1.1.13 "ITI System" means the procedures of operation for the
institutes owned, operated or licensed by ITI, utilizing
certain standards, specifications, methods, procedures,
techniques, processes, formulas, management systems, formats,
admissions criteria, Program Delivery and proprietary marks
and information, including without limitation certain
proprietary programs, systems, instructional and management
techniques, physical or technical security requirements,
procedures and methods for the education and training,
including curricula, and for admissions and placement, used in
the institutes, all of which may be changed, improved and
further developed from time to time by ITI, and including the
Confidential Operations Manual;
1.1.14 "License" means the rights granted under section 2.1 of this
Agreement;
1.1.15 "Licensed Marks" means the trade names, trademarks, service
marks, logos, symbols and other indicia of origin identified
in the Confidential Operations Manual by which ITI and its
licensees are now identified, whether or not registered, which
may include, but are not limited to, "ITI", "ITI Information
Technology Institute", "ITI Institute" and such other trade
names, trademarks, service marks, associated logos
<PAGE> 7
3
and symbols as are now designated by ITI and as may hereafter
be designated by ITI in writing;
1.1.16 "Licensee" means American European Corporation, a body
corporate, incorporated under the laws of Georgia, USA, and
shall include any corporation, partnership, individual or
combination of individuals, or other legal entity which owns a
majority interest of or controls American European
Corporation, or in which American European Corporation owns a
majority interest or controls;
1.1.17 "Program Delivery" means technologies, methodologies,
curricula and techniques employed for the purpose of the
facilitation of learning by students, including without
limitation, instruction, teaching, facilitation, use of
curricula, books, electronic media, distance education
technologies, self-paced learning materials, media,
courseware, and collaborative team and/or problem based
projects;
1.1.18 "Registrar" means an employee or employees of the Licensee
dedicated (unless otherwise agreed in writing by ITI, acting
reasonably) to perform the tasks of the registrar at the
Institute as specified in the Confidential Operations Manual,
such employee maintaining the credentials specified in the
Confidential Operations Manual;
1.1.19 "Stand-Alone ITI Program" means a program of information
technology education and training consisting only of curricula
designated by ITI to the Licensee under this Agreement and
using the ITI System; and
1.1.20 "Territory" means the State of Georgia in the United States of
America.
1.2 FUNDS. In this Agreement, all references to funds shall be in United
States dollars, unless otherwise stated.
2. LICENSE OF THE ITI SYSTEM
2.1 LICENSE. Subject to all of the conditions of this Agreement, ITI
grants to Licensee for the term established by section 9 of this Agreement a
license to use the ITI System in the Territory.
2.2 CONFIDENTIAL OPERATIONS MANUAL. ITI shall lend to Licensee, at no
additional charge, a copy of the Confidential Operations Manual as specified in
section 5.1.1. The Licensee acknowledges and agrees as follows:
2.2.1 ITI has determined that certain Program Delivery, and certain
other policies, systems, techniques and materials are
essential to the successful operation of an Institute. In
order to protect the reputation and goodwill of the businesses
operating under the ITI System and to maintain standards of
operation under the Licensed Marks, Licensee agrees to operate
its Institute in accordance with the Confidential Operations
Manual, including such amendments thereto, as ITI may publish
from time to time, all of which Licensee acknowledges belong
solely to ITI and shall be
<PAGE> 8
4
on loan from ITI during the term of this Agreement. Should
Licensee lose one or more of the Confidential Operations
Manual or supplements, ITI may impose a reasonable charge for
replacement manuals or supplements issued to Licensee. The
standards, specifications or requirements established by ITI
for Licensee, unless otherwise indicated, shall be set forth
in this Agreement or may, from time to time, be set forth by
ITI in the Confidential Operations Manual.
2.2.2 Licensee shall at all times use its best efforts to keep the
information in the Confidential Operations Manual, the
Confidential Operations Manual itself and any other manuals,
materials, goods and information created or used by ITI and
designated for confidential use within the ITI System
confidential and shall limit access to employees of Licensee
on a need-to-know basis, on this same confidential basis.
2.2.3 Licensee understands and acknowledges that the ITI System
serves markets and operates under market conditions that are
continuously changing and evolving, and that new and different
standards, procedures, curricula, and techniques will be
developed and recommended by ITI in response to those changes,
or other conditions in the ITI System, to maintain and/or
enhance the quality of services provided by Licensee, and the
reputation and goodwill of the ITI System and its institutes.
Accordingly, Licensee understands and acknowledges that ITI
may, from time to time, revise the contents of the
Confidential Operations Manual to implement new or different
requirements for the ITI System, and Licensee expressly agrees
to comply with all such changed requirements which are by
their terms mandatory, within 90 days of being notified by ITI
of such changed requirements; provided that such requirements
shall also be applied in a reasonably nondiscriminatory manner
to comparable institutes operated under the ITI System by ITI
or by other licensees having similar license agreements, and
that the fundamental terms and conditions of this Agreement
shall not be altered.
2.2.4 Licensee shall at all times insure that its copy of the
Confidential Operations Manual is kept current and up to date.
In the event of a dispute as to the contents of the
Confidential Operations Manual, the terms and dates of the
master copy of same maintained by ITI at its principal place
of business shall govern.
3. THE TERRITORY AND SITE LOCATION.
3.1 SITES MUTUALLY AGREED. Institutes in the Territory shall be located
at sites selected in accordance with sections 3.2, 5.1.7 and 7.14. All
services of Institutes must be delivered and received within the Territory.
For greater certainty, services shall be considered as delivered at the
location of the student of the Institute, including where the delivery is by
distributed team learning, correspondence or distance education by electronic
or other means as may be prescribed by ITI from time to time in the
Confidential Operations Manual. Licensee expressly understands and agrees that
ITI shall have the right, in its sole discretion, to own and operate (outright,
through contract, joint-ventures or otherwise) institutes using the ITI System
at any location(s) outside of the Territory; to grant licenses for the
operation of institutes using the ITI System at any location(s) outside of the
<PAGE> 9
5
Territory as ITI, in its sole and exclusive discretion, deems appropriate
(provided that ITI agrees that with the exception of a license for the City of
Calgary, Province of Alberta, Canada to the Southern Alberta Institute of
Technology, if the Licensee is not in default under this Agreement, it will not
enter into any license agreement on or before June 11, 1998); to conduct and
operate businesses, and offer and sell services, programs and products within
the Territory which do not comprise a part of the ITI System and, in connection
therewith, to exploit its Licensed Marks, name, reputation and know-how. ITI
agrees that, so long as this Agreement is in effect, it will not itself, or
through any affiliate or subsidiary, operate, nor will it license a third party
to, operate an institute utilizing or competitive with the ITI System in the
Territory except that:
3.1.1 ITI reserves the right to negotiate the sale and provision
of In-Territory Services. If ITI should secure such a
contract and Licensee is then in substantial compliance with
this Agreement, ITI shall, subject to the consent of the
customer (which consent ITI shall endeavour to obtain),
offer to Licensee a subcontract to perform all of the
In-Territory Services under such contract on the same terms
and conditions that ITI and the customer originally agreed
to, provided that ITI shall retain a portion of the fees
paid by the customer equal to ITI's costs of procuring and
negotiating the contract and acting as contractor thereunder
and any costs required to train or assist the Licensee as
may reasonably be required to prepare the Licensee to
provide such services. For greater certainty, any fees
received by the Licensee shall be included in Gross
Revenues. If the customer will not consent to a
subcontract, or if Licensee is not in substantial compliance
with this Agreement, or if Licensee elects not to execute
any such subcontract with ITI, ITI may elect to perform the
In-Territory Services itself or subcontract performance to
any third party, who may be another licensee of the ITI
System. If ITI should subcontract the In-Territory Services
to a third party because Licensee elected not to execute a
subcontract with ITI, ITI's subcontract with the third party
may be made on terms more favourable for the subcontractor
than those terms previously offered to Licensee only if
Licensee has been notified of the more favourable terms and
has not accepted a subcontract on such terms within five (5)
business days of receiving such notice. All operations by
ITI or a third party in providing In-Territory Services
pursuant to this section shall be conducted in compliance
with the same standards and requirements established by ITI
for its proprietary operations and for its licensees
generally.
3.1.2 ITI shall not sell or otherwise distribute any product or
service bearing any of the Licensed Marks without first
determining through appropriate market research that the
sale or distribution of such product or service, as offered
under the proposed marketing plan, is not likely to have a
material negative effect on Gross Revenues for licensees
generally. ITI may not require Licensee to sell any such
product or service in the Territory, and, correspondingly,
ITI shall not be required to sell any such product or
service to Licensee. If ITI makes any product or service
available to Licensee for resale, the price therefor shall
be no less favourable to Licensee than the price for which
such product or service is available to non-licensees.
<PAGE> 10
6
3.2 INSTITUTES BY LICENSEE WITHIN TERRITORY. The Licensee will operate at
least one Institute within the Territory. The first Institute shall be opened
by the Licensee within the Territory not later than November 3, 1997, unless a
later date is agreed to in writing by ITI. The opening of Institutes within
the Territory shall be subject to the following:
3.2.1 Licensee must notify ITI in writing of Licensee's intention
to open an Institute and shall submit to ITI other
information as is then required by ITI, including but not
limited to business plans, pro formas addressing new and
existing Institute operations, and financial information.
3.2.2 ITI must approve such new Institute in writing, in
accordance with such standards required for institutes, the
site and layout, size, decor, equipment, mechanical,
electrical, computer and telecommunication systems as are
then currently required for Institutes, as determined by
ITI.
3.2.3 Excepting the first Institute, Licensee must pay to ITI a
fee for services in accordance with the Fee Schedule to
compensate ITI for its expenses incurred in site review and
institute plan approval.
3.2.4 The Licensee must have all local, state and federal permits,
licenses and certificates necessary to operate the
Institute.
4. PROTECTION OF ITI'S PROPRIETARY RIGHTS
TRADE SECRETS. Licensee acknowledges ITI's proprietary rights in the ITI
System, including the programs, curricula, systems, techniques, manuals, and
trade secrets which will be disclosed to Licensee under this Agreement, and
further acknowledges that Licensee does not acquire any right or interest
therein beyond the rights expressly granted to it under this Agreement. By
execution of this Agreement, Licensee also acknowledges that the know-how and
operating format related to ITI's proprietary methods and materials is also
proprietary to ITI and will not be disclosed by Licensee except in connection
with Licensee's required activities as authorized by this Agreement during the
term of this Agreement and for a period of three (3) years after termination or
expiration of this Agreement. Licensee agrees to maintain adequate security in
the control, use, and handling of proprietary materials ITI supplies to
Licensee in accordance with the practices described in the Confidential
Operations Manual or as stated otherwise in writing from time to time. Unless
expressly waived by ITI in writing, Licensee shall require all persons who have
or could have access to ITI proprietary materials, to sign written
confidentiality agreements pertaining to the security of ITI proprietary
materials, which agreement shall be in a form reasonably acceptable to, and
approved in advance by ITI. Licensee shall immediately notify ITI of any
unauthorized use of ITI's trade secrets, or any infringement of ITI's
copyrights. ITI shall have sole discretion to take such action or inaction as
it deems appropriate. The obligation of confidentiality does not extend to
information which at the time of disclosure is generally available to the
public (other than as a result of a prohibited disclosure by the Licensee),
information which after disclosure becomes generally available to the public by
publication or otherwise through no fault of the Licensee, information which is
in the possession of the Licensee prior to disclosure and was not obtained,
directly or indirectly, from ITI, information received by the Licensee from a
third party, provided Licensee is
<PAGE> 11
7
not on notice that such third party is bound by a confidentiality agreement or
is otherwise prohibited from transmitting the information to Licensee by
contractual, legal or fiduciary obligations owing to ITI, and information now
or hereafter independently developed by the Licensee.
4.2 LICENSED MARKS
4.2.1 Licensee expressly acknowledges ITI's rights in and to the
Licensed Marks and agrees not to represent in any manner
that Licensee has acquired any ownership rights in the
Licensed Marks. Licensee agrees not to use any of the
Licensed Marks or any marks, names or indicia which are or
may be confusingly similar in its own corporate or business
name or in association with any of the Licensees operations
except as authorized in this Agreement. Licensee further
acknowledges and agrees that any and all goodwill associated
with the ITI System and identified by the Licensed Marks
shall inure directly and exclusively to the benefit of ITI
and that, upon the expiration or termination of this
Agreement for any reason, no monetary amount shall be
attributable by the Licensee to any goodwill associated with
Licensee's use of the Licensed Marks.
4.2.2 Licensee understands and agrees that any use of the Licensed
Marks other than as expressly authorized by this Agreement,
without ITI's prior written consent, is an infringement of
ITI's rights in the Licensed Marks and that the right to use
the Licensed Marks granted herein does not extend beyond the
termination or expiration of this Agreement, except as may
be required to liquidate any previously existing inventory
of promotional items using the Licensed Marks. Licensee
expressly covenants that, during the term of this Agreement
and thereafter, Licensee shall not, directly or indirectly,
commit any act or infringement or contest or aid others in
contesting the validity of ITI's right to use the Licensed
Marks or take any other action in derogation thereof.
4.2.3 Licensee acknowledges an obligation to monitor its own and
other parties' use of the Licensed Marks and agrees to do
so. Licensee shall promptly notify ITI of any claim, demand
or cause of action that ITI may have based upon or arising
from any unauthorized attempt by any person or legal entity
to use the Licensed Marks, any colourable variation thereof,
or any other mark, name or indicia in which ITI has or
claims a proprietary interest. Licensee shall assist ITI,
upon request and at ITI's expense, in taking such action, if
any, as ITI may deem appropriate to halt such activities,
but shall take no action nor incur any expenses on ITI's
behalf without ITI's prior written approval; if ITI
undertakes the defence or prosecution of any litigation
relating to the Licensed Marks, Licensee agrees to cooperate
with and assist ITI as ITI may reasonably request in the
defence or prosecution of any such action, and ITI shall
reimburse Licensee for Licensee's reasonable out-of-pocket
expenses incurred in providing such assistance. Any amounts
collected by ITI with respect to any infringement actions
prosecuted by ITI shall be retained by ITI; provided,
however, that such amounts as may be attributable to damages
suffered by Licensee, net of all costs and expenses incurred
by ITI in prosecuting the infringement, will be remitted to
Licensee and Licensee will include the same in
<PAGE> 12
8
its Gross Revenues. If ITI elects in writing to the
Licensee not to prosecute any trademark infringement, then
the Licensee may do so and ITI agrees to provide reasonable
non-financial assistance and to execute all pleadings as the
Licensee may reasonably deem necessary or prudent to
prosecute the infringement claim. Any amounts collected by
the Licensee with respect to any such infringement action
shall be retained by the Licensee and ITI shall have no
right or claim therein; provided, however, that such amounts
as may be attributably to costs incurred by ITI, in
connection with the Licensee prosecuting the infringements,
will be remitted to ITI and all amounts not so paid to ITI,
net of all costs and expenses incurred in prosecuting the
infringement, would be included in Gross Revenues.
4.2.4 Licensee further agrees and covenants to use the Licensed
Marks solely in the manner prescribed by ITI; to observe all
laws with respect to the registration of trade names and
assumed or fictitious names, to include in any application
therefore a statement that Licensee's use of the Licensed
Marks is limited by the terms of this Agreement, and to
provide ITI with a copy of any such application and other
registration document(s); and to observe such requirements
with respect to trademark and service mark registrations and
copyright notices as ITI may, from time to time, require,
including, without limitation, affixing "SM", "TM", or "(R)"
adjacent to the Licensed Marks.
4.2.5 ITI reserves the right, in its sole discretion, to designate
and require that Licensee use one or more new, modified or
replacement Licensed Marks, except as may be required to
liquidate any previously existing inventory of promotional
items using the Licensed Marks. If as a result of such
requirement, Licensee should be required to alter any
signage or outdoor advertising, Licensee shall have 120 days
from receipt of ITI's requirement to comply with same, at
Licensee's sole cost and expense.
4.2.6 In conducting any business or enterprise, in the Territory
and under the Licensed Marks, ITI agrees that it shall not
commit, or permit any of its licensees to commit, any act
causing an incurable tarnishment of the Licensed Marks or
the reputation and goodwill associated with the ITI System.
4.2.7 The Licensee acknowledges that the Licensee does not have
any rights greater than ITI to the use of the Licensed
Marks in the Territory. ITI and the Licensee shall use
their reasonable best efforts to obtain the use of the
Licensed Marks, including the name "ITI Information
Technology Institute" in the Territory, without obligation
to defend any Licensed Mark, prevent others from using the
Licensed Marks or any marks which are so similar as to be
confusing, or otherwise bargain with any users of similar
marks or trade names.
4.3 ITI shall use its best efforts to maintain in good standing all
Licensed Marks which the Licensee is required to use in the Territory. In the
event that ITI fails to use its best efforts, ITI shall indemnify and hold the
Licensee harmless from and against any losses, liabilities, claims, damages,
<PAGE> 13
9
costs or expenses incurred with respect to any actual or alleged infringement
resulting from the Licensee's use, in accordance with the terms of the
Agreement, of the License Marks.
5. OBLIGATIONS OF ITI; SUPERVISION, ASSISTANCE AND SERVICES
5.1 OBLIGATIONS INCLUDED IN LICENSE FEE. The obligations and services to
be performed by ITI as part of the License, and at no additional charge to
Licensee, are:
5.1.1 CONFIDENTIAL OPERATIONS MANUAL. The Confidential Operations
Manual will be loaned to Licensee as described in section
2.2.
5.1.2 ACTION PLAN. Prior to the opening of the first Institute in
the Territory, ITI will assist Licensee in developing an
action plan for Licensee to follow and implement in
operating its Institute, which includes a marketing
strategy, an estimate of expenses and sales goals. Neither
ITI nor Licensee shall be bound to implement the action
plan, nor shall any action plan constitute a representation
by ITI with respect to actual, average, projected, or
forecasted volume, sales, profits, or earnings of Licensee
if Licensee follows and implements such plan.
5.1.3 ASSISTANCE NUMBER. ITI will provide a telephone number for
Licensee's use in contacting employees of ITI for
assistance, as designated from time to time by ITI.
5.1.4 ADVERTISING MATERIALS. ITI will provide to Licensee, from
time to time, a copy of certain advertising material
approved by ITI.
5.1.5 QUALITY ASSURANCE REVIEW. ITI will maintain a procedure and
checklist for the Quality Assurance Review of all aspects of
Licensee's operation of its Institute whereby ITI can
determine the extent to which Licensee's operations are or
are not in compliance with the ITI System. Approximately
ninety (90) days after Licensee first opens its Institute,
ITI will send an ITI representative to Licensee's Institute
to conduct a Quality Assurance Review. At Licensee's
request, ITI will have an ITI representative conduct a
Quality Assurance Review at Licensee's Institute once each
calendar year if ITI has not itself initiated such action.
ITI has the right to conduct additional Quality Assurance
Reviews from time to time in its discretion. At Licensee's
request, ITI will provide Licensee with the materials and
forms used in the Quality Assurance Review process for
Licensee's use in reviewing Licensee's operations.
5.1.6 LATEST DEVELOPMENTS. ITI shall endeavour to keep abreast of
the most recent and advanced knowledge and techniques
concerning information technology education and training.
ITI will, based on its good faith determination of the
applicability of such knowledge and techniques to Licensee
operations, make certain such knowledge and techniques are
available to the Licensee.
5.1.7 SITE SELECTION. ITI will assist the Licensee in the
selection of a location for the first Institute and,
following the guidelines and standards contained in the
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Confidential Operations Manual, make recommendations and
suggestions regarding lease preparation, size, layout,
decor, furniture, equipment, and electrical, mechanical,
computer and telecommunication systems to ensure compliance
with ITI standards.
5.1.8 TRAINING MATERIALS AND FORMS. ITI will furnish Licensee
certain materials deemed by ITI to be appropriate for
instruction of Licensee's personnel in the conduct of the
ITI System.
5.1.9 TRAINING AND ASSISTANCE. Prior to the opening of the first
Institute in the Territory, ITI will:
(a) provide advice to the Licensee on the development of
advertising and marketing strategies for students, on
marketing to potential employers of graduates and on
public relations opportunities relating to the
opening of the first Institute;
(b) assist in meetings and negotiations with potential
strategic recruiting (employer) partners;
(c) provide training on ITI sales techniques and
terminology for the Director of Recruiting and sales
staff, such training not to exceed a maximum of five
person-days of ITI representatives;
(d) provide, up to a maximum of seven person-days of ITI
representatives, advice to the Licensee on the
development of employee recruiting strategies,
Instructor recruiting and selection, and staff
compensation models;
(e) provide, up to a maximum of seven person-days of ITI
representatives, training of technical support staff
and assistance with respect to installation of the
technical environment, including installation of
staff and student servers, premises wiring, equipment
specifications, and equipment and software license
procurement;
(f) provide training to the Director of Program Delivery
and Instructors of the Licensee in ITI Program
Delivery to a maximum of 10 person-days of ITI
representatives; and
(g) provide training to the Registrar, Director of
Program Delivery and Director of Recruiting in
policies and procedures under the ITI System to a
maximum of five person-days of ITI representatives.
5.2 ADDITIONAL FEES. In addition to the services described in section
5.1, ITI may, and will where such services are required to be obtained by the
Licensee under this Agreement, provide the following additional services for
additional fees and charges specified in the Fee Schedule:
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5.2.1 CONSULTATION SERVICES. ITI may, when requested by the
Licensee but subject to the availability and prior
commitments of ITI's representatives, provide to the
Licensee an ITI representative to consult in the following
areas:
(a) employer or corporate relations, including assistance
in meetings and negotiations with potential employers
of graduates to develop strategic recruiting
partnerships;
(b) premises related matters, including lease preparation
and negotiation, design concepts and space planning;
(c) human resources, including assistance in employee
recruiting and selection, and staff compensation
models;
(d) sales and marketing, including assistance in the
development of advertising and marketing strategies
and sales training;
(e) provision of media buying and ad placement
assistance;
(f) technical services, including assistance in the
development of the technical environment,
installation of servers, premises wiring, equipment
specifications, equipment and software procurement;
and
(g) assistance relating to administration and finance,
including training of Licensee employees on the ITI
System and any Quality Assurance Review.
5.2.2 ONGOING ASSISTANCE. ITI will at Licensee's request send an
ITI representative to Licensee's Institute to provide such
assistance and offer suggestions and recommendations within
his or her knowledge toward the continuous improvement of
the Institute.
5.2.3 TRAINING SESSIONS. From time to time, but at least once
each year, ITI will conduct training sessions of not
more than five (5) days duration at a location to be selected
by ITI. ITI shall determine the topics and agenda for such
conferences or training sessions to serve the purpose, among
other things, of updating the Licensee on new developments
affecting Licensee and other licensees, and exchanging
information between licensees and ITI personnel regarding
Institute operations and Program Delivery. Attendance at such
training shall be mandatory for Registrar, Director of
Program Delivery, Director of Recruiting and such other
personnel as ITI may prescribe from time to time in the
Confidential Operations Manual. All travel, room and board
expenses for Licensee and Licensee's personnel attending the
training shall be borne by Licensee.
5.2.4 PERIODIC TRAINING. ITI will provide training as requested
by the Licensee (subject to the availability of qualified
ITI representatives) and as required by section 7.5.
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6. FEES
6.1 INITIAL LICENSE FEE. Notwithstanding section 6.8, Licensee shall pay
an initial fee of $450,000 for the License and its rights pursuant to section
25, which fee shall be payable as follows:
6.1.1 $120,000 upon the execution of this Agreement;
6.1.2 $60,000 on the first day of each of the following months:
August, 1997; September, 1997; October, 1997 and November,
1997; and
6.1.3 $90,000 on the first day of December, 1997,
and the Licensee acknowledges that ITI has the right to deem such fee as having
been earned at or prior to such time.
6.2 MONTHLY ROYALTY FEE. At all times after the commencement of
operations by Licensee, Licensee shall pay ITI a monthly royalty for the
preceding month equal to seven percent (7%) of Gross Revenues. In addition,
Licensee agrees to pay an additional amount equal to any sales, gross receipts,
or similar tax imposed on ITI and calculated solely on payments required to be
made by Licensee to ITI under this Agreement, unless such tax is an optional
alternative to an income tax otherwise payable by ITI. In no event shall
Licensee be required to pay any income tax otherwise payable by ITI. ITI may
accept any such payment without prejudice to ITI's right to recover any balance
remaining or pursue any remedy available to ITI.
6.3 MONTHLY ROYALTY PAYMENT DATE. The payments under section 6.2 shall be
due and payable to ITI by electronic funds transfer or in such other manner as
ITI shall establish in the Confidential Operations Manual, or otherwise in
writing, by the last day of the calendar month for revenues received by
Licensee in the immediately preceding month. Within 30 days after expiration
or termination of this Agreement, Licensee shall pay ITI the royalty for the
period immediately preceding expiration or termination. Licensee agrees to pay
a late charge of five percent (5%) upon any sum not paid within 15 days of when
due under this section, plus such additional late charges as provided for in
section 6.8. The obligation to pay a late charge is in addition to the
potential liability for termination under section 10. Licensee's obligation to
pay sums due under section 6.2 for revenues received during the term of this
Agreement shall survive termination of this Agreement.
6.4 REPORTS. Licensee's monthly payment shall be accompanied by fully
completed and accurate (a) Gross Revenue, (b) income and expense and (c)
student accounts receivable reports on forms as required by the ITI, setting
forth information specified by ITI in the Confidential Operations Manual
including the Gross Revenues received during the previous month, the number of
students currently enrolled or confirmed for enrollment by Institute and any
advertising expenditures paid. Such forms and information required therein may
be changed by ITI from time to time. Licensee shall keep adequate records and
retain appropriate data and receipts to verify the information provided in such
reports and shall provide such backup data as ITI may request from time to
time. Licensee shall certify the accuracy of such data in writing on each such
report. Annually, within 120 days of the end of Licensee's tax year, Licensee
shall provide ITI with a profit and loss statement and a balance sheet for
Licensee's Institute, together with a reconciliation to the year end Gross
Revenues report, in form as requested by ITI, which may at ITI's specific
request
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13
be required to be audited by a Certified Public Accountant at Licensees
expense. Where Licensee installs computer equipment and software required by
ITI under section 7.9, ITI may request that Licensee submit monthly reports
electronically.
6.5 ESTABLISHMENT OF TUITION CHARGES. Licensee shall establish the
tuition and other charges to Licensee's students, provided that,
notwithstanding actual tuition charged by the Licensee from time to time to
students of the Institute, tuition payable in respect of each student of the
Institute attributable to Gross Revenues for the purposes of this Agreement,
including the calculation of any royalties, shall not, without the written
consent of ITI, be less than tuition charged for a program equivalent to the
Stand Alone ITI Program by ITI at other locations in the United States or, if
there are no institutes operated by ITI in the United States, the same number
of United States dollars (i.e. with adjustment for the exchange rate) of any
tuition charged by ITI in Canada from time to time for a program equivalent to
the Stand Alone ITI Program except that for the first 12 months from the date
hereof at 75% thereof. Licensee shall make revenue information available to
ITI on request, as necessary for the purpose of ITI's audit procedures and
other purposes. For greater certainty, such tuition shall not be reduced by
any bursaries, scholarships, bad debts or other discounts from the tuition
otherwise established under this section. Any tuition amounts deemed to be
included in Gross Revenues which are not paid or to be paid to the Licensee in
cash shall be deemed to have been received by the Licensee for the purposes of
determining Gross Revenues during the month of the corresponding commencement
of Program Delivery to the student at the Institute. Tuition shall be due as
specified by ITI in the Confidential Operations Manual. If any student account
for tuition at the Institute is in arrears for a period of 180 days, such
tuition shall be deemed to have been paid and is attributed to Gross Revenues
at that time.
6.6 RECORDS, INSPECTION AND AUDITING.
6.6.1 Without limitation, the Licensee shall on a timely basis
supply ITI with quarterly unaudited and annual audited
financial statements, prepared in accordance with generally
accepted accounting principles and disclosing separately the
operations of each Institute. Licensee shall allow ITI or
its representatives to inspect the Institute premises, the
books of account and federal and state income tax and sales
tax returns of Licensee pertaining to the Institute during
reasonable times of the business day upon two (2) days
advance written notice. Licensee shall maintain on the
Institute premises, or at a mutually agreed upon location,
for a period of at least three years, all student records,
cancelled cheques and receipts, and all books of account.
If ITI's audit discloses a liability for any fees due to
ITI, Licensee shall pay the amount of the deficiency,
including late charges due under section 6.3, within thirty
(30) days of ITI's notice to Licensee of the deficiency.
Should the audit reflect a balance due Licensee, ITI agrees
to pay said balance within thirty (30) days of completion of
the audit report. If the deficiency (excluding late
charges) is five percent (5%) or more of the fees Licensee
was required to pay hereunder for the relevant period,
Licensee shall pay ITI its reasonable costs incurred in
performing the audit in addition to the amount of the
deficiency. Nothing in this section shall limit ITI's right
to terminate Licensee under section 10 for Licensee's
failure to pay when due royalties owing ITI.
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6.6.2 In the event that the Licensee contests the accuracy of any
audit conducted by ITI under section 6.6.1, Licensee shall
pay to the Bank of Nova Scotia as escrow agent any amount
disclosed in ITI's audit as a liability for any fees due
from the Licensee to ITI, and the parties shall remit the
matter to arbitration in accordance with the provisions of
the Arbitration Act (Nova Scotia) or any other act relating
to arbitration at the time in force in the Province of Nova
Scotia. The cost of such arbitration shall be decided by
the arbitrators. Any royalty payment and related report
submitted by the Licensee to ITI shall, upon the expiration
of the 36 month period following receipt thereof, be deemed
to be true and accurate unless ITI has notified the Licensee
to the contrary prior to that time.
6.6.3 ITI agrees that it will maintain the confidentiality of all
financial information it shall obtain about Licensee's
operations which has not been publicly disclosed by the
Licensee, and shall not disclose such financial information
to any third party who is not bound to maintain the
confidentiality of such information unless otherwise
required by applicable law; provided however, that ITI may
use such information in preparing financial information so
long as the information about Licensee's operations is not
identified as pertaining to Licensee and such information
cannot be reasonably identified as pertaining to Licensee.
6.7 LICENSEE TO PAY TAXES. Licensee shall pay all taxes, regardless of
their nature, assessed against it when due and before delinquent except when
being contested in good faith by appropriate proceedings. If ITI is charged
with any tax by the authorized taxing authority of any state or political
subdivision thereof, including taxes on sales made to or licenses granted to
Licensee, or sales made by Licensee at Licensee's Institute, Licensee shall pay
such taxes on ITI's behalf except when being contested in good faith by
appropriate proceedings.
6.8 PAYMENT OF ACCOUNTS. ITI may, from time to time, and at its sole
option and discretion, allow Licensee to purchase goods, materials, equipment,
books, printed matter, electronically produced and distributed materials,
curricula and materials on an open or revolving account, or through special
installment payment plans. Any limitation on the amount Licensee may charge to
an account or payment plan will be determined by ITI, taking into consideration
the credit worthiness, financial capability and business history of Licensee.
All items charged to Licensee's account(s) shall be supported by invoice.
Licensee shall promptly pay ITI for all charges made to Licensee's account(s).
Invoiced charges are due and payable thirty (30) days after date of the
invoice. If not paid by then, the unpaid balance will be considered past due,
and balances not paid when due shall be subject to finance charges of one and
one-half percent (1 1/2%) per month or portion thereof that the amount due
remains unpaid. No payment by Licensee, nor any endorsement or statement on
any cheque or writing accompanying any cheque or payment may be deemed an
accord and satisfaction unless agreed by ITI in a separate writing. ITI may
accept any such cheque or payment without prejudice to ITI's right to recover
any balance remaining or pursue any remedy available to ITI.
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7. LICENSEE'S OBLIGATIONS
7.1 COMPLIANCE WITH STANDARDS. Licensee agrees that its Institute shall
be managed and administered in a competent manner, in full compliance with
applicable laws (including without limitation copyright and trademark), this
Agreement and the Confidential Operations Manual to preserve, maintain and
enhance the goodwill associated with the ITI System and the Licensed Marks.
Licensee shall use only the ITI System in the operation of the Institute.
Licensee agrees to comply with ITI's standards, specifications and other
reasonable requirements which ITI may make in writing from time to time
concerning Institute site, layout, size, decor and systems (including
equipment, mechanical, electrical, computer and telecommunications) and use of
the Licensed Marks. ITI may prescribe specific standards for all signs
identifying the Institute, and Licensee shall place and maintain at least one
sign at each location meeting ITI's standards, subject to local ordinances.
Licensee shall purchase from ITI all ITI proprietary courseware and other
material as set out in the Confidential Operations Manual or otherwise in
writing by ITI and other information booklets, and explanatory and promotional
brochures developed and copyrighted by ITI. ITI may also prescribe from time
to time in the Confidential Operations Manual that certain material may or must
be obtained by the Licensee from prescribed third party sources. ITI shall not
unreasonably withhold consent to alternative third party suppliers. Licensee
must at all times maintain an inventory of such material sufficient to service
its students.
ITI warrants that proprietary products purchased by Licensee from ITI hereunder
meet ITI's specifications for such products. ITI neither makes, nor does it
authorize Licensee to make any other warranties, express or implied, with
respect to proprietary products delivered under the Agreement, and ITI
expressly excludes and disclaims all implied warranties of merchantability and
fitness for a particular purpose with respect to proprietary products delivered
under the Agreement.
Licensee shall also purchase certain commercially available equipment and
materials required by ITI in the Confidential Operations Manual or otherwise in
writing for use in ITI Institute. The approved sources of such equipment and
materials shall be designated by maker or author, publisher, and title in the
Confidential Operations Manual. Licensee is free to choose the wholesale or
retail distributor from which it purchases such equipment and materials. The
equipment and materials used by the Licensee must be consistent with the type,
quantity, quality, and variety associated with the ITI image. Additional
sources may, in ITI's discretion, be approved in the future. Licensee may
request that ITI consider a proposed additional source by following the
procedure stated in the Confidential Operations Manual or otherwise in writing
by ITI.
Licensee shall also purchase certain furniture products which meet the
specifications of ITI. This furniture can be obtained through ITI or other
sources. If Licensee desires to purchase furniture through another source, ITI
will provide Licensee with specifications upon such request from Licensee. If
the furniture does not meet ITI's specifications, Licensee may not use such
furniture in any Institute, and the Institute will not be considered open for
purposes of section 3.2 unless and until such conforming furniture is
installed.
Licensee shall not purchase courseware, explanatory and promotional brochures,
equipment, furniture items or other materials for which ITI has designated
specifications from any supplier which does not meet ITI's specifications.
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7.2 OTHER IT INSTRUCTION. It is expressly acknowledged that the Licensee
is in the business of providing education through its "American
Intercontinental University" and/or other subsidiaries or business units, with
facilities in the Territory. The Licensee shall offer to students and operate
at the Institute a Stand Alone ITI Program at all times during the term of this
Agreement. The Licensee shall not offer any information technology related
program or any other program which would contain any Program Delivery which is
from time to time included in the ITI System other than in accordance with this
Agreement. The Licensee may, with the written consent of ITI obtained in
accordance with this section, offer other educational programs within the
Territory using the ITI System in combination with or as part of such other
educational programs of the Licensee only provided that:
7.2.1 Unless otherwise agreed in writing by ITI, a minimum of 50%
of the students of the Institute on an Annualized Full Time
Equivalent Basis shall be enrolled either in the Stand Alone
ITI Program or other programs of the Licensee which include
the whole of the Stand Alone ITI Program (i.e. a Masters in
Information Technology);
7.2.2 ITI shall be required to approve the curriculum for any
program containing Program Delivery in any way contained in
or derived from the ITI System, which program shall not, in
the opinion of ITI, derogate from the quality of Program
Delivery otherwise required under the ITI System. In the
event that the Licensee wishes to provide a program
containing Program Delivery in any way including or derived
from the ITI System, the Licensee shall provide written
notice to ITI, which notice must contain details of the
Program Delivery sufficient to enable ITI to determine the
quality of the program, both as it relates to the use of the
ITI System and otherwise, including curriculum, materials,
and a schedule of Program Delivery. ITI may, in its sole
discretion, request additional information that it considers
necessary to assess the program. ITI shall use its best
efforts to assess the program and provide a response to the
Licensee within 30 days of receipt of the notice referred to
herein, provided that ITI shall not be under any obligation
to provide its approval where, in its sole discretion, the
program may derogate from the quality of Program Delivery
otherwise required under the ITI System;
7.2.3 Unless otherwise approved in writing by ITI, the tuition
allocated to the program using the ITI System in any program
which is not a Stand Alone ITI Program shall be in
compliance with section 6.5 of this Agreement;
7.2.4 Any post-graduate programs of the Licensee containing
Program Delivery in any way including or derived from the
ITI System shall not substitute or alter in any way the
curriculum or schedule for delivery of instruction used in
the ITI System;
7.3 EXPENSE OF UPGRADES. Licensee acknowledges that ITI may, in its sole
good faith discretion, change or add to the ITI System, including any standards
or policies applicable to Licensee, and that such changes or additions may
affect Licensee's required performance or obligations hereunder or may require
additional capital investment or expenditures by Licensee; but
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in no event shall Licensee be required to spend more than 3% of Gross Revenues
in any calendar year in response to changes in or additions to such standards
and policies, excluding required continuous replacement or upgrades to computer
equipment and related network infrastructure (which is at the expense of the
Licensee) for which specifications shall be provided from time to time in the
Confidential Operations Manual.
7.4 TRAINING . The success of every student enrolled in an Institute is
dependent upon the quality and integrity of the Program Delivery in which that
student receives instruction, and in turn the quality and integrity of the
Program Delivery is dependent upon the proper initial and continuous training
of Licensee's personnel involved in the operation of the ITI System. To assist
Licensee in the operation of its Institute and the ITI Program Delivery, ITI
agrees to provide certain training sessions. The training sessions referred to
in sections 5.1.9 (c), (f) and (g) and 5.2.3 shall be mandatory for the
Registrar, Director of Program Delivery and/or Director of Recruiting as
referred to in such sections, and Licensee shall be required to ensure that
such Registrar, Director of Program Delivery and/or Director of Recruiting, as
the case may be, is available on reasonable notice to take such training.
Prior to any training, Licensee and the employees to be trained must sign a
confidentiality and nondisclosure agreement in a form approved by ITI.
Each Institute operated by Licensee must at least have one of each of a
Registrar, Director of Program Delivery and Director of Recruiting, each of
whom is a separate individual actively involved in the management and operation
of the Institute and is certified/credentialed in accordance with the
Confidential Operations Manual. In the event that the employment of a
Registrar, Director of Program Delivery or Director of Recruiting of Licensee
should be terminated and Licensee hires a replacement for such position,
Licensee agrees to submit the replacement to a minimum five day ITI training
session within ninety (90) days of a replacement's first day of employment.
Such training shall be an additional service of ITI and the Licensee shall pay
to ITI for such training additional fees and charges specified in the Fee
Schedule. All travel, room and board expenses for Licensee and Licensee's
personnel attending the training shall be borne by Licensee.
Licensee shall adequately train all other personnel at Licensee's Institute
with respect to ITI's methods and materials, all as may be specified from time
to time by ITI in the Confidential Operations Manual.
7.5 CREDENTIALED INSTRUCTORS/FACILITATORS. Licensee agrees that only
Instructors credentialed as specified by ITI in the Confidential Operations
Manual will provide the classroom and/or other instruction and team
facilitation which may be part of the ITI Program Delivery. When required by
third party official curriculum vendors, Licensee will ensure that Instructors
have achieved the necessary industry certifications which may also be specified
by ITI in the Confidential Operations Manual. In addition, in order to
maintain the high image and quality standards of the ITI Program Delivery,
Licensee shall ensure that Instructors are trained through ITI's professional
development programs under the ITI System or through Licensee's
ITI-credentialed staff who have been approved by ITI to deliver such
professional development training, as specified by ITI in the Confidential
Operations Manual. Upgrades to credentials and mandatory industry
certifications may be required from time to time as specified by ITI. ITI
shall, in the Confidential Operations Manual, establish Instructor/student
ratios and provide detailed descriptions of technical competencies required by
Instructors.
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7.6 ADVERTISING TO PROMOTE THE ITI SYSTEM. ITI will make available to
Licensee from time to time certain advertising materials which have been
approved by ITI as being suitable for advertising and promotional purposes.
Licensee shall not make any changes to such pre-approved advertising materials
without the advance written consent of ITI. ITI may subsequently withdraw its
approval of any previously approved advertising materials in which event
Licensee shall cease using such advertising within a reasonable period of time,
which shall in no event exceed ninety (90) days. Licensee shall not publish or
otherwise utilize in any medium any advertising which has not been previously
approved or provided by ITI. If Licensee wishes to use any advertising which
has not been previously approved by ITI, Licensee shall submit a copy of each
new advertisement to ITI prior to the first use of that advertisement, and
shall not use any advertising without the express written approval of ITI. Any
advertisement submitted to ITI for approval shall be deemed approved if not
expressly disapproved by ITI within twenty-one (21) calendar days after receipt
by ITI. Failure of the Licensee to so submit constitutes a breach by the
Licensee of this Agreement. Licensee may participate in or contribute to a
local or regional advertising cooperative comprised of such Licensee and ITI
operated Institutes as ITI shall designate or as shall elect to participate
with Licensee.
7.7 LICENSEE TO OBTAIN PERMITS AND LICENSES. Prior to commencing business
operations Licensee shall use its best efforts to obtain all local, state and
federal permits, licenses and certificates necessary to operate the Institute,
including those from the State of Georgia, the Southern Association of Colleges
and Schools, and the United States Department of Education. Licensee shall
also comply at all times with all educational, safety, building or other local,
state and federal statutes, ordinances, regulations, codes, licensing
requirements or standards applicable to Licensee's Institute. ITI shall in no
manner be liable for advising Licensee of such matters or determining
Licensee's compliance therewith and Licensee will defend, indemnify and hold
ITI harmless from any claims or loss relating to same. The Licensee's
obligations pursuant to this Agreement are subject to receipt by the Licensee
of all necessary approvals and licenses from the State of Georgia, the Southern
Association of Colleges and Schools and the United States Department of
Education, provided that the obligations of the Licensee to pay license fees to
ITI pursuant to paragraph 6.1 shall be effective until such time as the
Licensee has given to ITI written notice that it has used its best efforts and
is unable to obtain such approvals and licenses, following which monies due and
payable prior to such notice shall remain due and payable. The parties agree
that they will use their reasonable best efforts to modify this Agreement to
comply with requirements of the authorities of the State of Georgia, the
Southern Association of Colleges and Schools, and the United States Department
of Education in respect of this arrangement.
7.8 BEST EFFORTS. Licensee shall at all times during the term hereof
actively promote and sell ITI System services at and from the Institute and
will use its primary and best efforts to cultivate, develop and expand the
market therefore within the Territory consistent with ITI's evaluation of the
potential of the Territory taking into consideration such factors as the size
of population in and market potential of the Territory, competition in the
marketplace, the prior performance of Licensee, of ITI or other licensees in
other geographic areas, and such other financial and market factors as ITI may
deem pertinent. Excluding the 24 months following commencement of Program
Delivery at the Institute, Licensee shall maintain at the Institute a minimum
of 250 students on a Annualized Full Time Equivalent Basis.
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7.9 USE OF DESIGNATED COMPUTER SYSTEMS. Upon ITI's request, Licensee
agrees to install, update and replace any equipment (including both networked
and stand alone hardware and software) designed to be used in connection with
the Program Delivery and administration of the Institute, and to utilize
equipment, hardware and software of such kind and in such manner as specified
by ITI from time to time in the Confidential Operations Manual. The Licensee
shall provide dedicated (24 hours x 7 days) Internet access for each networked
computer system. The Internet connection and any additional security measures
(e.g., firewalls) must accommodate point to point type applications such as
desktop video conferencing. Without limiting the generality of the foregoing,
Licensee agrees that it shall install and utilize in connection with the
Institute such hardware and software as ITI may require from time to time for
Program Delivery and administration, which is compatible and accessible to
ITI's central administrative system through modem or other manual or electronic
access. Upon ITI's request, Licensee agrees to provide ITI with electronic and
physical access to its computer systems and to send ITI original or duplicates
of all electronic information used in the operation of the Institute, but in no
event shall this provision entitle ITI to any information other than that
pertaining to Licensee's Institute which ITI would have the right to secure if
ITI were auditing Licensee's records under section 6.6.
7.10 ADVERTISING EXPENDITURES. In order to promote its Institute, Program
Delivery and the ITI System generally, Licensee agrees that it shall expend on
approved advertising a monthly minimum of six percent (6%) of Licensee's
monthly Gross Revenues, averaged over the previous six months, on the type of
advertising specified in this Agreement or on other marketing and advertising
materials approved by ITI. Provided however, that there shall be no monthly
minimum advertising expenditures if the Licensee is operating the Institute at
a minimum of 85% capacity, with capacity being scheduled capacity agreed to by
ITI and the Licensee, each acting reasonably, on an Annualized Full Time
Equivalent Basis. Licensee shall keep appropriate records and receipts for all
advertising or marketing expenditures for at least three years, and shall
provide substantiating data for such expenditures upon request by ITI.
7.11 QUALITY ASSURANCE. In order to enhance the public image and
reputation of the ITI System and maintain and ensure the quality and
consistency of services provided thereunder, ITI may, with or without notice
(without notice, a maximum of four times in a calendar year) send an ITI
representative to Licensee's Institute, and Licensee shall allow ITI's
representative to observe Licensee's operation and methods. Licensee will
fully cooperate with such ITI representative and will make available any data
concerning Licensee's Institute and its operation as reasonably requested by
such ITI representative. If one is conducted, ITI's representative will
procure and deliver to Licensee a Quality Assurance Review which will describe
the results of the Review and include a Correction Plan setting forth any
material deficiencies observed and recommendations relating thereto. Licensee
will, within the time limits set forth in such Correction Plan, comply with and
fully implement any corrective action designated therein as mandatory or
required, and will consider in good faith any other recommendations or
suggestions. While an ITI representative is present in Licensee's Institute,
the representative will endeavour to minimize the disruption of the educational
services being provided by Licensee.
7.12 COMPLIANCE WITH EDUCATIONAL STANDARDS. ITI has established certain
defined standards in methods and procedures for Program Delivery, and will
offer help and assistance to the Licensee
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in attaining and maintaining those standards. Licensee shall comply with all
educational standards designated as required or mandatory by ITI in its
Confidential Operations Manual or otherwise in writing. From time to time, ITI
may develop new or enhanced programs or modules, and shall make such programs
or modules available to Licensee as either mandatory or optional items. In the
event the item is designated as mandatory, ITI may not require implementation
of the item in Licensee's Institute earlier than 90 days after the item is
generally made available to ITI's Licensees. Enhancements or updates to
mandatory programs shall be provided to Licensee by ITI. Optional programs and
updates to same will be made available to Licensee for such additional charges
as ITI shall establish.
7.13 BOARD OF DIRECTORS. Unless ITI otherwise directs from time to time,
management of the Licensee will propose one nominee of ITI for election to the
Board of Directors of EduTrek International, Inc. Management shall do all
things reasonably within its ability to ensure that such nominee is elected to
the Board of Directors. ITI agrees that Mr. Daniel Potter will be its nominee
unless a conflict exists which would prevent Mr. Potter from actively
participating on such Board of Directors.
7.14 LEASE. A fully executed copy of any lease of the Institute premises
shall be delivered to ITI promptly following execution thereof.
7.15 NON COMPETITION AGREEMENTS. The Licensee are required to obtain
non-competition agreements in favour of the Licensee and ITI, in such form and
content as may be used from time to time by ITI or as may otherwise be
prescribed from time to time by ITI in the Confidential Operations Manual, from
certain of the Licensee's and its affiliates key shareholders, directors,
officers or employees prescribed from time to time by ITI.
7.16 CONFIDENTIALITY AGREEMENTS. In order to preserve the confidentiality
of the ITI System, including ITI's proprietary information, Licensee expressly
agrees that no person or entity shall have or be allowed to have, nor shall the
Licensee allow without the written consent of ITI, access to any ITI
educational programs, trade secrets, confidential information or the
Confidential Operations Manual unless it is reasonably required for the
day-to-day operation or conduct of activities in the Institute in accordance
with this Agreement. ITI may, at is sole discretion, require the Licensee to
obtain confidentiality agreements in favour of the Licensee and ITI, in such
form and content as may be used from time to time by ITI or as may otherwise be
prescribed from time to time by ITI in the Confidential Operations Manual, from
certain of its shareholders, directors, officers or employees prescribed from
time to time by ITI. The obligation of confidentiality does not extend to
information which at the time of disclosure is generally available to the
public (other than as a result of a prohibited disclosure by Licensee),
information which after disclosure becomes generally available to the public by
publication or otherwise through no fault of Licensee, information which is in
the possession of Licensee prior to disclosure and which was not acquired,
directly or indirectly, from ITI, information received by Licensee from a third
party, provided Licensee is not on notice that such party is bound by a
confidentiality agreement or is otherwise prohibited from transmitting the
information to Licensee by contractual, legal or fiduciary obligation owing to
ITI, and information now or hereafter independently developed by Licensee.
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8. TRANSFER AND ASSIGNMENT
8.1 TRANSFER OR ASSIGNMENT BY ITI. This Agreement and all rights and
duties of ITI hereunder may be freely assigned or transferred by ITI at its
sole discretion to any person or legal entity which agrees to assume ITI's
obligations hereunder, with the Licensee's prior written consent acting
reasonably, and shall be binding upon and enure to the benefit of ITI's
successors and assigns including, without limitation, any entity which acquires
all or a portion of the capital stock of ITI or any entity resulting from or
participating in a merger, consolidation or reorganization in which ITI is
involved, and to which ITI's rights and duties hereunder are assigned or
transferred.
8.2 ASSIGNMENT BY LICENSEE. The Licensee shall not, without ITI's prior
written consent acting reasonably, directly or indirectly sell, assign,
transfer, convey, give away, pledge, mortgage or otherwise encumber any
interest in the License, this Agreement or any portion or aspect thereof. Any
purported assignment occurring by operation of law or otherwise, including any
assignment by a trustee in bankruptcy, without ITI's prior written consent
shall be a material default of this Agreement. Licensee shall have no rights
to sublicense under this Agreement. Any change of control of the Licensee is
deemed to be a transfer of the License, provided that this clause shall not
prevent any transfer or issue of shares in EduTrek International, Inc., the
parent company of the Licensee or reorganization of the share capital thereof.
8.3 APPROVAL OF TRANSFEREES. Prior to Licensee effecting any transfer
hereunder, ITI shall have forwarded to Licensee its conditional approval of the
proposed transfer subject to compliance with this section. Provided that
Licensee and the proposed transferee comply with the provisions of this
section, ITI shall not unreasonably withhold its consent to a transfer by
Licensee of any interest in this License, this Agreement or any equity or
voting interest in Licensee. Licensee agrees to place in escrow with a trustee
approved by ITI any and all funds received from the proposed transferee until
such time as all of the following requirements have been met:
8.3.1 The transferee shall demonstrate to ITI's sole satisfaction
that it meets all of ITI's requirements for becoming a
licensee, including, without limitation, that it meets ITI's
managerial, financial and business standards then in effect,
meets the financial requirements ITI shall deem appropriate
in light of the terms and conditions of the proposed
transfer; will comply with all Program Delivery and training
requirements of ITI and has the ability to operate the
licensed business (as may be evidenced by prior related
business experience or otherwise).
8.3.2 As of the effective date of the proposed transfer, all
obligations of Licensee under this Agreement and under any
other agreements between Licensee and ITI, its subsidiaries
and affiliates are fully satisfied. Licensee shall have
paid all outstanding debts and obligations to ITI, its
subsidiaries and affiliates.
8.3.3 As of the effective date of the proposed transfer, all
obligations of the proposed transferee to ITI, its
subsidiaries and affiliates must be fully satisfied.
8.3.4 If ITI is then offering license agreements to new licensees,
the proposed transferee must execute such documents as are
then required by ITI including ITI's then
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current form of license agreement which may contain terms
and conditions different from those in this Agreement;
otherwise, this Agreement shall be assumed by the
transferee.
8.3.5 There shall have been paid to ITI a transfer fee in the
amount of Twenty-five Thousand Dollars ($25,000).
8.3.6 There shall have been paid to ITI a transfer training fee in
such amount specified by ITI to be a reasonable estimate of
the training costs which would be incurred if ITI were to
offer this Territory to a new licensee, to fund training of
the transferee and/or its employees, and the transferee
agrees to complete, to ITI's satisfaction, the training then
required by ITI.
8.3.7 ITI will perform a Quality Assurance Review with respect to
the Institute to be transferred and will make the results
thereof available to Licensee and the proposed transferee.
Thereafter, Licensee shall prepare and deliver to ITI, prior
to the transfer, a written statement specifying how any
deficiencies set forth in the Review will be corrected, and
whether the expense thereof will be borne by Licensee or the
proposed transferee. Provided, however, that ITI assumes no
liability or responsibility to Licensee or the proposed
transferee with respect thereto.
8.3.8 Licensee agrees in writing to transfer to the proposed
transferee all curricula, books, programs, materials and
other items reasonably necessary to operate the Institute,
as set forth in the quality Assurance Review referenced
above.
8.3.9 Licensee shall have executed a general release in a form
satisfactory to ITI, of any and all claims against ITI, its
subsidiaries, affiliates and their officers and directors,
including, without limitation, claims arising under federal,
state and local laws, rules and ordinances arising out of,
or connected with, the performance of this Agreement.
8.3.10 ITI's consent to a transfer of any interest in the License
granted herein shall not constitute a waiver of any claims
it may have against the transferring party, nor shall it be
deemed a waiver of ITI's right to demand exact compliance
with any of the terms of this Agreement by the transferee.
8.4 RECORD OF OWNERSHIP. Without regard to whether ITI's consent to the
transfer is or may be required, Licensee shall submit to ITI at any time upon
request, a list of all holders of equity and voting interests of record
reflecting their respective present interests in Licensee, in such form as ITI
may reasonably require.
8.5 RIGHT OF FIRST REFUSAL. Before any transfer described above, Licensee
must advise ITI in writing of the proposed transfer, including the name and
background experience of the proposed transferee and all terms of the proposal.
ITI shall have the right of first refusal, to be exercised within 30 days of
ITI's receipt of Licensee's written notice, to acquire such interest on the
identical
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bona fide terms proposed by the transferee, or, at ITI's option, for the cash
equivalent thereof. In the event ITI does not elect to exercise its rights of
first refusal as provided, the other conditions of an assignment or transfer
stated herein must nevertheless be met, and Licensee may conclude the proposed
transfer, but only if such transaction is closed within sixty (60) days of
ITI's election not to accept, and only if the transaction closes on the same
terms and conditions as was advised to ITI. In the event the transaction is
not so closed, Licensee must again comply with all of the terms of this right
of first refusal before transferring to the proposed transferee or any other
transferee.
9. TERM AND RENEWAL
9.1 EXPIRATION. This Agreement will expire on July 31, 2007 unless
otherwise agreed.
9.2 RENEWAL OF LICENSE AGREEMENT. Licensee may renew the License granted
under this Agreement for one ten-year renewal term, with renewal being on this
same form of Agreement including any subsequent modifications or amendments
agreed to by ITI and Licensee. There shall be no renewal fee required of
Licensee when renewing under this section 9.2. Without waiving its rights not
to renew as provided in this section, ITI will notify Licensee of the upcoming
expiration date, and the procedures for securing approval of renewal, at least
270 days prior to the expiration date. Renewal will be granted provided that
Licensee meets the following conditions:
9.2.1 Licensee is in ITI's opinion, acting reasonably, in
substantial compliance with all conditions and terms of the
Agreement at the time of renewal.
9.2.2 Licensee has, during the last three years of the term of
this Agreement, never failed to timely cure any default as
to which Licensee was given a Notice of Default.
9.2.3 Licensee has never, during the term of this Agreement,
committed a material breach of this Agreement which cannot
be cured and as to which Licensee was given a Notice of
Default.
9.2.4 Licensee gives ITI notice of its intention to renew in the
last year of the ten-year term of the Agreement (but not
less than 270 days prior to the scheduled final day of the
term). If Licensee fails to give such notice or to so
agree, this Agreement shall expire on the expiration date of
the term without further notice to Licensee.
9.2.5 Licensee has complied with ITI's requirements for additional
performances or obligations of Licensee other than those set
forth herein such as correction of deficiencies,
modernization or updating, which ITI believes in its good
faith judgment shall be required and which may require
significant additional capital expenditures by Licensee.
9.3 MONTH-TO-MONTH LICENSE. If Licensee fails to give notice of its
election to renew the License as provided in section 9.2 and ITI nonetheless
permits Licensee to continue to operate an Institute under the Licensed Marks
and/or ITI System, all terms of this Agreement shall be deemed to be extended
on a month-to-month basis. In that event either party may terminate this
Agreement effective the last day of any calendar month, upon thirty (30) days'
notice to the other party.
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9.4 TERMINATION BEFORE EXPIRATION. Notwithstanding sections 9.1 and 9.2,
this Agreement may be terminated as provided in section 10 hereof.
9.5 SURVIVAL. Notwithstanding any other provisions of this Agreement, the
provisions of section 11 of this Agreement shall survive the termination of
this Agreement, whether by expiry of the term or otherwise, and remain in full
force and effect in accordance with its terms.
10. TERMINATION
10.1 DEFAULT AND TERMINATION NOTICES. If Licensee is materially in breach
of any provision of this Agreement, including, but not limited to section 10.2
of this Agreement, ITI may give a Notice of Default and Opportunity to Cure
which shall be not less than thirty (30) days with respect to curable monetary
defaults and forty-five (45) days with respect to curable non-monetary
defaults, after the date of the Notice. In no event, however, shall the number
of days of notice be less than that required by any applicable statute or
regulation of the state in which the Territory lies. If Licensee is determined
by ITI to have cured the breach before the date stated in the Notice, such
Notice shall be of no further effect. If the breach has not been cured before
the cure date stated in the Notice, then ITI may give a Notice of Termination
stating its intention to terminate on a certain date. With respect to breaches
stated herein or otherwise determined to be incurable, ITI need not provide a
period for cure.
10.2 MATERIAL BREACHES THAT MAY BE CURED. The following types of activity
are acknowledged by Licensee to jeopardize the goodwill associated with the ITI
System and the Licensed Marks, and shall, unless cured as provided herein, be
cause for termination. Provided, however, that although ITI intends to allow
Licensee to cure the defaults listed hereunder, if in ITI's good faith
judgement, reasonably exercised, such default cannot reasonably be cured (such
as, but not limited to damages to ITI from misrepresentations or warranties
referenced in section 10.2.3), then such breaches shall be deemed incurable
under section 10.3 hereof, and same shall be grounds for termination, effective
on the earlier of delivery or three days after mailing by ITI of a written
declaration of termination to Licensee.
10.2.1 The Licensee offering directly or indirectly, information
technology related programs at Licensee's Institute or
otherwise not approved by ITI and incompatible with the ITI
System and this Agreement.
10.2.2 Delivery by the Licensee or to allow receipt from the
Licensee, directly or indirectly, of any component of
Program Delivery using the ITI System outside of the
Territory without an appropriate license from ITI.
10.2.3 Expressly or impliedly to misrepresent, warrant or guarantee
the results of the licensed programs, except as specifically
authorized by ITI.
10.2.4 To fail to pay when due any invoice of ITI or of any third
party for goods or services Licensee has received; or any
sales or other taxes when due and before
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delinquent, except when being contested in good faith by
appropriate proceedings; or any rental or other amount due
under a lease covering the Institute premises.
10.2.5 To fail to provide at Licensee's Institute adequately
trained personnel as required by this Agreement.
10.2.6 Notorious behaviour by a principal, director, officer, agent
or employee of Licensee which would tend to bring Licensee's
Institute or the ITI System into disrepute. If the activity
is the type described in this subsection, ITI may require
Licensee, in order to the cure the breach adequately, to
sever its relationship with the person whose behaviour is
offensive.
10.2.7 To fail to provide any Gross Revenue Report or to pay any
royalty payment when due. In the event that Licensee fails
four times within any twelve-month period to pay any one or
more of such sums within ten days after the date same are
due, and has each time been notified by ITI of said failure,
Licensee may be deemed by ITI to have committed an incurable
breach of this Agreement.
10.2.8 To fail to comply with mandatory or required standards and
policies set forth in the Confidential Operations Manual and
any changes, additions or modifications thereto, or to fail
to implement required or mandatory components of Program
Delivery, module or other materials, or to adhere to
mandatory or required educational policies or standards, or
to implement new mandatory components of Program Delivery as
required by ITI.
10.2.9 To operate an Institute without obtaining and maintaining
all necessary permits and licenses, or to fail to comply
with applicable laws.
10.2.10 To fail to permit ITI to inspect the premises, or observe
the operation, or conduct an audit of Licensee's Institute.
10.2.11 To allow unlawful activities to occur or to sell, utilize or
exchange any unauthorized or illegal material at Licensee's
Institute.
10.2.12 To fail to maintain insurance as required by this Agreement.
10.2.13 To fail to obtain ITI's written approval of the site, design
and layout for any Institute that is opened within the
Territory.
10.2.14 To fail to implement or fully comply within the time
prescribed, any items designated as mandatory or required on
a Plan of Action delivered to Licensee pursuant to this
Agreement.
10.2.15 To place an advertisement or cause an advertisement to be
circulated in another Licensee's exclusive territory or in
the territory of an ITI owned Institute without
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the prior written approval of ITI, except pursuant to
section 7.6 hereof, or to violate ITI's policies, as
established from time to time, regarding advertising.
10.2.16 To fail to adhere to any other material provision of this
Agreement, any other agreements between Licensee and ITI,
its subsidiaries or affiliates, or any authorized
specification, standard, policy or operating procedure
prescribed by ITI as mandatory or required.
10.2.17 Failure of the Licensee to have representatives attend
training as required by section 7.4.
10.3 MATERIAL BREACHES THAT CANNOT BE CURED. ITI may terminate this
Agreement, effective on the sooner of delivery or three days after mailing a
written declaration of termination to the Licensee if any one or more of the
following material, non-curable breaches of this Agreement occur:
10.3.1 An assignment or transfer without ITI's prior written
consent which is prohibited under section 8 of this
Agreement.
10.3.2 Any incurable breach of Licensee's confidentiality
obligations under this Agreement which results in material
damage to ITI, in ITI's discretion acting reasonably.
10.3.3 Any act causing an incurable tarnishment of ITI's reputation
which results in material damage to ITI, in ITI's discretion
acting reasonably.
10.3.4 Assuming that Licensee operates but one Institute in the
Territory; the abandonment of the Institute, including any
closing of the Institute for a period of twenty (20) or more
consecutive days, without the written approval of ITI.
ITI's approval shall be given in those instances when the
Institute has been closed as the result of an act of God,
fire or weather-related catastrophe, but only on the
condition Licensee shall submit to ITI a plan for re-opening
the Institute within one hundred and eighty (180) days of
its closing. ITI's consent shall not be given in the event
Licensee's closing of the Institute is related to or
pursuant to the events described in sections 10.3.5 to
10.3.7 below, or due to any adverse financial or economic
condition suffered by Licensee.
10.3.5 The insolvency, bankruptcy, or reorganization of the
Licensee under the bankruptcy laws.
10.3.6 The making by Licensee of an assignment for the benefit of
creditors.
10.3.7 The appointment of a receiver or trustee of all or any part
of the assets of Licensee or Licensee's business.
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10.3.8 The conviction of Licensee or its principals of a felony or
misdemeanour relevant to the operation of the Institute.
10.3.9 The breach of any of the terms of this Agreement four (4) or
more times within any twelve (12) month period, whether or
not such breach was cured, each breach having been the
subject of a separate notice by ITI to Licensee.
10.3.10 Excluding the 24 months following commencement of Program
Delivery at the Institute, to have fewer than 250 students
on a Annualized Full Time Equivalent Basis.
10.3.11 Breach of section 7.2.
10.4 REMEDIES. The remedies hereby reserved are independent, cumulative,
and concurrent, and the exercise of any one shall not preclude the simultaneous
or subsequent exercise of the same, or any other remedy. ITI's right of
termination in this section is in addition to any other rights or remedies it
may have. ITI's failure to exercise any remedy available to it shall not be
deemed a waiver of its right to exercise any other right or remedy under this
Agreement.
10.5 LICENSEE'S NOTICE OF BREACH BY ITI. It is the intention of ITI to
comply with all obligations, performances and duties required of it under this
Agreement. In the event that Licensee shall claim that ITI has failed to meet
any obligation under this Agreement, Licensee shall provide ITI with a notice
of such claim. Licensee's notice shall describe ITI's alleged deficiency and
shall provide ITI with an opportunity to cure same within at least thirty (30)
days from the date of receipt of the notice by ITI.
11. RELATIONSHIP AFTER EXPIRATION OR TERMINATION
11.1 OBLIGATIONS OF LICENSEE. Upon the expiration of termination of this
Agreement, Licensee agrees that it shall immediately take the following action:
11.1.1 Licensee shall cease to do business under any name
incorporating or similar to "ITI Information Technology
Institute" or "ITI Learning Systems Inc." and shall cease to
use any and all of the ITI System, including Licensed Marks,
proprietary programs, curricula, systems, techniques, or
materials.
11.1.2 Licensee shall promptly return to ITI all proprietary,
confidential or trade secret materials in its possession,
custody or control including without limitation, the
Confidential Operating Manual(s), all computer software and
database material, customer lists, records and files.
Licensee hereby covenants and agrees that it will not
destroy, damage, hide or take any steps so as to prevent ITI
from obtaining any such information, nor will Licensee
retain any printouts, disks or tapes containing any of the
Program Delivery information or data stored in its computer
system. Licensee shall retain no copy or record of any of
the foregoing, except Licensee's copy of this Agreement, any
correspondence between the parties and any other documents
which Licensee reasonably needs for compliance with any
provision of
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law. Licensee expressly affirms and agrees that the
foregoing software, materials, lists, records and files
shall be deemed to be the property of ITI, and that ITI
shall have the right to enter upon Licensee's premises and
to remove such materials.
11.1.3 Licensee shall immediately remove and destroy or return to
ITI within thirty (30) days after such termination all
signs, designs and insignia in any way indicating or
suggesting that Licensee's business establishment is related
to or connected with ITI, its subsidiaries or affiliates, or
any of ITI's licensees.
11.1.4 Licensee acknowledges that there will be substantial
confusion in the mind of the public if, after the expiration
or termination of the Agreement Licensee continues to use
any of the listed or unlisted telephone numbers used by
Licensee's Institute, or listed in the "Yellow Pages" or
"White Pages" of the telephone directory under the name
"ITI," or some other name confusingly similar thereto.
Therefore, Licensee agrees that promptly after the
expiration or termination of the Agreement for any reason
whatsoever, Licensee will forthwith cease and desist using
such telephone numbers and, upon written demand of ITI,
direct the telephone company servicing Licensee's Institute
to transfer the telephone numbers utilized by or listed for
the Institute in the then-current "Yellow Pages" and "White
Pages" of the telephone directory to ITI, or to such other
person and at such location as ITI may direct. If Licensee
does not promptly so direct the telephone company, Licensee
irrevocably appoints ITI as its attorney-in-fact to so
direct the telephone company to make such transfers under
the terms of the Agreement.
11.1.5 Except as provided in section 11.2 below, Licensee shall
immediately refrain from engaging in any and all contacts
with customers, whether with respect to providing service to
customers, or for any other purpose whatsoever.
11.2 SETTLEMENT OF OUTSTANDING CONTRACTS WITH STUDENTS. Licensee agrees
that it is solely responsible to settle all claims of enrolled students whose
Program Delivery are not completed on the effective date of expiration or
termination of this Agreement. Upon termination, Licensee may not in any event
accept any new students at Licensee's Institute. However, if in ITI's sole
judgment, the breach that led to termination is not such that Licensee should
be immediately prevented from any further Program Delivery, ITI may, in
writing, allow Licensee to continue to complete the Program Delivery for some
or all of Licensee's existing students. ITI may in its reasonable discretion
waive the application of section 11.1 for a period not to exceed nine months,
to the extent necessary to allow Licensee to complete the student's course of
Program Delivery.
11.3 CESSATION OF SALES ACTIVITIES. If Licensee is in breach of any
material provision of this Agreement which is either incurable or which has not
been cured after ITI has given Licensee a Notice of Default and Opportunity to
Cure, ITI shall have no obligation whatsoever to sell any products, equipment
or services to Licensee on cash or credit. Licensee shall not thereafter have
any right to offer or sell ITI System products or services, and Licensee shall
not, as a result thereof, have a defence at law or equity based upon
impossibility of Licensee's performance, nor will Licensee as a result have any
claim against ITI.
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11.4 PAYMENT OF ALL OBLIGATIONS DUE. The expiration or termination of this
Agreement shall not relieve Licensee from its obligation to pay ITI and other
creditors when due any and all obligations and indebtedness incurred, or
license fee accrued, as of the effective date of termination, and Licensee's
obligations under sections 4 and 11.4 shall remain in full force and effect.
11.5 LICENSEE AND PRINCIPALS NOT TO COMPETE. Licensee acknowledges that it
has received information which ITI has developed in the ITI System over time at
great expense, including but not limited to methods of site selection;
marketing methods; delivery methodology and service methods and skills. They
further acknowledge that this information is not generally known in the
industry and that to develop it itself would be expensive, time-consuming and
difficult. Licensee further acknowledges that ITI's information provides a
competitive advantage and will be valuable to it in the development of its
business, and that gaining access to it is the primary reason why they are
entering into this Agreement. Accordingly, Licensee agrees that ITI's
information as described above constitutes trade secrets belonging to ITI. In
consideration of ITI's confidential disclosure of these trade secrets, Licensee
covenants:
11.5.1 During the term of this Agreement, to use its best efforts
in operating the licensed business and in recommending,
promoting and encouraging patronage of all ITI System
Institutes.
11.5.2 In the event this Agreement is terminated, expires, or is
not renewed, or if Licensee assigns or transfers its
interest herein to any person or business organization, then
in such event Licensee covenants, for a period of three (3)
years after such termination, expiration, non-renewal,
transfer or assignment not to engage in any education
business offering information technology education or
training contained in or derived from the ITI System, within
the Territory or otherwise, including at Los Angeles or
London, England, other than as an authorized licensee of
another ITI Institute.
11.5.3 The parties agree that each of the foregoing covenants shall
be construed as independent of any other covenant or
provision of this Agreement. Should any part of the
restrictions contained in this section be found to be
unenforceable by virtue of its scope in terms of area,
business activity prohibited or length of time, and should
such part be capable of being made enforceable by reduction
of any or all thereof, Licensee and ITI agree that the same
shall be enforced to the fullest extent permissible under
the law. The running of any period of time specified in
this section shall be tolled and suspended for any period of
time in which the Licensee is found by a court of competent
jurisdiction to have been in violation of any such
restrictive covenant. ITI may, unilaterally, at any time,
in its sole discretion, revise any of the covenants in this
section so as to reduce the obligations of Licensee
hereunder. Licensee further expressly agrees that the
existence of any claim it may have against ITI whether or
not arising from this Agreement, shall not constitute a
defence to the enforcement by ITI of the covenants in this
section.
<PAGE> 34
30
11.6 ASSIGNMENT OF TERRITORY UPON TERMINATION. Upon termination of this
Agreement for any reason, ITI may immediately license the Territory or any
portion thereof to another person or may itself operate an Institute within the
Territory.
12. INJUNCTIVE RELIEF AND LIQUIDATED DAMAGES
Licensee acknowledges that ITI's remedy at law for Licensee's breach
of section 4, section 11.1, or section 11.5 would be inadequate and that,
accordingly, in such events, ITI shall be entitled to immediate injunctive
relief. In addition to, and not in derogation of, the right to obtain an
injunction, ITI shall be entitled to liquidated damages until such injunction
issues. Due to the difficulties of computing actual damages from any such
breach, damages shall be fixed in an amount equal to the average monthly
royalty Licensee had paid ITI over the 36 month period (or such shorter period
if Licensee held the Agreement for a lesser period) preceding termination or
expiration of this Agreement for each month or part thereof that Licensee is in
breach of section 4, section 11.1, or section 11.5. The parties agree that the
stated sum is not a penalty, but reasonably represents the actual damages ITI
will suffer in the event of a breach of any one of the enumerated sections.
13. HOLD HARMLESS, INDEMNIFICATION AND INSURANCE
13.1 HOLD HARMLESS AND INDEMNIFICATION. Licensee agrees that it will
defend, indemnify and save ITI harmless from all fines, suits, proceedings,
claims, demands, or actions of any kind or nature, instituted by any third
party, arising or growing out of or otherwise connected with Licensee's
operation of its licensed business, except in respect of claims made by
students of Licensee based upon errors or misinformation occurring in the
copyrighted materials provided by ITI under this Agreement, as to which latter
claims ITI agrees to indemnify Licensee and save Licensee harmless from any and
all liability.
13.2 INSURANCE. Licensee shall, at its expense and no later than upon
commencement of the business contemplated by this Agreement, produce and
maintain in full force and effect throughout the term of this Agreement the
types of insurance enumerated in the Confidential Operations Manual which shall
be in such amounts as may from time to time be required by ITI, including but
not limited to workers' compensation insurance, all risk protection with
replacement cost coverage on equipment, furnishings, fixtures, and building,
comprehensive public liability insurance and business interruption insurance.
Licensee may, but is not required to, also secure teacher's professional errors
and omission coverage if available. ITI may at any time amend the amount of
insurance Licensee is required to carry. ITI shall be named as an insured
under the comprehensive public liability insurance policies, and otherwise as
its interest may appear. Licensee shall keep and maintain any and all
insurance required hereunder, and under any lease or any loan agreement, in
full force and effect at all times during the term of this Agreement. Licensee
shall make timely delivery of certificates of all required insurance to ITI,
each of which shall contain a statement by the insurer that the policy will not
be cancelled or materially altered without at least thirty (30) days' prior
written notice to ITI. The procurement and maintenance of such insurance shall
not relieve Licensee of any liability to ITI under any indemnity requirement of
this Agreement. In the event that Licensee fails to carry and maintain any and
all insurance as required hereunder, Licensee authorizes ITI to secure such
insurance for Licensee and to charge Licensee for such premiums.
<PAGE> 35
31
14. PARTIES AS INDEPENDENT CONTRACTORS
Nothing in this Agreement is intended by the parties hereto to create
a fiduciary relationship between them nor to constitute Licensee an agent,
legal representative, subsidiary, joint venturer, partner, employee or servant
of ITI for any purpose whatsoever. It is understood and agreed that Licensee
is an independent contractor and is in no way authorized to make any contract,
warranty or representation or to create any obligation on behalf of ITI.
In all dealings with third parties including, without limitation,
employees, suppliers and customers, Licensee shall disclose in an appropriate
manner acceptable to ITI that it is an independent entity licensed by ITI. At
ITI's request, Licensee shall prominently indicate on all letterheads, business
forms and the like that it is a Licensee of ITI by using language substantially
stating Licensee is "A Licensee of ITI Learning Systems Inc."
15. NOTICES
Any notice required or permitted by this Agreement shall be in
writing, addressed to a party at the address given below, or such other address
as the parties may advise in writing, or to such other address as the party by
notice informs the other, shall be mailed by registered or certified mail if
not hand delivered or transmitted via facsimile, and shall be effective on the
sooner of delivery or five days after mailing. The addresses for service are:
ITI Learning Systems Inc.
c/o ITI Information Technology Institute Incorporated
Suite 202, 5523 Spring Garden Road
Halifax, NS B3J 3T1
Attention: Chairman
American European Corporation or EduTrek International, Inc.
Tower Place, Suite 2000
3343 Peachtree Road NE
Atlanta, Georgia 30326
Attention: President
with a copy to:
Smith Gambrell & Russell, LLP
Atlanta Financial Centre
Suite 1800
3343 Peachtree Road NE
Atlanta, Georgia 30326-1010
Attention: Arthur Jay Schwartz
<PAGE> 36
32
16. ATTORNEY FEES
In the event either ITI or Licensee institutes a suit or action to
enforce any term or provision of this Agreement, the most prevailing party in
the suit or action, or on appeal, shall be entitled to recover from the losing
party a reasonable attorney fee to be set by the trial or appellate court in
addition to costs or disbursements provided by law.
17. CONSTRUCTION
All captions and headings are for reference purposes only and shall
not be deemed to be a part of this Agreement. If any part of this Agreement
shall, for any reason whatsoever, be declared invalid or unenforceable, the
affected portion shall nevertheless be enforced to the fullest extent allowed
by law, and such declaration shall not affect the validity of the remaining
provisions, which shall remain in full force and effect. The parties hereby
declare their intention that they would have executed the remaining portion of
this Agreement without including herein any portions which may, for any reason,
be declared invalid in the future.
18. TIME IS OF THE ESSENCE
Time is of the essence of this Agreement.
19. JURISDICTION AND VENUE
The parties agree that this agreement shall be interpreted and
enforced according to the laws of the Province of Nova Scotia, and the Parties
irrevocably attorn to the courts in the Province of Nova Scotia.
20. MOST FAVOURED NATIONS PROVISION
In the event that ITI shall enter into any agreement to grant a
license of the ITI System in another territory with any other person, firm or
corporation which agreement, when taken as a whole, shall contain more
favourable terms, covenants and conditions as those contained herein, ITI shall
notify the Licensee and the Licensee may in writing request to ITI that the
terms of this Agreement be amended to be consistent with such other agreement,
which request will not be unreasonably denied by ITI.
21. WAIVER
ITI reserves the right and privilege, in its sole discretion and as it
may deem in the best interests of all concerned in any specific instance, to
vary standards for any licensee based upon the peculiarities of a particular
site or circumstance, demographics, or any other conditions which ITI deems to
be of importance to the successful operation of an ITI Institute. Licensee
shall have no recourse against ITI on account of any licensee and shall not be
entitled to require ITI to grant Licensee a like or similar variation
hereunder.
<PAGE> 37
33
22. MODIFICATION
Except as otherwise provided herein, neither ITI nor Licensee may
modify this Agreement except by an instrument in writing between ITI and
Licensee.
23. ACKNOWLEDGEMENTS Licensee hereby acknowledges the following:
23.1 Licensee has conducted an independent investigation of the business
contemplated by this Agreement and understands and acknowledges that the
business contemplated by this Agreement involves business risks making the
success of the venture largely dependent upon the business abilities and
participation of Licensee and its efforts as an independent business operator.
ITI expressly disclaims the making of, and Licensee acknowledges that it has
not received or relied upon any warranty or guarantee, express or implied, as
to the potential volume, profits or success of the business venture
contemplated by this agreement, or as to the suitability of the site as a
successful location for the Institute.
23.2 Licensee has no knowledge of any representations by ITI or its
officers, directors, shareholders, employees, agents or servants, about the
business contemplated by this Agreement that are contrary to the terms of this
Agreement or the documents incorporated herein. Licensee represents, as an
inducement to ITI's entry into this Agreement, that Licensee has made no
misrepresentations in obtaining this Agreement.
23.3 Licensee acknowledges that ITI's approval of Licensee's premises does
not constitute any assurance by ITI that the operation of an ITI Institute at
the premises will be successful or profitable.
23.4 Licensee acknowledges that it has had ample opportunity to consult
with its own attorneys, accountants and other advisors with respect to this
Agreement or the relationship thereby created.
23.5 Licensee, together with its advisors, has sufficient knowledge and
experience in financial and business matters to make an informed investment
decision with respect to the License.
23.6 Licensee is aware of the fact that other present or future licensees
of ITI may operate under different forms of agreement(s), and consequently that
ITI's obligations and rights with respect to its various licensees may differ
materially in certain circumstances.
23.7 Licensee acknowledges that this instrument constitutes the entire
agreement of the parties, and supersedes any prior agreement between the
parties, concerning the same subject matter.
23.8 Licensee shall conspicuously identify itself and the institute in all
dealings with clients, contractors, suppliers, public officials and others, as
an independent licensee of ITI, and shall place such notice of independent
ownership on all forms, business cards, stationery, advertising, signs and
other materials and in such fashion as ITI may in its sole and exclusive
discretion, specify and require from time to time, in the Confidential
Operating Manual(s) (as same may be amended from time to time) or otherwise.
<PAGE> 38
34
24. GUARANTEE
In consideration of ITI granting the License to the Licensee, a wholly
owned subsidiary of the Guarantor, the Guarantor hereby guarantees to ITI the
payment of all monies by the Licensee to ITI under this Agreement and also the
observance and performance of the covenants, conditions and provisos herein
contained on the part of the Licensee to be observed and performed. ITI shall
be at liberty, from time to time, and at all times, at its discretion, to allow
installments of principal and interest to be in arrears or extend the time for
payment thereof, or any part or parts thereof, or otherwise deal with the
obligations of the Licensee in such manner as ITI may see fit without notice
to, or the consent of the Guarantor and that notwithstanding the conditions
recited above the Guarantor shall continue to be liable hereunder until all
monies due under the Agreement to ITI have been paid in full and all
obligations of the Licensee hereunder have been satisfied in full. ITI shall
not be bound to exhaust its remedies against the Licensee or against any other
person or persons before enforcing its rights against the Guarantor.
25. VESTED RIGHT TO ADDITIONAL TERRITORIES IN ADDITION TO THE TERRITORY
As part of the consideration extended pursuant to this Agreement, ITI
grants to the Licensee the right to open additional Institutes in each of the
cities of Los Angeles, London, England and Dubai on payment of an additional
$150,000 per additional territory pursuant to additional license agreements
substantially in the form of this Agreement.
26. BINDING
This Agreement may be executed in any number of counterparts, each of
which when so executed shall be deemed to be an original and such counterparts
together shall constitute but one instrument, and all parties hereto agree that
the reproduction of signatures by way of telecopying device shall be treated as
though such reproductions were executed originals.
27. BEST EFFORTS NEGOTIATIONS AND RIGHT OF FIRST REFUSAL
For a period of 12 months until July 26, 1998 so long as the Licensee
is not in default of this Agreement, ITI agrees that it will negotiate
exclusively with the Licensee, upon reasonable notice by the Licensee, in good
faith, further license agreements on terms to be agreed for the following
territories: (a) the State of California (in addition to Los Angeles); (b) the
State of Florida; (c) the State of Virginia; (d) the District of Columbia; (e)
the State of Texas; and (f) the United Arab Emirates (in addition to Dubai)
(collectively herein, the "Additional Territories").
For a further period of 24 months from July 26, 1998 so long as the
Licensee is not in default of this Agreement, if ITI receives a bona fide
written offer to license any of the Additional Territories (the "Subject
Territory") on terms acceptable to ITI (the "Prime Offer"), ITI shall supply a
copy of the Prime Offer to the Licensee and advise the Licensee that the Prime
Offer is acceptable to ITI. The Licensee shall have 10 days following the
receipt of such copy of the Prime Offer to make a written offer (the "Secondary
Offer") to ITI for the Subject Territory at the same price and upon the same
terms as contained in the Prime Offer. If the Licensee makes a Secondary Offer
as aforesaid, then the Licensee shall be entitled and required to license from
ITI, and ITI shall license, in accordance with the provisions of the Secondary
Offer all of the Subject Territory, on the
<PAGE> 39
35
execution of the required license agreement. If the Licensee does not make a
Secondary Offer within the 10-day period ITI shall be entitled to accept the
Prime Offer and to license the Subject Territory in accordance with the
provisions of the Prime Offer, but not otherwise.
It is understood that as a condition of this Agreement that in the
event that ITI shall enter into any agreement to grant a license of the ITI
System in another territory with any other person, firm or corporation which
agreement, when taken as a whole, shall contain more favourable terms,
covenants and conditions as those contained in the licenses of the Licensee,
ITI shall notify the Licensee and the Licensee shall be required to amend the
terms of the licenses of the Licensee in the Additional Territories to be
consistent with such other agreement (other that the license of the Territory).
This section shall not apply to the establishment of ITI proprietary
schools in the Additional Territories.
<PAGE> 40
36
IN WITNESS WHEREOF, the parties hereto have set their respective hands, as of
the day and year first above written.
ITI LEARNING SYSTEMS INC. EDUTREK INTERNATIONAL, INC.
By: /s/ Daniel F. Potter By: /s/ Steve Bostic
------------------------------- ---------------------------------
Daniel F. Potter
Chairman And: /s/ Douglas C. Chait
--------------------------------
AMERICAN EUROPEAN CORPORATION
By: /s/ Steve Bostic
--------------------------------
And: /s/ Douglas C. Chait
--------------------------------
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
Board of Directors
EduTrek International, Inc.
Atlanta, Georgia
We consent to the use in this Amendment No. 1 to the Registration Statement
No. 333-29603 of EduTrek International, Inc. on Form S-1 of our report with
respect to EduTrek International, Inc. dated July 18, 1997 appearing in the
Prospectus, which is a part of this Registration Statement, and to the reference
to us under the headings "Selected Consolidated Financial Data" and "Experts" in
such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 1, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
Board of Directors
EduTrek International, Inc.
Atlanta, Georgia
We consent to the use in this Amendment No. 1 to the Registration Statement
No. 333-29603 of EduTrek International, Inc. on Form S-1 of our report with
respect to American European Corporation dated June 18, 1997 appearing in the
Prospectus, which is a part of this Registration Statement, and to the reference
to us under the headings "Selected Consolidated Financial Data" and "Experts" in
such Prospectus.
/s/ DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 1, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EDUTREK
INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND><F1>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAY-31-1997
<EXCHANGE-RATE> 1
<CASH> 678
<SECURITIES> 0
<RECEIVABLES> 305
<ALLOWANCES> 33
<INVENTORY> 0
<CURRENT-ASSETS> 1,325
<PP&E> 5,503
<DEPRECIATION> 766
<TOTAL-ASSETS> 47,671
<CURRENT-LIABILITIES> 11,041
<BONDS> 0
0
0
<COMMON> 5,287
<OTHER-SE> 824
<TOTAL-LIABILITY-AND-EQUITY> 47,671
<SALES> 0
<TOTAL-REVENUES> 24,088
<CGS> 0
<TOTAL-COSTS> 16,910
<OTHER-EXPENSES> 696
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,499
<INCOME-PRETAX> 3,984
<INCOME-TAX> 1,981
<INCOME-CONTINUING> 2,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,003
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
<FN>
<F1> This schedule contains summary financial information for the eleven
month period from July 1, 1996 to May 31, 1997.
</FN>
</TABLE>
