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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1998
COMMISSION FILE NUMBER: 0-23021
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EDUTREK INTERNATIONAL, INC.
A GEORGIA CORPORATION
3340 PEACHTREE ROAD, SUITE 2000 58-2255472
ATLANTA, GEORGIA 30326 (IRS Employer Identification No.)
404-812-8200
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
NONE
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
CLASS A COMMON STOCK, WITHOUT PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K./X/
The aggregate market value of the Class A Common Stock of the registrant
held by nonaffiliates of the registrant (4,268,688) on July 31, 1998 was
$105,116,442. For the purposes of this response, officers, directors, and
holders of 5% or more of the registrant's Class A Common Stock are considered
the affiliates of the registrant at that date.
The number of shares outstanding of the registrant's Common Stock as of July
31, 1998: 4,337,095 Class A and 6,293,000 Class B.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its Annual
Meeting of Shareholders to be held in 1998 are incorporated by reference into
Part III of this Report, with the exception of information regarding executive
officers required under Item 10 of Part III, which information is included in
Part I, Item 1.
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EDUTREK INTERNATIONAL, INC.
FORM 10-K
INDEX
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PART I
Item 1. Business.................................................................................. 1
Item 2. Properties................................................................................ 20
Item 3. Legal Proceedings......................................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders....................................... 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 22
Item 6. Selected Consolidated Financial Data...................................................... 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 25
Item 7A. Quantitative and Qualititative Disclosures About Market Risk.............................. 32
Item 8. Financial Statements and Supplementary Data............................................... 32
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...... 50
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 50
Item 11. Executive Compensation.................................................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 50
Item 13. Certain Relationships and Related Transactions............................................ 50
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 50
SIGNATURES............................................................................................. 53
EXHIBIT INDEX.......................................................................................... 55
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PART I
ITEM 1. BUSINESS
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A SAFE HARBOR
TO ENCOURAGE COMPANIES TO PROVIDE PROSPECTIVE INFORMATION SO LONG AS IT IS
IDENTIFIED AS FORWARD-LOOKING AND ACCOMPANIED BY MEANINGFUL CAUTIONARY
STATEMENTS IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE DISCUSSED. FORWARD-LOOKING STATEMENTS ARE RELATED
TO THE PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ECONOMIC
PERFORMANCE, OF PROJECTIONS OF REVENUES, INCOME, EARNINGS PER SHARE, CAPITAL
EXPENDITURES, DIVIDENDS, CAPITAL STRUCTURE, OR OTHER FINANCIAL ITEMS. IN THE
FOLLOWING DISCUSSION AND ELSEWHERE IN THE REPORT, STATEMENTS CONTAINING WORDS
SUCH AS "INTEND," "EXPECT," "ANTICIPATE," "BELIEVE," "GOAL," "OBJECTIVE," OR
SIMILAR WORDS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE SUCH FORWARD-LOOKING STATEMENTS, AND IT
WISHES TO IDENTIFY IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS CONTAINED IN
THE FOLLOWING DISCUSSION AND ELSEWHERE IN THE REPORT. THE RISKS AND
UNCERTAINTIES THAT MAY AFFECT THE OPERATIONS, PERFORMANCE, DEVELOPMENT, AND
RESULTS OF THE COMPANY'S BUSINESS INCLUDE BUT ARE NOT LIMITED TO THE FOLLOWING:
(1) HEIGHTENED COMPETITION; (2) GENERAL ECONOMIC AND BUSINESS CONDITIONS WHICH
ARE LESS FAVORABLE THAN EXPECTED; (3) CONTINUED DIFFICULTIES IN THE ECONOMIES OF
ASIAN AND OTHER COUNTRIES THAT ARE A SOURCE OF STUDENTS FOR THE COMPANY; AND (4)
OTHER RISKS DETAILED HEREIN AND FROM TIME TO TIME IN THE COMPANY'S OTHER
REPORTS.
OVERVIEW
EduTrek International, Inc. ("EduTrek" or the "Company"), through American
InterContinental University ("AIU"), is a leading provider of global,
career-oriented higher education programs. AIU offers accredited associate's,
bachelor's, and master's degree programs in information technology ("IT"),
international business, multimedia communication, and design to over 3,000
students from over 100 countries. AIU maintains five campuses located in
Atlanta, Los Angeles, Washington, D.C., London, and Dubai, United Arab Emirates.
In 1987, AIU became the first for-profit four-year university to be accredited
by the Commission on Colleges of the Southern Association of Colleges and
Schools ("SACS"), one of the six regional accrediting agencies recognized by the
U.S. Department of Education. AIU's education programs are designed to help
graduates prepare for careers. AIU offers an authentic international education
environment; over half of its students are from outside the United States.
Through its Study Abroad program, AIU enrolled nearly 640 students from U.S.
universities in fiscal 1998 to study at AIU's London and Dubai campuses while
earning academic credit toward a degree from their home university. AIU intends
to become the high-quality, low-cost leader in the for-profit education industry
by offering market-driven programs in state-of-the-art facilities.
Established as a two-year institution in 1970, AIU has grown significantly,
establishing three new campuses since fall 1995. The number of students
attending AIU has increased 54.5% to 2,920 students at May 31, 1998 from 1,890
students at May 31, 1994. The Company intends to continue expanding by opening
new campuses (including two new campuses in the remainder of calendar 1998).
Each campus will be a fully-wired university, utilizing state-of-the-art
educational technology specifically designed to accommodate the collaborative,
team-based learning model. AIU will offer four new business and information
technology programs designed to equip students with skills that are in strong
demand by employers: Master of Information Technology ("MIT"), Bachelor of
Information Technology ("BIT"), and Master of Business Administration ("MBA")
and Bachelor of Business Administration ("BBA") in International Business. Each
program will be offered during the day for full-time students and in the
evenings for working adults in order to provide flexibility for students and to
maximize capacity utilization.
In July 1997, the Company licensed the core IT curriculum from ITI Education
Corporation ("ITI"), a quality provider of career-oriented postgraduate IT
diploma programs to university graduates, with five campuses in Canada. The
Company enriched and expanded this curriculum to develop the MIT degree, which
was approved by SACS. AIU launched the MIT degree program in Atlanta in December
1997. AIU
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currently has enrolled 300 MIT students at a program tuition of $24,950. The
retention rate for these students is in excess of 90%.
On December 11, 1997, EduTrek and ITI entered into an agreement through
which the Company would acquire ITI. On March 30, 1998, the two companies
terminated these plans in favor of an expanded licensing agreement. Under the
new agreement, EduTrek acquired rights to license ITI's information technology
education system for 11 major markets in the U.S. and internationally.
AIU has centralized at its Atlanta headquarters the administrative functions
of the various campuses, including marketing, accounting, recruiting, human
resources, program and curriculum development, information systems, financial
aid, and regulatory compliance. A campus president, supported by a team of human
resources, academic, marketing, and administrative staff members, manages local
campuses. AIU is in the process of implementing an integrated campus management
information system to assist in planning and controlling the opening of new
campuses. AIU is also implementing a total quality management program aimed at
assessing and improving the quality of academic and administrative services for
AIU's students.
MARKET
The United States education market may be divided into distinct segments:
kindergarten through twelfth grade schools ("K-12"), vocational and technical
training schools, workplace and consumer training, and degree-granting colleges
and universities ("higher education"). The Company operates primarily in the
higher education segment. The Company expects that the international demand for
postsecondary education will continue to increase over the next several years as
a result of certain projected demographic, economic, and social trends
including:
(1) 43% projected growth in the number of students enrolled in institutions
of higher education internationally from approximately 56 million in 1995
to approximately 80 million in 2005, according to UNESCO;
(2) estimated 346,000 current vacancies in computer programmer and system
analyst jobs in companies with more than 100 employees, representing one
out of ten of all information technology jobs, projected to increase to
one million vacancies by the year 2005, according to the Commerce
Department's Office of Technology Policy;
(3) 24% projected growth in the number of new high school graduates from
approximately 2.5 million in 1994 to approximately 3.1 million in 2004,
according to the United States Department of Education ("DOE");
(4) the relatively small percentage of adults over the age of 25 who possess
a bachelors degree (approximately 23% in 1995), according to the DOE;
(5) an increasing number of high school graduates attending postsecondary
institutions (65% in 1996 versus 53% in 1983), according to the DOE;
(6) increasing international student enrollment at U.S. colleges and
universities, reaching a record high of 454,000 in the 1995-1996 academic
year, according to the Institute of International Education ("IIE");
(7) 75% increase in the number of U.S. students studying abroad from
approximately 48,000 in the 1985-1986 academic year to approximately
89,000 in the 1995-96 academic year, according to the IIE; and
(8) heightened recognition of the importance of postsecondary education to
an individual's career progress and income potential.
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The Company believes that it is well positioned to take advantage of the
increasing demand for postsecondary education programs for the following
reasons:
BETTER QUALITY EDUCATIONAL PROGRAMS. AIU's primary goal is to deliver
better quality educational programs at a fast pace, resulting in a greater
return on students' investment. Quality educational programs provide students
with the life-long learning skills to compete successfully for employment
opportunities. In AIU's new programs in business and information technology,
students solve real-world problems in a collaborative, team-based environment,
which simulates the work environment. In addition, the new program curriculum
maximizes contact hours with faculty to accelerate the student learning process.
Students can earn a degree at AIU much more rapidly than at a traditional
university and begin his or her career sooner. By reducing the opportunity cost
of foregone income while in school, AIU graduates can increase the return on
their educational investment.
BETTER QUALITY LEARNING ENVIRONMENT. AIU's new campuses are equipped with
state-of-the-art technologies to enhance and accelerate student learning. They
are "plug-and-play" environments, with thousands of ports to give students easy
access to the Internet and electronic learning resources. The interiors are also
configured with classroom/team room modules to complement student learning.
WORKING ADULT PROGRAMS. AIU's programs for working adults in business and
information technology are designed to meet the unique needs of this market
segment. They are offered in the evenings at convenient times, can be completed
at a fast pace, and provide practical education based upon solving problems
likely to be encountered in the workplace.
INTERNATIONAL PROGRAMS. AIU's Global Studies program is composed of the
Study Abroad and Study in America programs. The Study Abroad program recruits
students at other U.S. universities to study at AIU's London and Dubai campuses.
The Study in America program recruits international students to attend AIU's
U.S. campuses. Program advisors for both programs ensure a smooth transition for
students studying at an international campus.
BUSINESS STRATEGY
EduTrek's strategic goal is to become the high quality, low cost producer of
higher education programs for traditional students, working adults and
international students by opening additional campus locations, developing or
acquiring new programs, and increasing enrollment at existing campuses through
targeted marketing programs.
OPEN NEW CAMPUSES
EduTrek plans to add campuses in high-growth markets throughout the United
States and worldwide. New locations are selected based on an analysis of a
variety of factors: the number of IT employers and their educational
reimbursement policies, the number of and projected growth in IT jobs, the
number of university graduates, the population of working adults, the
availability of similar programs offered by other institutions, and the timing
of securing state licenses to do business in the area. Campuses consist of
classrooms, team rooms and administrative facilities with full student and
administrative services. EduTrek has opened or plans to open five new campuses
in fiscal 1999: Dunwoody, north of Atlanta (opened in July 1998), Washington,
D.C. (opened in July 1998), Miami, Los Angeles (new campus located in Playa del
Rey), and a fifth site to be determined. In fiscal 2000, EduTrek plans to open
an additional campus each quarter. To the extent possible, EduTrek will open
campuses in markets where the Company currently has campuses in order to enhance
operating efficiencies.
DEVELOP OR ACQUIRE ADDITIONAL DEGREE PROGRAMS
EduTrek plans to introduce programs in additional fields of study and at
different degree levels. In fiscal 1998, AIU introduced two new programs,
including the MIT (day and evening) and the BBA for
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working adults, which had a total of 420 students enrolled on July 31, 1998. The
average annual tuition revenue per student for these new programs is $16,800, as
compared to $10,700 for students enrolled in AIU's traditional programs in
Atlanta. The retention rate for students in new programs is in excess of 90%.
EduTrek believes that the development and introduction of high quality new
programs will result in higher retention rates and higher revenues and operating
profits per student. EduTrek intends to launch three additional new programs for
both full-time and working adult students in fiscal 1999 in five campus
locations: BIT and BBA and MBA in International Business.
INCREASING ENROLLMENT AT EXISTING CAMPUSES
EduTrek plans to continue to implement an integrated marketing program which
utilizes direct mail, print and radio advertising, direct contact with high
school counselors and other referral sources and a public relations program to
build enrollment of students from local markets. Management believes that the
existing campuses will also benefit from greater brand awareness resulting from
increased advertising for AIU's new programs. In addition, EduTrek plans to
market to students from countries outside of Asia. In the Atlanta market, where
this plan was first initiated, students from the state of Georgia increased 92%
from 185 students to 355 students during the Summer II 1998 term. EduTrek will
institute this program at all existing campuses in fiscal 1999.
PROGRAMS OF STUDY
AIU offers the following degree programs and related areas of
specialization. Unless otherwise noted, each of the degree programs is offered
at all of AIU's campuses.
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ACADEMIC DISCIPLINE DEGREE PROGRAMS
(FALL 1997 ENROLLMENT, EXCEPT WHERE NOTED) DEGREE OFFERED (FALL 1997 ENROLLMENT, EXCEPT WHERE NOTED)
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International Business (1,125 students) A.A., B.S. International Business (947)
M.B.A. International Business* (48)
B.B.A.** International Business (120)
International Design (1,097 students) A.A., B.A. Fashion Design (173)
Fashion Marketing (254)
Fashion Design & Marketing (245)
Interior Design (425)
Multimedia Communication (586 students) A.A., B.A. Visual Communications (400)
Video Production*** (186)
Information Technology (300 students) M.I.T.**** Information Technology (300)
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* Offered only in London and Dubai
** On July 31, 1998; offered only in Dunwoody and Atlanta
*** Offered only in Atlanta and London
**** On July 31, 1998; offered only in Dunwoody
SACS accredits all of AIU's degree programs. AIU's interior design program
at the Atlanta and Los Angeles campuses is accredited by the Foundation for
Interior Design Education Research ("FIDER").
INFORMATION TECHNOLOGY. AIU offers the MIT program for both full-time
students during the day and working adults during the evening. The full-time
program is 10 1/2 months in length, and the evening program is 21 months. Both
programs educate university graduates from a variety of backgrounds to become IT
professionals. The IT curriculum is market-driven and changes frequently in
response to advances in technology. The technical portion of the curriculum
includes Microsoft Access-Registered Trademark-, Oracle-Registered Trademark-,
Visual Basic-Registered Trademark-, JAVA-TM- plus network administration for
Windows 95-TM-, Windows NT-TM-, network and
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hardware support, and Windows NT-TM- Internet Information Server. Students also
learn professional development skills and business strategy, including financial
accounting, marketing, and professional sales. The program features a method of
delivery that emphasizes problem-based, collaborative learning. Class size is
limited to cohorts, or groups, of 24 students to ensure interactive learning and
one-on-one attention from the faculty. MIT students enjoy new, state-of-the-art
facilities, including classrooms and team rooms designed specifically for the
MIT program. AIU plans to introduce an undergraduate BIT program for full-time
students and working adults in fiscal 1999.
INTERNATIONAL BUSINESS. AIU offers associate's, bachelor's, and master's
degrees in international business. The associate's and bachelor's degree
programs for working adults are focused on the unique needs of the adult
learner. Working adults can earn a BBA degree in about four years or less,
depending upon previously earned transfer credits. Classes meet one evening per
week, and class size is limited to 24 students to encourage group discussion and
the exchange of information and ideas. In addition to the regular class
meetings, students participate in weekly project team sessions. These sessions
give students the opportunity to find solutions to real-life problems, applying
their business knowledge in a collaborative learning environment. AIU plans to
introduce the master's degree program in international business for working
adults in fiscal 1999.
The international business programs for traditional students provide
students with a broad exposure to international business from the basic elements
through technical and functional areas. Students may follow a general business
track or choose advanced classes leading to a concentration in areas such as
marketing and management.
INTERNATIONAL DESIGN. The international design program educates students in
the fields of fashion design and marketing and commercial and residential
interior design. The fashion design program offers students a solid foundation
in designing and the opportunity to develop their own design collection. The
fashion marketing program prepares students for executive careers in the retail
and wholesale fashion industry and related businesses. The interior design
programs provide students with a thorough understanding of the fundamentals and
advanced principles of interior design.
MULTIMEDIA COMMUNICATION. The field of multimedia communication includes
advertising art, graphic design, photography, illustration, and video
production. Taught by working professionals, the programs offer a balance of
practical experience and theoretical concepts, providing a firm grounding in the
business aspects of the multimedia communication industry.
AMENDED ITI LICENSING AGREEMENT
On March 30, 1998, EduTrek and ITI terminated their planned merger in favor
of a revised licensing arrangement ("Second Agreement"), which expanded the
original licensing agreement ("Georgia Agreement") previously entered into by
the two companies on July 26, 1997. Under the Georgia Agreement, ITI licensed
its Applied Information Technology ("AIT") program to EduTrek for use in the
State of Georgia. The Georgia Agreement expires on July 31, 2007 and is
renewable for one ten-year term. The AIT program is an intensive nine month
postgraduate diploma program that trains students in the growing field of
information technology management. The AIT program is specifically designed to
convert university graduates from a broad range of disciplines with little or no
background in information technology to become IT professionals.
Under the Georgia Agreement, EduTrek paid a one-time initial license fee and
continuing royalties of a percentage of net revenues derived from AIU's use of
the AIT program curriculum. The Georgia Agreement stipulates that EduTrek is
required, among other things, to: (i) pay ITI royalties based upon the higher of
tuition levels charged to students enrolled in the program or minimum tuition
levels specified in the Georgia Agreement; (ii) expend a percentage of revenues
derived from the operation of the programs to market the AIT program; (iii)
purchase from ITI certain courseware, equipment and other materials
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and; (iv) make capital investments and expenditures necessary to upgrade the AIT
program. The Georgia Agreement further grants EduTrek the right to utilize the
AIT program in the cities of Los Angeles, London, and Dubai upon the payment of
an additional license fee for each location and the execution of an additional
license agreement substantially in the form of the Georgia Agreement for each
such territory. ITI also agreed to negotiate exclusively with EduTrek for
additional territories for a certain time period. ITI granted EduTrek a right of
first refusal in the event that ITI receives an offer to license its AIT program
in any such territories during the 24-month period beginning July 26, 1998.
The Second Agreement granted EduTrek the right until July 26, 1999 to
utilize the AIT program in the following additional territories upon the payment
of a one-time license fee: San Francisco-Oakland-San Jose, CA CMSA; San Diego,
CA MSA; Miami-Ft. Lauderdale FL, CMSA; Tampa-Saint Petersburg-Clearwater, FL
MSA; Dallas-Ft. Worth, TX CMSA; Houston-Galveston-Brazoria, TX CMSA; Washington,
D.C.-Baltimore, MD-VA-WV CMSA; and the United Arab Emirates (in addition to
Dubai). In addition, ITI granted EduTrek a right of first refusal in the event
that ITI receives an offer to license its AIT program in any of the above
territories during the 24-month period beginning July 26, 1999.
EduTrek was also granted the right to terminate the agreement without
penalty under the following conditions: (i) in the event of a direct or indirect
acquisition of 50.1% of more of ITI, (ii) upon 12 months written notice to ITI
and payment to ITI of a termination fee of $500,000; or (iii) upon 24 months
prior written notice to ITI.
STUDY ABROAD PROGRAM
The Study Abroad Program provides students from U.S. universities with the
opportunity to earn academic credits toward their degree from their home
university by studying at AIU's international campuses. The program was
established through a marketing program combining direct contact with selected
university professors and study abroad advisors with telemarketing support.
AIU's study abroad personnel ensure that students enjoy a seamless transition to
international college life, from selecting the appropriate courses to
understanding and appreciating cultural differences.
Since the program's inception in fall 1989, nearly 300 U.S. universities
have "outsourced" international education to AIU. The U.S. institutions sending
the highest number of students to AIU's London and Dubai campuses in the 1997
fall term were the following:
Ohio State University
University of Wisconsin
Indiana University
Ohio University
Washington State University
Philadelphia College of Textiles and Design
University of Rhode Island
University of Georgia
Furman University
State University of New York
University of Iowa
University of Massachusetts
University of Arizona
Student participation has increased approximately 30% annually since 1994.
During fiscal 1998, nearly 640 students enrolled in AIU's Study Abroad program.
TUITION AND FEES
AIU's undergraduate tuition is priced between the tuition levels of
non-profit private universities and comparatively lower tuition charged to
resident students at public universities. The tuition is comparable to the
tuition of public universities of non-resident and international students. The
tuition ranges between $3,625 and $4,425 per academic term, or $10,875 and
$13,275 for the full academic year, depending upon campus location. The tuition
for AIU's MIT program is $24,950; all textbooks, registration fees, lab fees,
Internet account, use of notebook computer, and use of electronic library
resources are included in the tuition. The annual tuition for the BBA program
for working adults is approximately $8,650.
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AIU offers a number of institutional scholarships for selected students who
meet specific eligibility requirements and range from $500 to full tuition
scholarships. In fiscal 1998, institutional scholarships had a value of
approximately $843,000, or 2.0% of EduTrek's net revenues.
AIU bills students for tuition and instruction fees by term of instruction.
AIU's refund policies meet the requirements of the DOE, SACS, and the state or
country where the campus is located. Generally, if a student drops out during
the first 60% of the term, AIU will refund a pro-rated portion of the tuition.
After a student has attended 60% of the term, AIU is not obligated to refund and
will retain 100% of tuition and fees.
Historically, AIU has increased tuition and fees without consumer
resistance. AIU increased tuition and fees by approximately 5% for the 1997-98
academic year and did the same in the 1998-99 academic year. EduTrek anticipates
that tuition increases will keep pace with inflation.
FACULTY
Faculty members are hired in accordance with criteria established by AIU,
accrediting bodies and applicable federal and state regulatory authorities. The
critical measures of faculty competence are teaching excellence, academic
background, prior education, and the degree and relevance of prior work
experience to the curriculum. AIU has developed a competency-based hiring model
designed to target and screen qualified faculty members. AIU has also
implemented a faculty development program to ensure that the skills and
knowledge base of all IT faculty are continually updated as new technologies are
introduced into the marketplace. In addition, faculty are trained in
collaborative learning techniques so that student learning in the team
environment is optimized.
AIU faculty members are typically working professionals who are experts in
their fields, rather than professional educators. For this reason, management
believes that AIU faculty provide students with a practical education that can
be applied directly to their chosen careers.
Most faculty members are employed on a contractual basis and are compensated
based on the number of courses taught. All IT faculty members are employed on a
full-time basis. Low student-teacher ratios (approximately 14:1, 15:1, 14:1, and
18:1 in fall 1997 for AIU's campuses in Atlanta, Los Angeles, London, and Dubai,
respectively) and the absence of a faculty tenure track promote a
student-focused environment. In AIU's MIT program, students rotate from
classroom instruction with 24 students to team problem-solving sessions with six
students. Students and administrative staff evaluate faculty members each
academic term on the basis of teaching abilities and demonstrated technical
knowledge.
STUDENT RECRUITMENT
To generate interest in AIU's academic programs, EduTrek engages in a broad
range of activities, including print and radio advertising, Internet
advertising, direct mail, and direct contact with targeted corporations, high
schools, and community colleges. EduTrek also attempts to locate its campuses
near major highways to provide high visibility and easy access. Alumni,
employers, embassies, and currently enrolled students refer a substantial
portion of new students.
EduTrek also has Web sites on the Internet World Wide Web
(http//:www.edutrek.com, http://www.aiuniv.edu) that allow electronic access to
company and program information. These Web sites are accessible from major
online networks and Internet service providers.
AIU advertising is controlled centrally and is targeted at local markets
where the campuses are located, at U.S. universities (for the Study Abroad
program), and at international markets to attract students from other countries.
Direct responses to advertising and direct mail are received, tracked, and
forwarded promptly to the appropriate admissions officers. All responses are
analyzed in order to improve AIU's marketing efforts continually.
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EduTrek employs over 40 admissions representatives who make visits and
presentations at various organizations and who follow up on leads generated by
EduTrek's advertising efforts and referrals. Representatives pursue leads by
arranging interviews with prospective students at the campus and generally
assist students with clarifying their career goals and completing the
application process. The interview is designed to establish the student's
qualifications, academic background and goals, determine their suitability for
specific programs, and administer any required tests. Recruiting policies and
processes are established centrally but implemented at the campus level through
a director of admissions. AIU also employs recruiting personnel who recruit
students at high schools, community colleges, universities, embassies, college
fairs, and corporations.
ADMISSIONS REQUIREMENTS
To gain admission to AIU's undergraduate programs, students must generally
have a high school diploma or General Equivalency Diploma ("G.E.D."),
demonstrate a satisfactory level of English language competence, satisfy certain
minimum grade point average requirements, and submit two letters of reference.
Prospective students are interviewed to assess their qualifications, their
interest in the degree programs, and their commitment to education.
To gain admission to AIU's graduate programs, students generally must have
an undergraduate degree from a regionally accredited college or university and
satisfy minimum grade point average, work experience, and employment
requirements.
STUDENT RETENTION
The ability to retain students until graduation is a critical indicator of
AIU's success and early academic intervention is crucial to improving student
completion rates. To minimize student withdrawals, AIU devotes staff and other
resources to assist and advise students regarding academic and financial
matters, part-time employment, and housing. AIU employs guidance counselors at
all its campuses to advise students. Tutoring is also encouraged for those
students experiencing academic difficulties.
GRADUATE PLACEMENT
The successful placement of graduates in occupations related to their fields
of study is critical to AIU's ability to continue to recruit students
successfully. Based on the information received from recent alumni and
employers, 83% of U.S. AIU graduates in 1997, excluding those who continued
their education, obtained employment within approximately six months of
graduation, as compared to 71% in 1996. The approximate average starting salary
of 1997 AIU bachelor's degree graduates was $27,900, as compared to $24,000 in
1996.
To increase placement rates and starting salaries, AIU increased its
placement staff in fiscal 1998. The placement personnel assist students in
developing individualized career plans, selecting classes to further these
plans, obtaining internships and forming job search strategies. Students also
receive instruction during their program of study on basic job search skills.
COMPETITION
The higher education market is highly fragmented and competitive with no
private or public institution enjoying a significant market share. In the U.S.
and London, EduTrek competes primarily with four-year and two-year degree
granting public and private regionally accredited colleges and universities.
Many of these institutions have greater financial resources than EduTrek. The
American University in Dubai is currently the only U.S.-accredited postsecondary
institution offering degree programs in the United Arab Emirates and competes
with numerous institutions in the Persian Gulf region. Some of these
institutions in the United Kingdom and The Persian Gulf region are government
sponsored and charge a lower tuition than AIU.
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AIU competes primarily at a local and regional level with other regionally
accredited colleges and universities based on the quality of the academic
programs, the accessibility of the programs and learning resources, the cost of
the program, the perceived quality of the instruction, the employability of its
graduates, and the time required to earn a degree.
SUPERVISION AND REGULATION
ACCREDITATION
Accreditation is a process for evaluating the quality of educational
institutions and their programs against established criteria and standards. This
process entitles institutions of higher education to the confidence of the
educational community and the public. In the United States, an institution
submits itself to qualitative review by an organization of peer institutions to
obtain accreditation. There are three types of accrediting agencies in the
United States: (i) regional accrediting associations, of which there are six,
which accredit degree-granting institutions located within their geographic
areas, (ii) national accrediting agencies, which accredit institutions without
regard to their locations, and (iii) specialized accrediting agencies, which
accredit specific programs within an institution. Accrediting agencies primarily
examine the institutional and programmatic operations and the academic quality
of the instructional programs. A grant of accreditation is generally viewed as
certification that the institution's programs meet generally accepted or
specific academic standards. Accrediting agencies also review the
administrative, service, and financial operations of institutions to ensure that
each has the resources to accomplish its educational mission.
The accreditation of AIU provides significant advantages over most other
for-profit educational institutions. College and university administrators
depend on accreditation to evaluate transfers of credit and applications to
graduate schools. Employers rely on the accreditation when evaluating a
candidate's credentials, and parents and high school counselors look to
accreditation for assurance that an institution meets quality educational
standards. Moreover, accreditation is necessary for students to qualify for
eligibility for federal financial assistance. Also, most scholarship commissions
restrict their awards to students attending accredited institutions.
Pursuant to provisions of the Higher Education Act of 1965, as amended (the
"HEA"), the DOE relies on accrediting agencies to determine whether
institutions' educational programs qualify them to participate in Title IV
Programs. The HEA specifies certain standards that all recognized accrediting
agencies must adopt in connection with their review of postsecondary
institutions. Accrediting agencies that meet DOE standards are recognized as the
arbiters of the quality of the education or training offered by an institution.
Each of AIU's campuses is accredited by SACS, an accrediting agency recognized
by the DOE. In addition, AIU's interior design programs in Atlanta and Los
Angeles are accredited by FIDER, and the advertising program in Dubai is
accredited by the International Advertising Association.
The HEA requires each recognized accrediting agency to submit to a periodic
review of its procedures and practices by the DOE as a condition of its
continued recognition. SACS, AIU's regional accreditor for purposes of
participation in Title IV Programs, has been reviewed within the last three
years and has had its recognition extended.
An accrediting agency may place an institution on private or public
"reporting" status in order to monitor one or more specified areas of a school's
performance. An institution placed on reporting status is required to report
periodically to its accrediting agency on that school's performance in the
specified areas. While on reporting status, an institution may not open and
commence teaching at new locations without first receiving a waiver from its
accrediting agency. Frequently, sanctions may be attached to this "reporting"
status. Failure to demonstrate compliance with accrediting standards could
result in the loss of accreditation. None of AIU's campuses have been placed on
reporting status by their respective accrediting agencies.
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STUDENT FINANCIAL ASSISTANCE
Students attending AIU finance their education through a combination of
family contributions, individual resources, financial aid, and employer tuition
reimbursement. As at most other postsecondary institutions, many students
enrolled at AIU must rely, at least in part, on financial assistance to pay the
cost of their education. The largest source of such support for AIU's U.S.
students is the federal programs of student financial assistance under Title IV
of the HEA.
Additional sources of funds include other federal grant programs, state
grant and loan programs, private loan programs, and institutional grants and
scholarships. Because international students attending AIU are not eligible to
participate in U.S. government-sponsored student loan programs, the majority of
their funding is derived from personal and family resources. Less than 1% of the
international students enrolled at AIU receive funding from their home
government.
To provide students access to Title IV Programs, a school must be (i)
authorized to offer its programs of instruction by the relevant agency of the
state in which it is located, (ii) accredited by an agency recognized by the
DOE, and (iii) certified as an eligible institution by the DOE. In addition,
that school must ensure that Title IV Program funds are properly accounted for
and disbursed in the correct amounts to eligible students.
Under the HEA and its implementing regulations, AIU must comply with certain
standards on an institutional basis. For purposes of these standards, the
Regulations define an institution as a main campus with additional locations
(formerly called branch campuses), if any. Under this definition, all of AIU's
campuses are treated as one institution for purposes of complying with the HEA.
NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION
While the states support public colleges and universities primarily through
direct state subsidies, the federal government provides a substantial part of
its support for postsecondary education in the form of grants and loans to
students enrolled at eligible institutions. Title IV Programs have provided aid
to students for more than 30 years and, since the enactment of the HEA in 1965,
the scope and size of such programs have steadily increased. Since 1972,
Congress has expanded the scope of the HEA to provide for the needs of the
changing national student population. Among other things, the amended HEA
provides that students at proprietary schools are eligible for assistance under
Title IV Programs, establishes a program for loans to parents of eligible
students, opens Title IV Programs to part-time students, increases maximum loan
limits, and eliminates the requirement that students demonstrate financial need
to obtain unsubsidized federally guaranteed student loans. Most recently, the
Direct Loan program was enacted, enabling students to obtain loans from the
federal government rather than from commercial lenders.
Students at AIU participate in the following Title IV Programs.
PELL. The Federal Pell Grant ("Pell") program is the principle means by
which the DOE makes grants to students who demonstrate financial need. Every
eligible student is entitled to receive a Pell grant; there is no institutional
allocation or limit. Grants presently range from $400 to $2,700 per year.
Amounts received by students enrolled in AIU in fiscal 1998 under the Pell
program equaled approximately $800,000 or 1.9% of the Company's net revenues.
FSEOG. Federal Supplemental Educational Opportunity Grant ("FSEOG") program
awards are designed to supplement Pell grants for the neediest students. FSEOG
grants generally range in amount from $100 to $4,000 per year. The maximum
amount of FSEOG grants may be increased to as much as $4,400 for a student
participating in a program of study abroad that is approved for credit by the
student's home educational institution. The availability of FSEOG awards,
however, is limited by the amount of those funds allocated to an institution
under a formula that is based upon the size of the institution, its costs, and
the income levels of its students. FSEOG awards at AIU generally do not exceed
$1,500 per eligible student per year. The Company is required to make, at a
minimum, a 25% matching contribution
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for all FSEOG program funds disbursed. Resources for this institutional
contribution may include institutional grants and scholarships and, in certain
states, portions of state scholarships. In fiscal 1998, the Company's
institutional match was approximately $18,000. Amounts received by students
enrolled in AIU under the FSEOG program in fiscal 1998 equaled approximately
$111,000 or 0.3% of the Company's net revenues.
FEDERAL FAMILY EDUCATION LOANS AND FEDERAL DIRECT STUDENT LOANS. The FFEL
programs include the Federal Stafford Loan Program ("Stafford Loan"), and the
Federal PLUS Loan Program ("PLUS"), whereby private lenders make loans to a
student or his or her parents to pay the cost of attendance at a postsecondary
school.
The FFEL Program is administered through state and private non-profit
guarantee agencies that insure loans directly, collect loans in default, and
provide various services to lenders. The federal government provides interest
subsidies in some cases and reinsurance payments for borrower default, death,
disability, and bankruptcy.
The Direct Loan program is substantially the same as the FFEL program in
providing Stafford and PLUS loans. Under the Direct Loan program, however, funds
are provided directly by the federal government to the students, and the loans
are administered through the school. For schools electing to participate, the
Direct Loan program replaces the FFEL program (unless the participation in both
programs is permitted by the DOE), although loans are made on the same general
terms and conditions.
DIRECT AND FFEL STAFFORD LOAN PROGRAM. Undergraduate students may borrow an
aggregate of $2,625 for their first undergraduate academic year, $3,500 for
their second academic year, and $5,500 for their third and fourth academic years
under the FFEL Stafford Loan or Direct Stafford Loan program. Graduate students
may borrow up to $8,500 each academic year. If the student qualifies for a
subsidized loan, based on financial need, the federal government pays interest
on the loan while the student is attending school and during certain grace and
deferment periods. If the student does not qualify for a subsidized Stafford
Loan, the interest accruing on the loans must be paid by the student. In
addition, independent students may qualify for an additional $4,000 to $10,000 a
year in unsubsidized Stafford loans.
In fiscal 1998, AIU participated in both the FFEL and Direct Loan programs.
FFEL and Direct Stafford loans amounted to approximately $2.6 million and $6.4
million, respectively, or approximately 6.2% and 15.3%, respectively, of the
Company's net revenues in fiscal 1998.
DIRECT AND FFEL PLUS LOAN PROGRAM. Parents of dependent students may
receive loans under the FFEL PLUS Loan Program or the Direct PLUS Loan Program
on an academic year basis. The maximum amount of any PLUS loan is the total cost
of a student's education for each relevant academic year less other financial
aid received by the student attributable to such year. These loans are repayable
commencing 60 days following the last disbursement, with flexible payment
schedules over a ten year period. The FFEL PLUS loans are made by lending
institutions and guaranteed by the federal government. The Direct PLUS Loan
Program provides PLUS loans issued directly by the federal government on the
same general terms as the FFEL PLUS loans. FFEL PLUS loans and Direct PLUS loans
amounted to approximately $762,000 and $590,000, respectively, or approximately
1.8% and 1.4%, respectively, of the Company's net revenues in fiscal 1998.
FEDERAL WORK-STUDY. Under the Federal Work-Study ("FWS") program, federal
funds are made available to pay up to 75% of the cost of part-time employment of
eligible students, based on their financial need, to perform work for the
institution or for off-campus public or non-profit organizations. At least 5% of
an institution's FWS allocation must be used to fund student employment in
community service positions. In fiscal 1998, FWS funds amounted to approximately
$54,000 or 0.1% of the Company's net revenues.
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AVAILABILITY OF LENDERS
Five lending institutions currently provide over 85% of all federally
guaranteed loans to students attending AIU. While the Company believes that
other lenders would be willing to make federally guaranteed student loans to its
students if loans were no longer available from its current lenders, there can
be no assurance in this regard. In addition, the HEA requires the establishment
of lenders of last resort in every state to make loans to students at any school
that cannot otherwise identify lenders willing to make federally guaranteed
loans to its students. Moreover, because AIU is a participant in the Direct Loan
program, students are able to obtain loans directly from the federal government.
The DOE currently guarantees over 85% of all federally guaranteed student
loans made to students enrolled at AIU. The Company believes that other guaranty
agencies would be willing to guarantee loans to AIU's students if the DOE ceased
guaranteeing those loans or reduced the volume of those loans guaranteed.
FOREIGN SOURCES OF FINANCIAL AID
In fiscal 1998, 78 international students, or less than 1% of total
enrollment, received financial assistance from their respective foreign
governments in the form of either loans or grants. The foreign government
providing loans to AIU's students was Sweden and the foreign governments
awarding grants to AIU's students were Bahrain, Botswana, Libya, Qatar, Saudi
Arabia, Sweden, Zimbabwe, and the United Arab Emirates.
OTHER FINANCIAL ASSISTANCE SOURCES
Students at AIU participate in state grant programs, including most recently
Georgia's HOPE Scholarship and Tuition Equalization Grant programs. In fiscal
1998, approximately $409,000 or 1.0% of the Company's net revenues was derived
from state grant programs. In addition, certain students attending AIU receive
financial aid provided by the United States Department of Veterans Affairs, the
United States Department of the Interior (Bureau of Indian Affairs), and the
Rehabilitative Services Administration of the DOE (vocational rehabilitation
funding). In fiscal 1998, financial assistance from such federal programs
equaled less than 0.2% of the Company's net revenues. AIU also provides
institutional scholarships to qualified students. In fiscal 1998, institutional
scholarships had a value equal to approximately $843,000 or 2.0% of the
Company's net revenues.
FEDERAL OVERSIGHT OF TITLE IV PROGRAMS
The substantial amount of federal funds disbursed through Title IV Programs
and the large numbers of participating students and institutions have led to
instances of fraud, waste, and abuse. As a result, the United States Congress
has required the DOE to increase its level of regulatory oversight of schools to
ensure that public funds are properly used. Therefore, to obtain and maintain
eligibility to participate in the Title IV Programs, AIU must comply with the
rules and regulations set forth in the HEA and the Regulations thereunder. An
institution must obtain certification by the DOE as an "eligible institution" to
participate in Title IV Programs. Certification as an "eligible institution"
requires, among other things, that the institution be authorized to offer its
educational programs by the state in which it operates. It must also be
accredited by an accrediting agency recognized by the DOE.
The HEA provides standards for institutional eligibility to participate in
the Title IV Programs. The standards are designed, among other things, to limit
dependence on Title IV Program funds, prevent schools with unacceptable student
loan default rates from participating in Title IV Programs, and, in general,
require institutions to satisfy certain criteria intended to protect the
integrity of the federal programs, including criteria regarding administrative
capability and financial responsibility. A school that has been certified as
eligible to participate in the Title IV Programs continues to remain eligible
for the period of its certification, which is generally four years. A school
must apply for a renewal of its
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certification prior to its expiration, and must demonstrate compliance with the
eligibility requirements in its application.
Under certain circumstances, the DOE may provisionally certify a school to
participate in Title IV Programs. Provisional certification may be imposed when
a school undergoes a change in ownership resulting in a change of control or
when a school is reapplying for certification, if the school (i) does not
satisfy all the financial responsibility standards, (ii) has a cohort default
rate of 25% or more in any single fiscal year of the three most recent federal
fiscal years for which data is available, and (iii) under other circumstances
determined by the Secretary of Education. Provisional certification may last no
longer than three years. Provisional certification differs from certification in
that a provisionally certified school may be terminated from eligibility to
participate in the Title IV Programs without the same opportunity for a hearing
before an independent hearing officer and an appeal to the Secretary of
Education as is afforded to a fully certified school faced with termination,
suspension, or limitation of eligibility prior to expiration of its
certification. Additionally, the DOE may impose such further conditions on a
provisionally certified institution's eligibility to continue participating in
the Title IV Programs as the DOE deems necessary. In connection with the
Company's acquisition of American European in October 1996 which resulted in a
change of control of AIU, the Company has been provisionally certified to
participate in Title IV Programs.
COHORT DEFAULT RATES. A significant component of the Congressional
initiative aimed at reducing fraud, waste, and abuse was the imposition of
limitations on participation in Title IV Programs by institutions whose former
students defaulted on the repayment of federally guaranteed student loans at an
"excessive" rate. Since the DOE began to impose sanctions on institutions with
cohort default rates above certain levels, more than 600 institutions have lost
their eligibility to participate in some or all Title IV Programs. However, many
institutions, including AIU, have responded by implementing aggressive student
loan default management programs aimed at reducing the likelihood of student
defaults.
A school's cohort default rate under the FFEL program is calculated on an
annual basis as the rate at which student borrowers scheduled to begin repayment
on their loans in one federal fiscal year default on those loans by the end of
the next federal fiscal year. Any institution whose FFEL cohort default rates
equal or exceed 25% for three consecutive years will no longer be eligible to
participate in that program or the Direct Loan program for the remainder of the
federal fiscal year in which the DOE determines that such institution has lost
its eligibility and for the two subsequent federal fiscal years. In addition, an
institution whose FFEL cohort default rate for any federal fiscal year exceeds
40% may have its eligibility to participate in all Title IV Programs limited,
suspended, or terminated. Since the calculation of FFEL cohort default rates
involves the collection of data from many non-governmental agencies (i.e.,
lenders and private guarantors), as well as the DOE, the HEA provides a formal
process for the review and appeal of the accuracy of FFEL cohort default rates
before the DOE takes any action against an institution based on its FFEL cohort
default rates. An institution may continue to participate in the FFEL and Direct
Loan programs during the pendency of the appeal process.
AIU has had FFEL cohort default rates of less than 25% for three consecutive
federal fiscal years. AIU had a published 1995 FFEL cohort default rate and a
1994 rate below 25%. For federal fiscal 1993 and 1994, the FFEL cohort default
rate for all borrowers at AIU was 14.3% and 14.0%, respectively. The average
FFEL cohort default rate for all proprietary institutions for federal fiscal
1993 and 1994 was 26.5% and 21.1%, respectively. For federal fiscal year 1995,
the preliminary FFEL cohort default rate for all borrowers at AIU was 18.5%.
Preliminary cohort default rates are subject to revision by the DOE based on
information that schools and guaranty agencies identify and submit to the DOE
for review, in order to correct errors. Any such adjustment will be made by the
DOE at the time that final rates are officially published. In connection with
AIU's preliminary default rate issued for the federal fiscal year 1995, AIU
received a preliminary default rate of 18.5%. However, after submitting
corrections, AIU's default rate was adjusted to a final rate of 16.7%.
Accordingly, AIU has submitted such corrections for its 1996 preliminary cohort
default rate and anticipates that the DOE will reduce AIU's cohort default rate
from a preliminary
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rate of 14.1% to a final rate of 13.7%, although there can be no assurance that
the DOE will agree with the corrections submitted by AIU with regard to its 1996
preliminary cohort default rate. The Company understands that the DOE
anticipates issuing official 1996 FFEL cohort default rates in October 1998, and
the Company expects preliminary 1997 FFEL cohort default rates to be issued in
early calendar year 1999.
If an institution's FFEL cohort default rate equals or exceeds 25% in any of
the three most recent federal fiscal years, that institution may be placed on
provisional certification status for up to four years. Provisional certification
does not limit an institution's access to Title IV Program funds; however, an
institution with provisional status is under closer review by the DOE and may be
subject to summary adverse action if it commits violations of Title IV Program
requirements. To the Company's knowledge, the DOE reviews an institution's
compliance with the cohort default rate thresholds only when that school is
otherwise subject to a DOE certification review. AIU has not had a FFEL cohort
default rate of 25% or greater during any of the last three fiscal years.
INCREASED REGULATORY SCRUTINY. The 1992 reauthorization of the HEA
contained a three-part initiative, referred to as the Program Integrity Triad,
intended to increase regulatory scrutiny of postsecondary education
institutions. Part one of that initiative required each state to establish a
State Postsecondary Review Entity ("SPRE") to review certain institutions to
determine their eligibility to continue participating in Title IV Programs.
However, the United States Congress has declined to provide funding for SPREs in
appropriations legislation that has been signed into law, the DOE has not
requested any future funding for SPREs, and the United States House of
Representatives has passed legislation repealing SPRE authority.
Part two of the Program Integrity Triad expanded the role of accrediting
agencies in the oversight of institutions participating in Title IV Programs. As
a result, the accrediting agencies that accredit AIU have increased the depth
and intensity of reviews and have expanded examinations in such areas as
financial responsibility and timeliness of student refunds. The Program
Integrity Triad provisions also require each accrediting agency recognized by
the DOE to undergo comprehensive periodic reviews to ascertain whether such
accrediting agency is adhering to required standards. No accrediting agency or
association may be approved by the DOE for a period of more than five years.
SACS, AIU's primary accrediting agency, has been reviewed by the DOE under the
Program Integrity Triad provisions and reapproved for continued recognition by
the DOE.
Part three of the Program Integrity Triad tightened the standards to be
applied by the DOE in evaluating the financial responsibility and administrative
capability of institutions participating in Title IV Programs, and mandated that
the DOE periodically review the eligibility and certification to participate in
Title IV Programs of every such eligible institution. By law, all institutions
are required to undergo such a recertification review by the DOE by 1997 and
every four years thereafter. Under these standards, AIU would be evaluated by
the DOE more frequently than in the past. A denial of recertification would
preclude AIU from continuing to participate in Title IV Programs.
FINANCIAL RESPONSIBILITY STANDARDS. All institutions participating in Title
IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements as part of the DOE's quadrennial recertification process and also
annually as each institution submits its audited financial statements to the
DOE.
In November 1997, the DOE published new regulations regarding financial
responsibility, which are effective on July 1, 1998. The new regulations take
effect for audited financial statements submitted to the DOE on or after July 1,
1998 and will apply to the Company's fiscal years commencing June 1, 1997 and
thereafter. The new standards replace the acid test ratio, the tangible net
worth standard, and the net operating results test with three different ratios:
an equity ratio, a primary reserve ratio, and a net income ratio. The equity
ratio measures an institution's capital resources, ability to borrow, and
financial viability. The primary reserve ratio measures an institution's ability
to support current operations from expendable resources. The net income ratio
measures the ability to operate at a profit. The results of each ratio are
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assigned a strength factor on a scale from negative 1.0 to positive 3.0, with
negative 1.0 reflecting financial weakness and a positive 3.0 reflecting
financial strength. An institution's strength factors are then evaluated based
on an assigned weighting percentage for each ratio. The weighted scores for the
three ratios are then added together to produce a composite score for the
institution. The composite score must be at least 1.5 for the institution to be
deemed financially responsible by the DOE without the need for further financial
monitoring. If the institution's composite score is less than 1.5, but equal to
or greater than 1.0, the institution may continue in the Title IV Programs for a
maximum period of three (3) years, subject to more rigorous financial aid
disbursement and financial monitoring requirements by the DOE. Based on the
Company's interpretation of the application of these new standards to the
Company's financial statements for the fiscal year ended May 31, 1998, the
Company's calculations result in a composite score of 1.5 on a consolidated
basis.
An institution that is determined by the DOE not to meet the standards of
financial responsibility on the basis of failing to meet one or more of the
specified numeric indicators is nonetheless entitled to participate in Title IV
Programs if it can demonstrate to the DOE that it is financially responsible on
an alternative basis. An institution may do so by demonstrating, with the
support of a statement from a certified public accountant, proof of prior
compliance with the numeric standards and other information specified in the
regulations, and that its continued operation is not jeopardized by its
financial condition. Alternatively, an institution may post surety either in an
amount equal to one-half of the total Title IV Program funds received by
students enrolled at such institution during the prior year or in an amount
equal to 10% of such prior year's funds and agree to disburse those funds only
on an "as-earned" basis. The DOE has interpreted this surety condition to
require the posting of an irrevocable letter of credit in favor of the DOE.
In addition to the financial responsibility standards, an institution is
required to make timely refunds when a student who receives Title IV Program
funds withdraws from an institution. Depending on when during the academic term
the student withdraws, the institution is required to refund all or a portion of
the Title IV Program funds paid by the withdrawing student. Beginning with the
1995-1996 award year, an institution that has failed to make all Title IV
Program refunds on a timely basis during the previous two years is required to
post a letter of credit in favor of the DOE equal to 25% of the Title IV Program
refunds that the institution was required to make for the previous year. During
the past three years AIU has made all Title IV Program refunds on a timely
basis.
ADMINISTRATIVE CAPABILITY. The Regulations set certain standards of
"administrative capability" which a school must satisfy to participate in the
Title IV Programs. These criteria require, among other things, that the school
comply with all applicable Title IV Regulations, have capable and sufficient
personnel to administer the Title IV Programs, have acceptable methods of
defining and measuring the satisfactory academic progress of its students,
provide financial aid counseling to its students, timely submit all reports and
financial statements required by the Regulations, and have cohort default rates
not equal to or in excess of 25% for any one of the three most recent fiscal
years. See "--Cohort Default Rates."
Failure to satisfy any of the criteria may lead the DOE to determine that
the school lacks the requisite administrative capability and may subject the
school to provisional certification when it seeks to renew its certification as
an eligible institution, or may subject it to a fine or to a proceeding for the
limitation, suspension, or termination of its participation in Title IV
Programs. Proceedings to fine, limit, suspend, or terminate an institution are
conducted before an independent hearing officer of the DOE and are subject to
appeal to the Secretary of Education, prior to any sanction taking effect.
Thereafter, judicial review may be sought in the federal courts pursuant to the
federal Administrative Procedures Act.
RESTRICTIONS ON OPERATING ADDITIONAL CAMPUSES. The HEA generally requires
that certain institutions, including proprietary schools, be in full operation
for two years before applying to participate in Title IV Programs. However,
under the HEA and the Regulations, an institution that is certified to
participate in Title IV Programs may establish an additional location within a
state or selected territory of the United
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States (as identified in the Regulations) and apply to participate in Title IV
Programs at that location without reference to the two-year requirement, if such
additional location satisfies all other applicable requirements. In addition, a
school which undergoes a change in ownership resulting in a change of control
must be reviewed and recertified for participation in Title IV Programs under
its new ownership. See "--Change of Control." Pending recertification, the DOE
suspends Title IV Program funding to that school's students. If a school is
recertified, it will be on a provisional basis. During the time a school is
provisionally certified, it may be subject to summary adverse action for
violations of Title IV Program requirements, but provisional certification does
not otherwise limit an institution's access to Title IV Program funds. The
Company's expansion plans are based, in part, on its ability to add additional
locations and acquire schools that can be recertified.
Certain of the state authorizing agencies and accrediting agencies with
jurisdiction over AIU also have requirements that may, in certain instances,
limit the ability of the Company to open a new school, acquire an existing
school, or establish an additional location of an existing school. The Company
does not believe that those standards will have a material adverse effect on the
Company or its expansion plans.
CHANGE OF CONTROL. Upon a change in ownership resulting in a change of
control of the Company, as defined in the HEA and the Regulations, AIU would
lose its eligibility to participate in Title IV Programs for an indeterminate
period of time during which it applies to regain eligibility. A change of
control also could have significant regulatory consequences for the Company at
the state level and could affect the accreditation of AIU's campuses.
In connection with the Company's acquisition of American European in October
1996, AIU was required to be recertified by the DOE as well as obtain the
reaccreditation of SACS. In addition, AIU's campus in Los Angeles was required
to be reauthorized by the State of California. The DOE has granted AIU
provisional certification to participate in Title IV Programs which provisional
certification will expire in December 1999. Because the acquisition of American
European was found to be an excluded transaction under the Regulations, however,
AIU's Title IV Program funding was not suspended during the DOE's review of its
recertification application. On August 5, 1996 the change of control was
approved by SACS and following a Substantive Change Visit to AIU in April 1997,
as required to ensure compliance with accreditation standards following a change
of control, on April 18, 1997 SACS issued a final report on AIU with no
recommendations. On August 14, 1996, AIU's Los Angeles campus was reapproved by
the State of California's Council for Private Postsecondary and Vocational
Education (the "California Council").
The DOE's regulations provide that after a Company becomes publicly-traded,
a change of control occurs when a report on Form 8-K is required to be filed
with the Commission disclosing a change of control. Most states and accrediting
agencies have similar requirements, but they do not provide a uniform definition
of change of control. If the Company were to lose its eligibility to participate
in Title IV Programs for a significant period of time pending an application to
regain eligibility, or if it were determined not to be eligible, its operations
would be materially adversely effected. The possible loss of Title IV
eligibility resulting from a change of control may also discourage or impede a
tender offer, proxy contest, or other similar transaction involving control of
the Company.
THE "85/15 RULE." Under a provision of the HEA commonly referred to as the
"85/15 Rule," a proprietary institution, such as AIU, would cease being eligible
to participate in Title IV Programs if, on a cash accounting basis, more than
85% of its revenues for the prior fiscal year was derived from Title IV
Programs. Any school that violates the 85/15 Rule immediately becomes ineligible
to participate in Title IV Programs and is unable to apply to regain its
eligibility until the following fiscal year. Each year, every institution
participating in the Title IV Programs must submit consolidated financial
statements demonstrating compliance with this standard. The Company has
calculated that, since this requirement took effect in fiscal 1995, AIU has not
derived more than 27% of its revenues from Title IV Programs for any fiscal
year, and during fiscal 1998, approximately 27% of AIU's revenues were derived
from Title IV
16
<PAGE>
Programs. The Company regularly monitors compliance with this requirement in
order to minimize the risk that AIU would derive more than 85% of its revenues
from Title IV Programs for any fiscal year. If AIU appears likely to approach
the 85% threshold, the Company would evaluate the appropriateness of making
changes in student funding and financing to ensure compliance.
BRANCHING AND CLASSROOM LOCATIONS. The Regulations contain specific
requirements governing the establishment of new main campuses, branch campuses,
and classroom locations at which any student receives not less than 50% of his
or her instruction. In addition to classrooms at campuses, locations affected by
these requirements include the business facilities of client companies used by
AIU. AIU has obtained approval for all locations required to be approved by the
Regulations. Should the DOE change its regulations with respect to this approval
process, or delay approvals of new locations beyond the current approval time
rate, the Company's business strategy may be impacted negatively.
RESTRICTIONS ON PAYMENT OF BONUSES, COMMISSIONS, OR OTHER
INCENTIVES. Schools participating in Title IV Programs are prohibited from
providing any commission, bonus, or other incentive payment based directly or
indirectly on success in securing enrollments or financial aid to persons
engaged in any student recruitment, admission, or financial aid awarding
activity (the "Incentive Compensation Rule"). The DOE has not provided specific
regulations with respect to this requirement. If the DOE were to determine that
AIU's methods of compensation do not comply with the Incentive Compensation
Rule, AIU could be required to modify its compensation system, repay certain
previously disbursed Title IV Program funds, pay administrative fines, or lose
its eligibility to participate in Title IV Programs. The Company believes AIU's
compensation policies do not violate the Incentive Compensation Rule.
STATE AUTHORIZATION
AIU's campuses in Atlanta and Los Angeles are authorized to offer education
programs and grant degrees or diplomas by the States of Georgia and California,
respectively. In addition, because AIU's campuses located in London and Dubai
are operated under a corporation whose parent corporation is organized under the
laws of the District of Columbia, the London and Dubai campuses in addition to
the District of Columbia campus are authorized to offer education programs and
grant degrees or diplomas by the Education Licensure Commission of the District
of Columbia. The level of regulatory oversight varies substantially from state
to state. In some states, campuses are subject to licensure by the state
education agency and also by a separate higher education agency. State laws
establish standards for instruction, qualifications of faculty, location and
nature of facilities, financial policies and responsibility, and other
operational matters. State laws and regulations may limit the ability of the
Company to obtain authorization to operate in certain states or to award degrees
or diplomas or offer new degree programs. As discussed below, California
prescribes standards of financial responsibility that are different from those
prescribed by the DOE. The Company believes that AIU's campuses in Atlanta, Los
Angeles, London, Dubai, and the District of Columbia are in substantial
compliance with state authorizing and licensure laws.
CALIFORNIA. In January 1991, the State of California adopted legislation
that requires private, postsecondary educational institutions to meet certain
fiscal tests in order to continue operating in the state. These fiscal tests
include three requirements: (i) not having an operating loss in each of an
institution's two most recent fiscal years; (ii) having positive net worth in
its latest fiscal year; and (iii) maintaining a ratio of current assets to
current liabilities of 1.25:1 or greater. For the year ended May 31, 1998, the
AIU's Los Angeles campus had satisfied each of these tests. The California
Council also has discretion under this statute to allow an educational
institution to continue operating if it does not satisfy the fiscal tests, if
the institution can demonstrate that it has maintained sufficient financial
resources to sustain all of its promised educational services. Accordingly, if
AIU's campus in Los Angeles fails to meet one of the above-described tests, the
Company has the opportunity to demonstrate to the California Council its
financial strength and ability to continue to operate. In connection with
granting authority for
17
<PAGE>
continued operations, California law also requires an on-site visit to all
postsecondary institutions having accreditation from a regional accrediting
association other than the Western Association of Colleges and Schools. The
California Council conducted a visit to AIU's campus in Los Angeles in June 1996
and recently issued its report, granting approval for continued degree-granting
operation for the maximum four-year period.
GEORGIA. Until May 1, 1997 AIU's campus in Atlanta was exempt from the
regulatory oversight of the State of Georgia. For fiscal 1998, AIU agreed,
however, to subject its operations to the oversight of the State of Georgia in
order to become eligible to participate in Georgia's HOPE Scholarship and
Tuition Equalization Grant programs as well as to use the term "University" as
part of its name. In the State of Georgia, for-profit institutions such as AIU
are reviewed by the Georgia Nonpublic Postsecondary Education Commission
("NPEC"). NPEC regulations require for-profit institutions to meet minimum
standards relating to educational quality, ethical business practices, health
and safety, and fiscal responsibility. These standards include, but are not
limited to, requirements that the institution demonstrate that it has adequate
facilities and equipment, that its instructors and administrators have the
requisite education and experience, and that the quality and content of each
program meet stated objectives. Other NPEC standards address such areas as the
institution's library resources, catalog disclosures, support services, student
complaints, advertising, admissions, recruitment, student refunds, and student
records. In order to demonstrate fiscal responsibility, NPEC requires that the
institution have sufficient resources to support its operation for at least the
length of its degree program, funds to operate which are not limited to current
tuition, and accounts receivable and funds available to operate the institution
for at least the quarter or semester, as the case may be. NPEC recently
determined that AIU satisfied its requirements and issued a certificate of
authorization for the period of May 1, 1997 through April 30, 1998. The Company
must seek renewal of this authorization on a yearly basis and is in the process
of submitting its annual report for such authorization.
DISTRICT OF COLUMBIA. AIU's campuses in London, Dubai, and the District of
Columbia are subject to the regulatory oversight of the District of Columbia
Education Licensure Commission (the "Licensure Commission"). The Licensure
Commission's standards governing degree granting institutions address such areas
as administration, the adequacy of the institution's finances, faculty
qualifications, curricula, admissions, procedures for assessing student
outcomes, student services, the adequacy of the library and equipment,
maintenance of student records, and advertising. Additionally, in connection
with conferring degree-granting status, the Licensure Commission requires an
on-site visit to all post-secondary institutions with accreditation under the
laws of the District of Columbia. The Licensure Commission conducted a visit to
AIU's campuses in London and Dubai in December 1997 and will conduct a visit to
AIU's campus in the District of Columbia in the Fall of 1999. The Licensure
Commission granted AIU a license which will remain in effect until June 30,
2001. These licenses are subject to periodic review under various circumstances
including a change in ownership and changes in accreditation status, location,
and degrees or certificates offered.
FLORIDA. The State of Florida through its State Board of Independent
Colleges and Universities (SBICU) regulates the establishment of in-state and
out-of-state higher educational enterprises within the territorial jurisdiction
of the state. The SBICU utilizes a multi-stage process by which to grant
institutions permission to operate and move through a series of progressive
steps toward "full approval." Each approval stage is accompanied by a mandated
report and an appearance before the SBICU in public session. Two of the four
stages are preceded by visitations of staff or a peer review team to the Florida
location. AIU was granted Temporary Licensure in April of 1998 and moved to
Level I Provisional Licensure in July of that same year. A staff member visited
the parent campus for information collection purposes and further analysis of
the institution prior to the July action. AIU is currently in the process of
establishing its Florida location and working toward achievement of the next
approval stage. AIU is presently authorized to advertised, admit students, and
operate an institution of higher education in Florida.
18
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Steve Bostic.................................. 55 Chairman of the Board and Chief Executive Officer
Stephen G. Franklin, Sr....................... 51 President, Chief Academic Officer and Director
Donald J. Blankers............................ 59 Chief Financial Officer
Barbara S. Butterfield........................ 58 Senior Vice President, Human Resources
Douglas C. Chait.............................. 34 Vice President, Corporate Development and Secretary
Eric R. Fliegel............................... 36 Chief Information Officer
</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 AIU's Governing Board, and since June 1997, Mr. Bostic has
served as the President of AIU. Prior to founding the Company in 1996, from 1993
to 1996 Mr. Bostic was the Chairman of the Board of EduTrek Systems, Inc. and,
from 1989 to 1993, Mr. Bostic was the chairman of the Board of Delphi
Technology, Inc., a company specializing in the scientific development and
application of cognitive-based learning systems. Mr. Bostic was the principal
owner and Chairman of American Photo Group, an operator of consumer photo
processing labs, from 1981 to 1987. In addition, Mr. Bostic serves as a member
of the Board of Trustees of Presbyterian College, the Dean's Advisory Council of
the Indiana School of Business, and the Board of the School of Public Policy at
Georgia Institute of Technology. Mr. Bostic has more than ten years of
experience in the educational arena.
STEPHEN G. FRANKLIN, SR. has served as the President of the Company since
July 1997, Chief Academic Officer since April 1997 and as a member of the Board
of Directors of the Company since June 1997. Prior to his appointment as
President, Dr. Franklin served as Executive Vice President of the Company from
April to July 1997. Since October 1996, Franklin has also served on the AIU's
Governing Board. Prior to joining the Company, Dr. Franklin served as the
Associate Dean of Executive Education at the Goizueta Business School of Emory
University from 1995 to 1997 where he developed and delivered executive
education programs for companies. Prior to serving as Associate Dean, Dr.
Franklin was a tenured professor of Business Administration of the Goizueta
Business School of Emory University from 1978 to 1984. At Emory, Dr. Franklin
focused his academic research on change management, team-based anticipating
learning strategies, and entrepreneurship in organizations and has co-authored
two management textbooks. Dr. Franklin established and, from March 1988 to 1995,
owned Global Access Learning, Inc., an international executive education and
management development firm specializing in developing custom management
programs for global companies. Prior to that time, from 1984 to 1988, Dr.
Franklin was the Executive Vice President and principal shareholder in Financial
Service Corporation, an independent financial planning broker-dealer.
DONALD J. BLANKERS has served as the Chief Financial Officer of the Company
since September 1996 and is a member of the American Institute of Certified
Public Accountants and Financial Executives Institute. Prior to joining the
Company, from 1995 to 1996, Mr. Blankers served as Acting Chief Financial
Officer for Alcott Staff Leasing, Inc. From 1994 to 1995, Mr. Blankers was a
consultant for CFO Consulting and, from 1993 to 1994, Mr. Blankers served as
Vice President and Chief Financial Office for Cryolife, Inc. From 1991 to 1993,
Mr. Blankers served as an independent consultant and, from 1983 to 1991, Mr.
Blankers served in various capacities with National Data Corporation, including
Senior Vice President and Chief Financial Officer from 1987 to 1991 and Vice
President, Controller, and Treasurer from 1983 to 1987.
BARBARA S. BUTTERFIELD is the Senior Vice President of Human Resources, a
position she has held since March 1997. Prior to joining the Company, from 1991
to 1997, Dr. Butterfield was the Vice President of Human Resources and Vice
President of Faculty and Staff Services at Stanford University, Palo Alto,
19
<PAGE>
California where she provided long-range planning, analysis and strategies in
such areas as risk management, environmental health and safety, faculty/staff
housing, and human resources. Prior to Stanford University, Dr. Butterfield was
the Vice President of Human Resources at the University of Pennsylvania from
1987 to 1991. From 1986 to 1987, Dr. Butterfield was the Director of Human
Resources Administration at Duke University and from 1983 to 1986, was the
Director of Personnel Administration at Michigan State University.
DOUGLAS C. CHAIT has served as the Vice President, Corporate Development,
and Secretary since October 1996. Prior to joining the Company, Mr. Chait was
the Director of Corporate Development for EduTrek Systems, Inc. from May 1994 to
October 1996 where he was responsible for identifying and pursuing joint venture
and acquisition opportunities in the corporate training and education
industries. From September 1992 to May 1994, Mr. Chait attended the Goizueta
Business School of Emory University where he graduated with an M.B.A. in finance
and strategy.
ERIC R. FLIEGEL has served as the Chief Information Officer since April
1997. Prior to joining the Company, from 1995 to 1997, Mr. Fliegel served as the
Executive Director of Information Services for Emory Healthcare where he was
responsible for providing information services to such Emory Healthcare entities
as Emory University Hospital, Crawford Long Hospital, and the Emory Clinic. From
1988 to 1995, Mr. Fliegel served as the Assistant Dean of Information Services
for the Goizueta Business School of Emory University where he managed the
school's information systems, and from January 1981 to April 1988, Mr. Fliegel
was the Associate Director of Computing for the William E. Simon Graduate School
of Business Administration.
ITEM 2. PROPERTIES
AIU maintains well-equipped campuses and facilities that support the
university's focus on technology in education. Classrooms and team rooms provide
a comfortable but professional environment to facilitate collaborative learning
and better prepare students for the workplace. An advanced technical
infrastructure allows students to work on-line from thousands of data ports,
communicating with each other, instructors, and the world via the internet. In
the undergraduate areas of study, fashion and interior design studios feature
sophisticated equipment. The visual communication facilities include
professionally equipped darkrooms and photography studios as well as classrooms
with drafting tables and other studio supplies. Video production studios house
advanced sound and video equipment. Macintosh and PC labs feature computers and
printers and the latest software available, including programs for
computer-aided design. The Library Resource Center on each campus includes audio
visual and interior design resources.
The Company leases all of its administrative and educational facilities. The
table below sets forth certain information regarding the Company's facilities as
of May 31, 1998:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE EXPIRATION
- ----------------------------------------------------------------------- --------------- ------------------------
<S> <C> <C>
Atlanta, GA
AIU.................................................................. 60,800 January 31, 2009
AIU.................................................................. 10,400 December 31, 1998
Headquarters......................................................... 18,400 December 31, 1999
Corporate Education.................................................. 2,200 March 31, 2001
Los Angeles, California............................................ 32,900 From September 30,
1998 to May 31, 1999
London, England.................................................... 46,000 November 27, 2005
Dubai, United Arab Emirates........................................ 34,300 Leased by MEC
</TABLE>
Typically, AIU's facilities occupy an entire building or several floors or
portions of floors in a building. Leases typically have terms of six months to
ten years, with zero to five year renewal options. The Company also leases
facilities for student parking and housing.
20
<PAGE>
The Company entered into a 138-month lease to begin in July of 1998 for a
75,700 square foot building in the North Atlanta area for its Dunwoody campus.
The Company also entered into a 127-month lease to begin July of 1998 for a
32,600 square foot space in the District of Columbia for a new campus.
The Company actively monitors facility capacity in light of current
utilization and projected enrollment growth. Management believes that in order
to accommodate projected increases in student enrollment at each of its campuses
over the next two years, AIU may be required to acquire additional space. The
Company believes that it can acquire additional capacity on acceptable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings, the adverse outcome of
which, in management's opinion, would have a material adverse effect on the
Company's operating results.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of the Company during
the fourth quarter ended May 31, 1998.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Class A Common Stock began trading on the Nasdaq National
Market ("Nasdaq") under the symbol "EDUT" during the second quarter of fiscal
year 1998 on September 24, 1997. Prior to that time, the Company's Class A
Common Stock was not listed or traded on any organized market. The Company's
Class B Common Stock, which does not trade on any market and which is held
entirely by the Company's Chairman and Chief Executive Officer and his
affiliates, may be converted into Class A Common Stock, in whole or in part, at
any time on the basis of one share of Class A Common Stock for each share of
Class B Common Stock.
The following table sets forth, for the periods indicated, the reported high
and low sale prices of the Company's Class A Common Stock, as reported by
Nasdaq:
<TABLE>
<CAPTION>
YEAR ENDED
MAY 31, 1998
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
Second Quarter (September 24, 1997 through November 30, 1997).......................... 28.75 18.00
Third Quarter ended February 28, 1998.................................................. 26.00 20.75
Fourth Quarter ended May 31, 1998...................................................... 28.25 18.50
</TABLE>
STOCKHOLDERS
According to the records of the Company's transfer agent, the Company had 47
and 3 holders of record of Class A and Class B Common Stock, respectively, at
July 31, 1998. The Company believes that a substantially larger number of
beneficial owners hold such shares in depository or nominee form.
DIVIDENDS AND DISTRIBUTIONS
The Company has never declared nor paid cash dividends on its Common Stock
and does not anticipate paying any cash dividends on its Common Stock in the
near future. It is the current policy of the Company's Board of Directors to
retain earnings to finance the operations and expansion of the Company's
business. Holders of Class A Common Stock are entitled to receive cash dividends
on at least an equal per share basis as holders of Class B Common Stock if and
when such dividends are declared by the Board of Directors of the Company.
SALES OF UNREGISTERED SECURITIES
On June 17, 1997, September 24, 1997, and December 3, 1997, following the
exercise of warrants to purchase shares of Class A Common Stock by three
holders, the Company issued 257,110, 444,318, and 177,723 shares, respectively,
of Class A Common Stock for purchase prices of $359.95, $622.05, and $248.81,
respectively.
The issuances of the securities described above were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended, as a transaction by an issuer not involving a public offering.
The securities were acquired by the purchasers for investment and with no view
toward the resale or distribution thereof. The purchasers had a preexisting
relationship with the Company or its founder, the offers and sales were made
without any public solicitation, and the stock certificates bear restrictive
legends. No underwriter was involved in the transaction and no commissions were
paid.
22
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain consolidated financial and other
operating data for the Company and American European Corporation and
Subsidiaries (the "Predecessor"). This information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 of this Form 10-K and the Company's and
Predecessor's Consolidated Financial Statements and Notes thereto included in
Item 8 of this Form 10-K.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE, PERCENTAGE, AND ENROLLMENT DATA)
<TABLE>
<CAPTION>
THE COMPANY(1)
--------------------- THE PREDECESSOR(1)(2)
------------------------------------------------
FISCAL YEAR ENDED MAY PERIOD FROM
31, JUNE 1, 1996 FISCAL YEAR ENDED MAY 31,
--------------------- THROUGH -------------------------------
1998 1997 OCTOBER 8, 1996 1996 1995 1994
--------- ---------- --------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(3):
Net revenues............................. $ 41,914 $ 23,590 $ 6,189 $ 26,493 $ 23,696 $ 20,654
Cost of education and facilities....... 16,927 9,014 3,256 11,144 10,051 8,611
Selling and promotional expenses....... 6,321 2,428 1,335 3,614 3,083 3,165
General and administrative expenses.... 10,516 5,468 2,739 6,677 6,115 6,264
Acquisition costs...................... 487 -- -- -- -- --
Rents paid to majority shareholder..... -- -- 49 150 145 146
Amortization of goodwill............... 1,008 696 -- -- -- --
--------- ---------- ------- --------- --------- ---------
Total costs and expenses............... 35,259 17,606 7,379 21,585 19,394 18,186
--------- ---------- ------- --------- --------- ---------
Income (loss) from campus operations..... 6,655 5,984 (1,190) 4,908 4,302 2,468
Income (loss) from management
agreement.............................. 23 479 (21) 127 -- --
--------- ---------- ------- --------- --------- ---------
Income (loss) from operations............ 6,678 6,463 (1,211) 5,035 4,302 2,468
Interest expense......................... 1,328 2,499 258 730 607 440
Interest income--shareholder notes....... -- -- 98 361 153 183
Other income--net........................ 1,539 20 66 72 25 483
--------- ---------- ------- --------- --------- ---------
Income (loss) before income taxes,
minority interest, and extraordinary
item................................... 6,889 3,984 (1,305) 4,738 3,873 2,694
Provision for income taxes(4)............ (2,581) (1,981) -- (107) (124) (148)
--------- ---------- ------- --------- --------- ---------
Income (loss) before minority interest
and extraordinary item................. 4,308 2,003 (1,305) 4,631 3,749 2,546
Minority interest in earnings of American
University in Dubai.................... (1,445) -- -- -- -- --
--------- ---------- ------- --------- --------- ---------
Income (loss) before extraordinary
item................................... 2,863 2,003 (1,305) 4,631 3,749 2,546
Extraordinary loss less applicable income
taxes.................................. (960) -- -- -- -- --
--------- ---------- ------- --------- --------- ---------
Net income............................... $ 1,903 $ 2,003 $ (1,305) $ 4,631 $ 3,749 $ 2,546
--------- ---------- ------- --------- --------- ---------
--------- ---------- ------- --------- --------- ---------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
THE COMPANY(1)
--------------------- THE PREDECESSOR(1)(2)
------------------------------------------------
FISCAL YEAR ENDED MAY PERIOD FROM
31, JUNE 1, 1996 FISCAL YEAR ENDED MAY 31,
--------------------- THROUGH -------------------------------
1998 1997 OCTOBER 8, 1996 1996 1995 1994
--------- ---------- --------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic income per share before
extraordinary item(5).................. $ 0.30 $ 0.29
Basic income per share(5)................ $ 0.20 $ 0.29
Diluted income per share before
extraordinary item(5).................. $ 0.28 $ 0.26
Diluted income per share(5).............. $ 0.19 $ 0.26
Average shares outstanding............... 9,527 7,000
Dilutive effect of stock options and
warrants............................... 681 569
--------- ----------
Average shares outstanding assuming
dilution............................... 10,208 7,569
PRO FORMA DATA:
Income before income taxes, as
reported............................... $ (1,305) $ 4,738 $ 3,873 $ 2,694
Pro forma provision for income
taxes(6)............................... 509 1,848 1,510 1,051
------- --------- --------- ---------
Pro forma net income..................... $ (796) $ 2,890 $ 2,363 $ 1,643
------- --------- --------- ---------
------- --------- --------- ---------
SELECTED OPERATING DATA:
Net cash provided by operating
activities............................. 2,686 1,356 1,413 5,798 5,522 4,375
Net cash provided by (used in) investing
activities............................. (2,045) (31,428) (288) (2,662) (1,507) 725
Net cash provided by (used in) financing
activities............................. 4,510 30,780 (1,197) (3,442) (3,916) (5,030)
AIU fall term enrollment(7).............. 3,045 2,822 2,822 2,441 2,200 2,000
BALANCE SHEET DATA:
Working capital deficiency............... (281) (9,772) (8,696) (8,355) (8,467)
Total assets............................. 58,285 47,671 7,253 6,682 7,190
Long-term debt, including current
portion................................ 1,241 30,075 4,756 2,874 2,333
Shareholders' equity..................... 44,294 7,877 (7,287) (6,166) (4,877)
</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 note 1 of notes to consolidated financial statements.
(2) Because the Company did not acquire the Predecessor until October 8, 1996,
the financial information with respect to the Company for the period from
July 1, 1996 through October 8, 1996 does not include the Predecessor.
EduTrek Systems is included in the financial information of the Company in a
manner similar to a pooling of interests because the Company and EduTrek
Systems were under common control. Financial information for EduTrek Systems
is not included in the Selected Consolidated Financial Data prior to July 1,
1996 because, since its formation in 1992, EduTrek Systems has not generated
revenues and in the years ended December 31, 1992, 1993, 1994, and 1995 and
for the period ended October 8, 1996, EduTrek Systems incurred losses of
$321,000, $90,911, $312,954, $584,627, and $819,430, respectively. Such
amounts are not considered to be relevant to the Company
24
<PAGE>
and the Predecessor because, in prior years, EduTrek Systems had no revenues
and existed solely to provide a corporate structure through which its
controlling shareholder could pursue a variety of opportunities and
activities.
(3) The Company's results of operations are affected by AIU's level of
enrollment which ranges from the highest level during the Fall term
(October-December) to the lowest level during the Summer terms
(June-September). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seasonality."
(4) As a result of its election to be treated as an S Corporation for income tax
purposes, the Predecessor has not been subject to federal and most state
income taxes. Accordingly, the historical provision for income taxes
includes income taxes only for those jurisdictions that do not recognize S
Corporation status.
(5) Income per share information for the Predecessor is not presented as the
amounts are not considered meaningful due to the minimal number of
outstanding shares and the S Corporation election of the Predecessor.
(6) As a result of its election to be treated as an S Corporation for income tax
purposes, the Predecessor has not been subject to federal and most state
income taxes. Accordingly, the historical provision for income taxes
includes income taxes only for those jurisdictions that do not recognize S
Corporation status. The pro forma provision for income taxes (computed under
the provisions of Statement of Financial Accounting Standards No. 109)
reflects provisions that would have been recorded had the Predecessor been a
C Corporation for income tax purposes during the periods shown using an
estimated income tax rate of 40.0%. Prior to the initial public offering,
distributions in the form of cash dividends were made principally to assist
the shareholders with their income tax obligations arising from the
Predecessor's S Corporation status. Such distributions amounted to
$4,068,962, $3,800,000, $4,500,000, and $1,889,694 for the fiscal years
ended May 31, 1994, 1995, and 1996 and for the period from June 1, 1996
through October 8, 1996, respectively.
(7) Represents enrollment data as measured on the first day of each Fall term.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the results of operations and financial
condition of the Company and Predecessor should be read in conjunction with the
"Selected Consolidated Financial Data" and the Company's and Predecessor's
Consolidated Financial Statements and Notes thereto. Unless otherwise specified,
any reference to a "fiscal year" is to a fiscal year ended May 31.
OVERVIEW
EduTrek acquired AIU (formerly The American College) through its acquisition
of the American European Corporation (the "Predecessor") on October 8, 1996.
EduTrek's revenues have increased 102% to $41.9 million for the fiscal year 1998
from $20.7 million for the fiscal year 1994. The number of students attending
AIU has increased 54.5% to 2,920 students at May 31, 1998 from 1,890 students at
May 31, 1994.
EduTrek's principal sources of revenue are tuition, related fees and
payments for student housing collected from students. Other sources of revenue
include sales of textbooks, application fees, other student fees, consulting and
other income. Net revenues are calculated by deducting AIU awarded scholarships
from gross revenues.
AIU's academic year is divided into three 10-week terms (Fall, Winter,
Spring) and two eight-week summer terms (Summer I and Summer II). Summer terms
are shorter and more concentrated, and the two terms combined equal a 10-week
term with respect to their contribution to net revenues. The average term
25
<PAGE>
enrollment levels for Winter, Spring and Summer terms are approximately 95%, 90%
and 85%, respectively, of the Fall benchmark. The following table correlates
EduTrek's fiscal quarters to AIU's academic terms:
<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
Third (December-February) Last third of Fall and four-fifths of Winter
Fourth (March-May) Last fifth of Winter and all of Spring
</TABLE>
AIU's MIT program has four enrollment periods per year: January, April, July
and October. The full-time day program is divided into four 10-week terms, and
the evening program is divided into seven 10-week terms. Enrollment periods for
AIU's BBA evening program occur approximately once per month. Net revenues from
this program vary from period to period based on several factors that include
(1) the aggregate number of students attending classes; (2) the number of
classes held during the period; and (3) the average tuition per credit hour.
Tuition and fees are payable prior to the start of each term, and
historically over 80% of funds are received in advance of the term's start date.
Of the balance, approximately 40% is collected through financial aid; the
remainder is collected under payment schedules established on a student by
student basis. Uncollectible receivables are written off once a year and have
not exceeded 0.75% of annual net revenues during each of the fiscal years in the
three-year period ending May 31, 1998.
Each of AIU's campuses is 100% controlled by EduTrek except the campus in
Dubai, which is 50.1% controlled by EduTrek under a management agreement with an
investment group based in the United Arab Emirates. Under the terms of that
agreement, the investment group provided all the start-up capital required to
open the campus in Dubai and is responsible for ongoing capital expenditures in
exchange for 49.9% of net operating cash flow from that campus. In exchange for
its management services, EduTrek receives 50.1% of the net operating cash flow.
As tuition is received, it is recorded as deferred tuition income, a current
liability. During the term, the applicable portion of deferred tuition income is
recognized as revenue each month based on the aggregate number of credit hours
taken by students during the term. Deferred tuition income historically has been
at its highest level at the end of September before the start of the academic
year and Fall term for two reasons: (1) the Fall term represents the highest
level of enrollment in the year, and (2) some students, principally non-U.S.
students in London, pay a full year's tuition in advance.
EduTrek's expenses consist of cost of education and facilities, selling and
promotional expenses, general and administrative expenses and, effective with
the acquisition of the Predecessor in October 1996, the amortization of
goodwill.
Education costs include salaries of full-time and adjunct faculty,
instructional support, academic administrators, student development and support
costs relating to library and classroom expenses, curriculum costs and royalty
payments to ITI. Facility costs consist of leasing, maintenance and other
occupancy costs relating to campus facilities. Student housing costs are also
included.
Selling and promotional expenses include salaries of personnel involved in
recruitment, admissions and marketing at the campus and corporate office level
and their related costs. The costs of advertising and the production of
marketing materials are also included.
General and administrative expenses include salaries of personnel engaged in
general administration, accounting, financial aid, personnel and compliance at
the campus level, all corporate personnel and their related expenses and the net
costs of EduTrek's airplane, which was sold in the fourth quarter of fiscal
1998. These expenses also include depreciation and amortization of related fixed
assets and deferred costs as well as benefits relating to personnel at the
campus and corporate levels.
26
<PAGE>
As a result of its election to be treated as an S corporation for income tax
purposes, the Predecessor was not subject to federal and state income taxes.
Accordingly, the provision for income taxes for the Predecessor includes income
taxes only for those jurisdictions that do not recognize S corporation status.
Since its inception in July 1996, EduTrek has been a C corporation for income
tax purposes. EduTrek's income tax provision is provided at rates approximating
statutory federal and state rates (approximately 40%).
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain statement of operations items to net revenues for the
Company and Predecessor:
<TABLE>
<CAPTION>
THE COMPANY
--------------------
THE PREDECESSOR
---------------------------------- FISCAL YEAR ENDED
FISCAL YEAR PERIOD FROM JUNE MAY 31,
ENDED MAY 31, 1, 1996 THROUGH --------------------
1996 OCTOBER 8, 1996 1997 1998
--------------- ----------------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................................... 100.0% 100.0% 100.0% 100.0%
Cost of education and facilities................................ 42.1 52.6 38.2 40.4
Selling and promotional expenses................................ 13.6 21.6 10.3 15.1
General and administrative expenses............................. 25.2 44.3 23.2 25.1
Acquisition costs............................................... 0.0 0.0 0.0 1.2
Rents paid to majority shareholder.............................. 0.6 0.8 0.0 0.0
Amortization of goodwill........................................ 0.0 0.0 2.9 2.4
----- ----- --------- ---------
Income (loss) from campus operations............................ 18.5 (19.3) 25.3 15.8
Income (loss) from management agreement......................... 0.5 (0.3) 2.0 0.1
----- ----- --------- ---------
Income (loss) from operations................................... 19.0 (19.6) 27.3 15.9
Interest expense................................................ 2.8 4.2 10.6 3.2
Interest income--shareholder notes.............................. 1.4 1.6 0.0 0.0
Other income--net............................................... 0.3 1.1 0.1 3.7
----- ----- --------- ---------
Income (loss) before income taxes, minority interest, and
extraordinary item............................................ 17.9 (21.1) 16.8 16.4
Provision for income taxes...................................... (0.4) 0.0 (8.4) (6.2)
Income (loss) before minority interest and extraordinary item... 17.5 (21.1) (8.4) 10.2
Minority interest in earnings of American University in Dubai... 0 0 0 (3.4)
Income (loss) before extraordinary item......................... 17.5 (21.1) 8.4 6.8
Extraordinary loss less applicable income Taxes................. 0.0 0.0 0.0 (2.3)
----- ----- --------- ---------
Net income (loss)............................................... 17.5% (21.1)% 8.4% 4.5%
----- ----- --------- ---------
----- ----- --------- ---------
</TABLE>
YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 31, 1997
Prior to the Company's acquisition of the Predecessor in October 1996, the
Company's operations were de minimis as its principal operations primarily
related to the acquisition of the Predecessor. The following discussion compares
the Company's results for the twelve months ended May 31, 1998 to the eleven
month period from July 1, 1996 through May 31, 1997 which, because the
operations of the Company were de minimis prior to October 1996, essentially
presents the operations of the Company for the eight month period ended May 31,
1997.
27
<PAGE>
NET REVENUES. Net revenues increased approximately $18.3 million or 77.7%
from $23.6 million for the eleven months ended May 31, 1997 (the "1997 period")
to $41.9 million for the year ended May 31, 1998 (the "1998 period"). Of this
77.7% increase, 26.6% or approximately $4.9 million was due to the consolidation
of the American University in Dubai ("Dubai") (see note 2 of notes to
consolidated financial statements). The remaining increase in net revenues was
due to an increase in student enrollments and a tuition increase.
COST OF EDUCATION AND FACILITIES. Cost of education and facilities
increased approximately $7.9 million or 88.1% from $9.0 million in the 1997
period to $16.9 million in the 1998 period. Education costs increased
approximately $4.8 million or 89.3% from $5.4 million in the 1997 period to
$10.2 million in the 1998 period due to the consolidation of Dubai and salary
and other cost increases. Facility costs increased approximately $3.1 million or
86.2% from $3.6 million in the 1997 period to $6.7 million in the 1998 period
due to the consolidation of Dubai, rent increases, and an increase in the number
of housing students. Cost of education and facilities increased as a percentage
of net revenues from 38.2% in the 1997 period to 40.4% in the 1998 period.
SELLING AND PROMOTIONAL EXPENSES. Selling and promotional expenses
increased by approximately $3.9 million or 160.3% from $2.4 million in the 1997
period to $6.3 million in the 1998 period. Of the 160.3% increase, 9.2% or
approximately $223,000 was due to the consolidation of Dubai. The remaining
increase was due to increases in salary and other selling and promotional
expenses related to new educational programs such as the Masters in Information
Technology and the Bachelors in Business Administration for adult evening
students. As a percentage of net revenues, selling and promotional expenses
increased from 10.3% in the 1997 period to 15.1% in the 1998 period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $5.0 million or 92.3% from $5.5 million in the 1997
period to $10.5 million in the 1998 period. Of the 92.3% increase, 20.4% or
approximately $1.1 million was due to the consolidation of Dubai. The remaining
increase was primarily due to additions of personnel at the home office to
support the Company's growth. As a percentage of net revenues, general and
administrative expenses increased from 23.2% in the 1997 period to 25.1% in the
1998 period.
ACQUISITION COSTS. Acquisition costs include $487,000 of accounting, legal,
and other costs in the 1998 period associated with the planned combination with
ITI Education Corporation ("ITI"). In March 1998, the Company and ITI announced
that their planned combination was terminated in favor of amended and expanded
licensing arrangements under which the Company acquired rights to ITI's
information technology system.
AMORTIZATION OF GOODWILL. Amortization expenses, principally goodwill
expenses, of approximately $1.0 million in the 1998 period and approximately
$696,000 in the 1997 period were the result of the October 1996 acquisition of
the Predecessor with goodwill costs being amortized over a 40-year period.
INCOME FROM MANAGEMENT AGREEMENT. Income from the Dubai campus management
agreement decreased approximately $456,000 or 95.2% from approximately $479,000
in the 1997 period to approximately $23,000 in the 1998 period due to the
consolidation of Dubai effective September 1, 1997. The portion of income from
operations related to Dubai was approximately $789,000 for the 1998 period,
which represents an increase of 64.7% primarily due to an increase in
enrollment.
INTEREST EXPENSE. Interest expense decreased approximately $1.2 million or
46.9% in the 1998 period compared to the 1997 period as a result of the
application of the proceeds of the Company's September 1997 initial public
offering to retire debt.
OTHER INCOME--NET. Other income--net increased from $20,000 in the 1997
period to approximately $1.5 million in the 1998 period primarily due to a
$991,000 gain on the sale of aircraft, which offset
28
<PAGE>
$481,000 of related net operating costs during the 1998 period. The remaining
increase is related to interest income after the initial public offering and a
one-time sales tax recovery.
MINORITY INTEREST IN EARNINGS OF AMERICAN UNIVERSITY IN DUBAI. Effective
September 1, 1997, the Company modified its joint venture agreement relating to
Dubai, which resulted in the change in presentation of income from management
agreement and minority interest in earnings (see note 2 of notes to consolidated
financial statements).
EXTRAORDINARY LOSS LESS APPLICABLE INCOME TAXES. The extraordinary loss of
$960,000 is the result of the early retirement of debt after the Company's
initial public offering.
YEAR ENDED MAY 31, 1997 (COMPANY) COMPARED TO EIGHT MONTHS ENDED MAY 31, 1996
(UNAUDITED) (PREDECESSOR)
The Company was organized on July 1, 1996 for the purpose of acquiring the
Predecessor and all of the capital stock of EduTrek Systems. Prior to the
Company's acquisition of the Predecessor in October 1996, the Company's
operations were de minimis as its principal operations primarily related to the
acquisition of the Predecessor. The following discussion compares the Company's
results for the eleven month period from July 1, 1996 through May 31, 1997 to
the Predecessor's results for the eight month period from October 8, 1995
through May 31, 1996 which, because the operations of the Company were de
minimis prior to October 1996, essentially presents a comparison of the
operations of the Company for the eight month period ended May 31, 1997 to the
comparable eight months of the prior year. The results of the Company during the
period from July 1996 through October 1996 related primarily to the Company's
acquisition activities, were non-operational in nature and immaterial in amount.
The period from October through May is comprised of AIU's Fall, Winter, and
Spring terms.
NET REVENUES. Net revenues increased approximately $2.7 million or 13.0%
from $20.9 million for the eight months ended May 31, 1996 (the "1996 period")
to $23.6 million for the eleven months ended May 31, 1997 (the "1997 period").
Of this 13.0% increase, 6.2% or approximately $1.3 million was due to an
increase in student enrollment and 6.8% or approximately $1.4 million was the
result of an effective price increase.
COST OF EDUCATION AND FACILITIES. Cost of education and facilities
increased approximately $1.4 million or 18.1% from $7.6 million in the 1996
period to $9.0 million in the 1997 period. Education costs increased
approximately $946,000 or 21.2% from $4.5 million in the 1996 period to $5.4
million in the 1997 period due to salary and other cost increases. Facility
costs increased approximately $433,000 or 13.6% from $3.2 million in the 1996
period to $3.6 million in the 1997 period due to rent increases and an increase
in the number of housing students. Cost of education and facilities increased as
a percentage of net revenues from 36.6% in the 1996 period to 38.2% in the 1997
period.
SELLING AND PROMOTIONAL EXPENSES. Selling and promotional expenses remained
constant at approximately $2.4 million in the 1997 period. Decreases in
advertising of approximately $267,000 were offset by increases in salary and
other selling and promotional expenses. As a percentage of net revenues, selling
and promotional expenses decreased from 11.4% in the 1996 period to 10.3% in the
1997 period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $881,000 or 19.2% from $4.6 million in the 1996 period
to $5.5 million in the 1997 period. The increase was due to costs incurred prior
to the acquisition of the Predecessor and to additions of personnel at the home
office after the acquisition, which expenses were offset in part by a reduction
in costs relating to assets purchased by one of the selling shareholders in
connection with the acquisition of The American College. As a percentage of net
revenues, general and administrative expenses increased from 22.0% in the 1996
period to 23.2% in the 1997 period.
29
<PAGE>
AMORTIZATION OF GOODWILL. Amortization expenses, principally goodwill
expenses, of approximately $696,000 in the 1997 period were the result of the
October 1996 acquisition of the Predecessor with goodwill costs being amortized
over a 40-year period.
INCOME FROM MANAGEMENT AGREEMENT. Income from the Dubai campus management
agreement increased approximately $393,000 or 457.0% from its start-up level of
approximately $86,000 in the 1996 period to approximately $479,000 in the 1997
period.
INTEREST EXPENSE. Interest expense increased approximately $2.2 million or
753.4% from approximately $292,000 in the 1996 period to $2.5 million in the
1997 period due to an increase in borrowing associated with the acquisition of
the Predecessor in October 1996.
OTHER INCOME--NET. Other income decreased approximately $198,000 or 91.2%
from approximately $217,000 in the 1996 period to approximately $19,000 in the
1997 period due to a decrease in interest income.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly financial data for each
of the eight fiscal quarters in the two years ended May 31, 1998. The Company
believes that this information includes all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation of such
quarterly information when read in conjunction with the Company's Consolidated
Financial Statements. The operating results for any quarter are not necessarily
indicative of the results for any future period.
QUARTERLY DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MAY 31, 1997 FISCAL YEAR ENDED MAY 31, 1998
-------------------------------------------------- --------------------------------------------
1ST QTR(1) 2ND QTR(1) 3RD QTR 4TH QTR 1ST QTR 2ND QTR 3RD QTR 4TH QTR
----------- ----------- ----------- ----------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues..................... $ 4,842 $ 6,718 $ 8,803 $ 9,416 $ 6,228 $ 9,312 $ 12,701 $ 13,673
Income (loss) from operations.... (284) 371 2,699 2,466 (526) 768 3,115 3,321
Income (loss) before
extraordinary item............. (333) (714) 935 810 (962) 214 1,778 1,833
Net income (loss)................ $ (333) $ (714) $ 935 $ 810 $ (962) $ (746) $ 1,778 $ 1,833
Basic income (loss) per share
before extraordinary item(2)... $ 0.13 $ 0.12 $ (0.13) $ 0.02 $ 0.17 $ 0.17
Basic income (loss) per
share(2)....................... $ 0.13 $ 0.12 $ (0.13) $ (0.08) $ 0.17 $ 0.17
Diluted income (loss) per share
before extraordinary item(2)... $ 0.12 $ 0.10 N/A $ 0.02 $ 0.16 $ 0.17
Diluted income (loss) per
share(2)....................... $ 0.12 $ 0.10 N/A $ (0.07) $ 0.16 $ 0.17
</TABLE>
- ------------------------
(1) Includes financial data of the Predecessor from June 1, 1996 through October
8, 1996, the date the Company acquired the Predecessor.
(2) Income per share information is not presented for first and second quarter
1997 as the amounts are not considered meaningful due to the minimal number
of outstanding shares and the S Corporation election of the Predecessor.
30
<PAGE>
SEASONALITY IN RESULTS OF OPERATIONS
The Company experiences seasonality in its results of operations primarily
as a result of changes in the level of student enrollments. While the Company
enrolls students throughout the year, the Company's first and second fiscal
quarter enrollments and related revenues generally are lower than the third and
fourth fiscal quarters due to traditionally lower student enrollment levels in
the summer terms (the first fiscal quarter is comprised of the Summer I term and
one-half of the Summer II term; the second fiscal quarter is comprised of
one-half of the Summer II term and two-thirds of the Fall term). First and
second fiscal quarter costs and expenses historically are higher as a percentage
of net revenues as a result of certain fixed costs which are not significantly
affected by the seasonal first and second fiscal quarter declines in net
revenues.
LIQUIDITY AND CAPITAL RESOURCES
EduTrek finances its operating activities and capital requirements,
including debt repayments, principally from cash provided by operating
activities, borrowings under the NationsBank Credit Agreement (the "Credit
Agreement"), and cash proceeds from the initial public offering. The Credit
Agreement provides that, beginning on October 1, 1997, the maximum permitted
borrowings is $1.75 million and on October 1, 1998, the maximum permitted
borrowings is to be reduced to $1.0 million. Amounts outstanding bear interest
at 9.5%. EduTrek has generated positive cash flow from operations over the last
three fiscal years. Cash flow from operations was $1.4 million and $2.7 million
for fiscal 1997 and 1998, respectively. Fiscal 1997 includes the operations of
AIU from October 8, 1996. EduTrek's principal sources of funds as of May 31,
1998 were cash and equivalents of $5.8 million and available borrowings of $1.75
million under the Credit Agreement.
At May 31, 1998, EduTrek had no outstanding borrowings under the Credit
Agreement. The Credit Agreement is renewable annually and any amounts borrowed
are payable upon its termination in October 1, 1999.
Historically, EduTrek's investing activity has primarily consisted of
capital asset purchases. Capital expenditures, excluding capital leases, totaled
approximately $1.4 million, $681,000 and $4.1 million for fiscal 1996, 1997 and
1998. The increase in capital expenditures was principally due to the increase
in the number of locations and to curriculum licensing costs associated with
this expansion.
Total purchases of property, plant and equipment for the year ended May 31,
1999 are expected to range from $4.5 million to $5.5 million. The increase from
1998 is due to: (1) the opening of several new campuses; (2) hardware and
software costs related to the installation of a new management information
system; (3) improvements to EduTrek's computer facilities and telecommunications
equipment at the corporate level; (4) investments in computer technology to
support AIU's information technology curriculum; and (5) increases in normal
recurring capital expenditures due to the overall increases in student and
employment levels resulting from the growth of the business. In addition,
curriculum development costs are not expected to exceed $5.5 million for the
year ended May 31, 1999, including a $900,000 per-site license fee payable to
ITI and additional staff dedicated to curriculum development. Start-up costs are
expected to be no greater than $1.0 million for fiscal 1999, as compared to
$240,000 for fiscal 1998, due to recent and planned campus expansion. EduTrek
expects to fund these capital expenditures for new campuses through cash from
operations and a proposed amendment to the Credit Agreement, which is currently
under negotiation and will increase the Company's borrowing capacity.
The DOE requires that Title IV program funds collected by an institution for
unbilled tuition be kept in a separate cash or cash equivalent account until the
students are billed for the portion of their program related to these funds. In
addition, all funds transferred to EduTrek through electronic funds transfer
programs are held in a separate, cash account until certain conditions are
satisfied. As of May 31, 1998, EduTrek had approximately $220,000 in these
separate accounts to comply with these requirements. These
31
<PAGE>
funds generally remain in these separate accounts for an average of 60 to 75
days from the date of collection. These restrictions on cash have not affected
EduTrek's ability to fund daily operations.
On September 29, 1997, EduTrek completed its initial public offering. Net
proceeds from the offering were approximately $34.6 million. A large portion of
the proceeds were used to repay in full the outstanding principal and interest
under the Term Loan, Subordinate Debt and Revolving Loan incurred with the
acquisition of the American European Corporation.
YEAR 2000 COMPLIANCE
Some of the Company's computer information systems are not currently
configured to recognize the year 2000 in the two digit date field used by such
system. The Company is currently implementing a new centralized information
system to integrate its operations and financial data including admissions,
financial aid, student services, placement services, and default management. The
new system is designed to properly recognize the year 2000 in the two digit date
field. The Company anticipates that the information system will be fully
operational by the end of fiscal 1999 and that it will require a total of
approximately $2 million in fiscal 1998 and fiscal 1999 to develop and implement
this integrated information system although there can be no assurance that the
new system will be implemented on a timely basis or the total expenditures will
not exceed $2 million. Management does not anticipate that the expenditure of
such funds to implement the new computer system will have a material impact on
the Company's results of operations, liquidity, or capital resources. In the
event this information system is not implemented in a timely fashion, management
will evaluate other available options to revise its computer programs, as
necessary, for the effect of the year 2000 problem including, without
limitation, relying on manual record keeping until full compliance is achieved.
EFFECT OF INFLATION
The Company does not believe its operations have been materially affected by
inflation.
ACCOUNTING PRONOUNCEMENTS
In 1997 the Financial Accounting Standards Board issued SFAS 130, "Reporting
Comprehensive Income," and SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." These statements, which are effective for
fiscal years beginning after December 15, 1997, expand or modify disclosures and
will have no impact on the Company's consolidated financial position, results of
operations, or cash flows.
The Company adopted SFAS 128, "Earnings per Share," during fiscal year 1998.
In accordance with SFAS 128, the Company has presented both basic and diluted
per share amounts in the 1998 and 1997 statements of operations presented.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No response is required to this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... 33
Consolidated Balance Sheets................................................................................ 34
Consolidated Statements of Operations...................................................................... 35
Consolidated Statements of Changes in Shareholders' Equity................................................. 36
Consolidated Statements of Cash Flows...................................................................... 37
Notes to Consolidated Financial Statements................................................................. 38
</TABLE>
32
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors of EduTrek International, Inc.:
We have audited the accompanying consolidated balance sheets of EduTrek
International, Inc. (the "Company") and its subsidiaries as of May 31, 1998 and
1997 and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the year ended May 31, 1998 and the
period from July 1, 1996 (date of formation) to May 31, 1997. We also audited
the accompanying consolidated statements of operations, changes in shareholders'
equity, and cash flows of American European Corporation and subsidiaries (the
Predecessor) for the period from June 1, 1996 to October 8, 1996 and for the
year ended May 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
subsidiaries as of May 31, 1998 and 1997 and the results of their operations and
their cash flows for the year ended May 31, 1998 and for the period from July 1,
1996 (date of formation) to May 31, 1997 and the results of operations and cash
flows of the Predecessor for the period from June 1, 1996 to October 8, 1996 and
for the year ended May 31, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 7, 1998
33
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MAY 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................................. $ 5,843 $ 678
Accounts receivable--net of allowance of $190 and $33, respectively....................... 5,402 272
Deferred income taxes..................................................................... 130 95
Other..................................................................................... 759 224
--------- ---------
Total current assets........................................................................ 12,134 1,269
Property, plant, and equipment--net of accumulated depreciation............................. 5,729 4,737
Goodwill--net of accumulated amortization of $1,704 and $696, respectively.................. 38,957 39,965
Deferred financing costs--net of accumulated amortization of $165........................... -- 1,156
Other....................................................................................... 1,465 544
--------- ---------
$ 58,285 $ 47,671
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................................................... $ 2,508 $ 1,501
Accrued expenses.......................................................................... 721 1,167
Value-added tax payable................................................................... 157 606
Unearned revenues......................................................................... 6,839 3,997
Income taxes payable...................................................................... 1,616 1,756
Current maturities--long-term debt........................................................ 574 2,014
--------- ---------
Total current liabilities................................................................... 12,415 11,041
Long-term debt--less current maturities..................................................... 667 27,649
Due to affiliates........................................................................... -- 412
Deferred rent............................................................................... 849 692
Other liabilities........................................................................... 60 --
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, Class A voting, one vote per share, without par value, 40,000,000 shares
authorized, 4,335,401 and 665,000, issued and outstanding, respectively................... 36,564 1,287
Common stock, Class B voting, ten votes per share, without par value, 10,000,000 shares
authorized, 6,293,000 and 6,335,000 issued and outstanding, respectively.................. 3,973 4,000
Common stock warrants....................................................................... -- 677
Foreign currency translation................................................................ 88 147
Retained earnings........................................................................... 3,669 1,766
--------- ---------
Total shareholders' equity.................................................................. 44,294 7,877
--------- ---------
$ 58,285 $ 47,671
--------- ---------
--------- ---------
</TABLE>
See notes to consolidated financial statements.
34
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
---------------------------------- ------------------------------
PERIOD FROM JULY 1, PERIOD FROM
1996 JUNE 1, 1996
YEAR ENDED (DATE OF FORMATION) THROUGH YEAR ENDED
MAY 31, 1998 TO MAY 31, 1997 OCTOBER 8, 1996 MAY 31, 1996
------------- ------------------- --------------- -------------
<S> <C> <C> <C> <C>
Net revenues.................................... $ 41,914 $ 23,590 $ 6,189 $ 26,493
Costs and expenses:
Cost of education and facilities.............. 16,927 9,014 3,256 11,144
Selling and promotional expenses.............. 6,321 2,428 1,335 3,614
General and administrative expenses........... 10,516 5,468 2,739 6,677
Acquisition costs............................. 487 -- -- --
Amortization of goodwill...................... 1,008 696 -- --
Rents paid to majority stockholders........... -- -- 49 150
------------- ------- ------- -------------
Total costs and expenses.................... 35,259 17,606 7,379 21,585
------------- ------- ------- -------------
Income (loss) from campus operations............ 6,655 5,984 (1,190) 4,908
Income (loss) from management agreement......... 23 479 (21) 127
------------- ------- ------- -------------
Income (loss) from operations................... 6,678 6,463 (1,211) 5,035
Interest expense................................ 1,328 2,499 258 730
Other income--net............................... 1,539 20 164 433
------------- ------- ------- -------------
Income (loss) before income taxes, minority
interest, and extraordinary item.............. 6,889 3,984 (1,305) 4,738
Provision for income taxes...................... (2,581) (1,981) -- (107)
------------- ------- ------- -------------
Income (loss) before minority interest and
extraordinary item............................ 4,308 2,003 (1,305) 4,631
Minority interest in earnings of American
University in Dubai........................... (1,445) -- -- --
------------- ------- ------- -------------
Income (loss) before extraordinary item......... 2,863 2,003 (1,305) 4,631
Extraordinary loss less applicable income
taxes......................................... (960) -- -- --
------------- ------- ------- -------------
Net income (loss)............................... $ 1,903 $ 2,003 $ (1,305) $ 4,631
------------- ------- ------- -------------
------------- ------- ------- -------------
Earnings Per Share:
Basic income per share before extraordinary
item.......................................... $ 0.30 $ 0.29
Basic net income per share...................... $ 0.20 $ 0.29
Diluted income per share before extraordinary
item.......................................... $ 0.28 $ 0.26
Diluted net income per share.................... $ 0.19 $ 0.26
Average shares outstanding...................... 9,527 7,000
Dilutive effect:
Warrants...................................... 240 569
Options....................................... 441 --
------------- -------
681 569
------------- -------
Average shares outstanding assuming dilution.... 10,208 7,569
------------- -------
------------- -------
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
CURRENCY
COMMON PAID-IN STOCKHOLDERS' TRANSLATION ACCUMULATED
PREDECESSOR STOCK CAPITAL NOTES ADJUSTMENT DEFICIT
- ------------------------------------------------------ ----------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance--May 31, 1995................................. $ 1 $ 434 $ (3,229) $ 67 $ (3,440)
Distribution to shareholders.......................... (4,500)
Capital contributed by stockholder.................... 43
Net income............................................ 4,631
Foreign currency translation.......................... 35
Notes receivable and advances from shareholders....... (1,330)
----- ----- ------------- --- -------------
Balance--May 31, 1996................................. 1 477 (4,559) 102 (3,309)
Distribution to shareholders.......................... (1,890)
Capital contributed by stockholder.................... 1,239
Net loss.............................................. (1,305)
Foreign currency translation.......................... (18)
Notes receivable and advances from shareholders....... (1,016)
----- ----- ------------- --- -------------
Balance--October 8, 1996.............................. $ 1 $ 477 $ (5,575) $ 84 $ (5,265)
----- ----- ------------- --- -------------
----- ----- ------------- --- -------------
<CAPTION>
PREDECESSOR TOTAL
- ------------------------------------------------------ ---------
<S> <C>
Balance--May 31, 1995................................. $ (6,167)
Distribution to shareholders.......................... (4,500)
Capital contributed by stockholder.................... 43
Net income............................................ 4,631
Foreign currency translation.......................... 35
Notes receivable and advances from shareholders....... (1,330)
---------
Balance--May 31, 1996................................. (7,288)
Distribution to shareholders.......................... (1,890)
Capital contributed by stockholder.................... 1,239
Net loss.............................................. (1,305)
Foreign currency translation.......................... (18)
Notes receivable and advances from shareholders....... (1,016)
---------
Balance--October 8, 1996.............................. $ (10,278)
---------
---------
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK-- FOREIGN
NUMBER OF SHARES COMMON STOCK COMPANY CURRENCY
------------------------ ------------------------ STOCK TRANSLATION
COMPANY CLASS A CLASS B CLASS A CLASS B WARRANTS ADJUSTMENT
- --------------------------------------------- ----------- ----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock--July 1, 1996....... 2,240 $ 1,000
Issuance of common stock in connection with
the acquisition of EduTrek Systems, Inc.... 105 1,995
Sale of common stock in connection with
acquisition of Predecessor................. 2,100 3,000
Issuance of common stock in exchange for
certain fees............................... 350 $ 500
Issuance of warrants in connection with
acquisition of Predecessor................. $ 677
Issuance of common stock in exchange for
stock of Predecessor 210 787
Foreign currency translation................. $ 147
Net income...................................
----------- ----------- ----------- ----------- ----- -----
Balance--May 31, 1997........................ 665 6,335 1,287 4,000 677 147
Issuance of common stock net of initial
public offering costs--September 29,
1997....................................... 2,733 34,560
Conversion of warrants to common stock....... 879 677 (677)
Conversion of Class B Common Stock to Class A
Common Stock............................... 42 (42) 27 (27)
Issuance of common stock under stock option
plan....................................... 16 13
Foreign currency translation................. (59)
Net income...................................
----------- ----------- ----------- ----------- ----- -----
Balance--May 31, 1998........................ 4,335 6,293 $ 36,564 $ 3,973 $ -- $ 88
----------- ----------- ----------- ----------- ----- -----
----------- ----------- ----------- ----------- ----- -----
<CAPTION>
RETAINED
COMPANY EARNINGS TOTAL
- --------------------------------------------- ----------- ---------
<S> <C> <C>
Issuance of common stock--July 1, 1996....... $ 1,000
Issuance of common stock in connection with
the acquisition of EduTrek Systems, Inc.... $ (237) (237)
Sale of common stock in connection with
acquisition of Predecessor................. 3,000
Issuance of common stock in exchange for
certain fees............................... 500
Issuance of warrants in connection with
acquisition of Predecessor................. 677
Issuance of common stock in exchange for
stock of Predecessor 787
Foreign currency translation................. 147
Net income................................... 2,003 2,003
----------- ---------
Balance--May 31, 1997........................ 1,766 7,877
Issuance of common stock net of initial
public offering costs--September 29,
1997....................................... 34,560
Conversion of warrants to common stock....... --
Conversion of Class B Common Stock to Class A
Common Stock............................... --
Issuance of common stock under stock option
plan....................................... 13
Foreign currency translation................. (59)
Net income................................... 1,903 1,903
----------- ---------
Balance--May 31, 1998........................ $ 3,669 $ 44,294
----------- ---------
----------- ---------
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THE COMPANY THE PREDECESSOR
---------------------------------- ------------------------------
PERIOD FROM JULY 1, PERIOD FROM
1996 (DATE OF JUNE 1, 1996
YEAR ENDED FORMATION) TO MAY THROUGH OCTOBER YEAR ENDED
MAY 31, 1998 31, 1997 8, 1996 MAY 31, 1996
------------- ------------------- --------------- -------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....................................... $ 1,903 $ 2,003 $ (1,305) $ 4,631
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss...................................... 1,600 -- -- --
Gain on sale of aircraft................................ (991) -- -- --
Depreciation and amortization........................... 2,718 1,626 392 1,087
Bad debt expense........................................ 307 126 69 168
Amortization of loan discount........................... 22 146 -- --
Decrease (increase) in accounts receivable.............. (5,437) 1,334 (192) (199)
Increase (decrease) in accounts payable and accrued
liabilities........................................... 561 796 (461) 391
Increase (decrease) in unearned revenues................ 2,842 (6,508) 3,135 30
Increase (decrease) in value-added taxes payable........ (449) (323) 190 13
Increase (decrease) in income taxes payable............. (140) 1,537 -- (58)
Other................................................... (250) 619 (415) (265)
------------- ------- ------- -------------
Net cash provided by operating activities............... 2,686 1,356 1,413 5,798
INVESTING ACTIVITIES
Additions to pre-opening and curriculum development
costs................................................. (1,440) -- -- --
Purchases of property, plant, and equipment............. (2,681) (681) (118) (1,434)
Sale of property, plant, and equipment.................. 2,076
Acquisition of Predecessor.............................. -- (30,747) -- --
Net increase in note receivable from related parties and
former stockholders................................... -- -- (170) (1,228)
------------- ------- ------- -------------
Net cash used in investing activities................... (2,045) (31,428) (288) (2,662)
FINANCING ACTIVITIES
Proceeds from issuance of common stock.................. 34,560 4,000 -- --
Proceeds from long-term borrowings...................... 4,043 29,117 750 2,058
Principal repayments on long-term debt.................. (33,347) (26) (234) (893)
Principal payments under capital lease obligations...... (346) (52) (94) (148)
Other................................................... (400) -- 120 --
Net receipts (payments)--line-of-credit................. -- (938) 151 (2)
Distributions to stockholders........................... -- -- (1,890) (4,500)
Capital contribution from stockholder................... -- -- -- 43
Increase in deferred loan costs......................... -- (1,321) -- --
------------- ------- ------- -------------
Net cash provided by (used in) financing activities..... 4,510 30,780 (1,197) (3,442)
Effect of exchange rate changes on cash................. 14 (30) (12) 8
------------- ------- ------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.... 5,165 678 (84) (298)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.......... 678 -- 453 751
------------- ------- ------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD................ $ 5,843 $ 678 $ 369 $ 453
------------- ------- ------- -------------
------------- ------- ------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 1,567 $ 1,690 $ 295 $ 730
Income taxes............................................ 2,047 45 -- 107
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPANY--AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997; PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND FOR THE YEAR ENDED MAY 31,
1996
NOTE 1--ORGANIZATION AND BUSINESS
ORGANIZATION--EduTrek International, Inc. (the "Company"), through American
InterContinental University ("AIU"), is a leading provider of career-oriented,
internationally focused higher education programs. The Company operates campuses
in Atlanta, Los Angeles, London, and Dubai, United Arab Emirates, with curricula
focusing on international business, multimedia communications, design, and
information technology. AIU is accredited by the Commission on Colleges of the
Southern Association of Colleges and Schools.
ACQUISITION--The Company, formerly known as E Holdings, Inc., was organized
by Mr. Steve Bostic, the Company's current Chairman and Chief Executive Officer,
on July 1, 1996 for the purpose of acquiring all of the capital stock of EduTrek
Systems, Inc. ("EduTrek Systems") (a company also controlled by Mr. Bostic),
American Intercontinental University, Inc. ("AIU, Inc."), formerly known as
American European Corporation, and American College in London, Ltd. U.S., as
well as 85% of the membership interests of American European Middle East
Corporation, L.L.C ("AEMEC" which, together with AIU, Inc. and American College
in London, Ltd., U.S. are collectively referred to herein as the "Predecessor").
On October 8, 1996, the Company acquired the capital stock and membership
interests of the Predecessor which, prior to its acquisition, operated The
American College, now known as AIU. The purchase price for the acquisition of
the Predecessor was approximately $38.0 million. Also on October 8, 1996, the
Company acquired all of the issued and outstanding capital stock of EduTrek
Systems for an aggregate of 105,000 shares of Class A Common Stock and 1,995,000
shares of Class B Common Stock.
The Company did not acquire the Predecessor until October 8, 1996.
Accordingly, the financial statements of the Company for the period from July 1,
1996 through October 7, 1996 do not include the Predecessor. EduTrek Systems is
included in the financial statements of the Company from July 1, 1996, the date
of the Company's formation, in a manner similar to a pooling of interests. The
results of operations of the Company include losses arising from the operation
of EduTrek Systems of approximately $380,000 for the period from July 1, 1996 to
May 31, 1997. Financial information for EduTrek Systems is not included prior to
July 1, 1996.
The Company's acquisition of the Predecessor has been accounted for as a
purchase. Accordingly, the purchase price has been allocated to the
Predecessor's identifiable assets and liabilities based on estimated fair values
at the acquisition date. The excess of the purchase price over the fair value of
the Predecessor's identifiable net assets has been classified as goodwill. The
purchase price, net of noncash items totaling approximately $1.5 million, of the
Predecessor has been allocated as follows (in millions):
<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>
38
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPANY--AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997; PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND FOR THE YEAR ENDED MAY 31,
1996
NOTE 1--ORGANIZATION AND BUSINESS (CONTINUED)
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the results of the
acquisition of the Predecessor for the period from July 1, 1996 to May 31, 1997
as if the acquisition had occurred as of July 1, 1996:
<TABLE>
<S> <C>
Net revenue.................................... $27,926,000
Net income..................................... $ 276,000
Basic income per share......................... $ 0.04
Diluted income per share....................... $ 0.03
</TABLE>
PUBLIC OFFERING--On September 29, 1997, the Company completed an initial
public offering of 2,990,000 shares of its Class A Common Stock, of which
2,732,890 shares were sold by the Company, including 390,000 shares sold as the
result of the Underwriter's exercise of an over-allotment option, at $14 per
share, which after underwriting discounts and commissions and payment of
offering expenses raised $34,560,000 for the Company. The Company used
$28,571,000 of the proceeds to retire long-term debt and related accrued and
unpaid interest incurred in connection with the acquisition, $620,000 to repay
short-term indebtedness outstanding under the Revolving Loan, and the remaining
net proceeds of $5,369,000 being used for general corporate purposes, including
increased working capital requirements of the Company resulting from its growth.
OTHER--The Company effected a 7 for 1 stock split in June 1997. All share
and per share data information in the accompanying 1998 and 1997 consolidated
financial statements have been restated to reflect the stock split as if such
had occurred as of the earliest period presented.
In June 1997, one warrant holder exercised its option to purchase 257,110
shares of Class A Common Stock at an exercise price of $.0014 per share. In
September 1997, another warrant holder exercised its option to purchase 444,318
shares of Class A Common Stock at the same exercise price.
In December 1997, one warrant holder exercised its option to purchase
177,723 shares of Class A Common Stock at an exercise price of $.0014 per share.
There are no remaining warrants outstanding.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--Effective September 1, 1997, AEMEC entered into
an agreement with Middle East Colleges, Ltd. ("MEC") to modify certain aspects
of their joint venture agreement relating to the operation of the American
University in Dubai ("Dubai"). These modifications give effective control of the
joint venture to AEMEC as defined in Statement of Financial Accounting Standard
("SFAS") 94, "Consolidation of All Majority-Owned Subsidiaries," and require
consolidation of the financial statements of Dubai with those of the Company as
of September 1, 1997. Prior to this date, AEMEC's portion of the net income from
Dubai had been reported in the income statement of the Company as "income from
management agreement." Effective September 1, 1997, the Company records MEC's
ownership interest in the joint venture of 49.9% as minority interest in the
consolidated financial statements.
The consolidated financial statements include the accounts of the Company,
AIU, Inc., the American College in London Ltd. U.S., AEMEC, MEC, and the
American College in London, Ltd., a registered
39
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPANY--AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997; PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND FOR THE YEAR ENDED MAY 31,
1996
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
British corporation that is wholly owned by The American College in London, Ltd.
U.S. Significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--The Company considers cash equivalents to be all
demand deposits and highly liquid unrestricted investments with an original
maturity of three months or less which can be readily converted to cash on
demand without penalty.
Cash at May 31, 1998 and 1997 includes approximately $218,000 and $442,000,
respectively, which is restricted to expenditures for scholarships and other
awards to students. A corresponding liability has been recorded for these funds
until they are disbursed.
PROPERTY AND EQUIPMENT--Property and equipment is stated at cost less
accumulated depreciation. Prior to its sale, the aircraft was depreciated over
10 years on the double declining balance method (see note 4). Depreciation for
all other property and equipment is calculated on a straight-line basis over the
estimated useful lives of the assets.
INTANGIBLE ASSETS--Goodwill is amortized over 40 years using the
straight-line method.
CURRICULUM DEVELOPMENT COSTS--The Company's policy is to capitalize direct
costs incurred in the production of and improvements to educational courses.
These direct costs, which are included in other assets, primarily include
salaries for staff directly engaged in the curriculum development process and
are amortized over a three year period beginning in the month the courses are
placed into service.
PRE-OPENING COSTS--The Company's policy is to capitalize all pre-opening
costs, except those costs
related to advertising, prior to the commencement of a new educational program.
Pre-opening costs are amortized over twelve months upon commencement of a new
program. American Institute of Certified Public Accountants Statement of
Position 98-5, "Reporting on the Costs of Start-up Activities," (SOP 98-5) will
require the Company to expense all pre-opening costs as incurred and to write
off any pre-opening costs included on the balance sheet beginning in June 1999.
LICENSES--The Company capitalizes license fees and then amortizes the fees
over the life of the agreement. During the year ended May 31, 1998, the Company
capitalized and began amortizing a $450,000 license fee paid to ITI Education
Corporation ("ITI") for the use of an information technology curriculum in the
Masters of Information Technology program in Atlanta, GA. The amortization
period is 10 years, the life of the agreement. Also during fiscal year 1998, the
Company entered into a 10-year license agreement with ITI Learning Systems, Inc.
(a wholly-owned subsidiary of ITI) for the use of an information technology
curriculum at subsequent locations. The cost of this license was $750,000 which
was paid in July 1998. The license fee for subsequent locations is $900,000 per
location and will be amortized over 10 years.
40
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPANY--AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997; PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND FOR THE YEAR ENDED MAY 31,
1996
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS--All long-lived assets are evaluated for
impairment in accordance with SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under this
method, the Company is required to review long-lived assets and certain
identifiable intangibles to be held and used for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. All long-lived assets to be disposed of will be reported at the
lower of carrying amount or fair value less cost to sell.
REVENUE RECOGNITION--Revenue is recognized when all educational related
services have been performed. The Company records accounts receivable and
related unearned revenue when students are billed for tuition, fees, and dorm
payments.
UNEARNED REVENUES--Unearned revenues represent the portion of student
tuition, fees, and dorm payments received in advance of services being
performed.
DEFERRED RENT--The Company records rent expense under operating leases with
escalating rent payments by amortizing the total operating lease obligation over
the lease term on a straight-line basis.
INCOME TAXES--Deferred income taxes are recognized for the tax consequences
of "temporary differences" by applying currently enacted statutory rates to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities. The effect on deferred taxes of a change in
tax rates is recognized in the results of operations in the period that includes
the enactment date.
EARNINGS PER SHARE--Basic net income per share is computed by dividing net
income by the weighted-average number of shares outstanding. Diluted net income
per share includes the dilutive effect of stock options and warrants.
NEW ACCOUNTING PRONOUNCEMENTS--In 1997 the Financial Accounting Standards
Board issued SFAS 130, "Reporting Comprehensive Income," and SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information." These
statements, which are effective for fiscal years beginning after December 15,
1997, expand or modify disclosures and will have no impact on the Company's
consolidated financial position, results of operations, or cash flows.
The Company adopted SFAS 128, "Earnings per Share," during fiscal year 1998.
In accordance with SFAS 128, the Company has presented both basic and diluted
per share amounts in the 1998 and 1997 statements of operations presented. SFAS
128 is effective for annual financial statements for periods ending after
December 15, 1997 and requires the Company to change the method previously used
to compute earnings per share and to restate all prior periods. As such, the
Company has conformed the 1998 and 1997 reported amounts to the provisions of
SFAS 128.
FOREIGN CURRENCY TRANSLATION--Assets and liabilities of the Company's United
Kingdom operations are translated from Pounds Sterling into U.S. dollars at the
rate of currency exchange at the end of the fiscal period. Revenues and Expenses
are translated at average monthly exchange rates prevailing during the period.
Resulting translation differences are recognized as a component of shareholders'
equity.
FAIR VALUE OF FINANCIAL INSTRUMENTS--Management has reviewed the various
assets and liabilities of the Company in accordance with SFAS 107, "Disclosures
About Fair Values of Financial Instruments," and has
41
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPANY--AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997; PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND FOR THE YEAR ENDED MAY 31,
1996
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
concluded that substantially all of the Company's financial instruments have
terms such that their book value approximates fair value.
RECLASSIFICATIONS--Certain prior period amounts have been reclassified to
conform with current year presentation.
NOTE 3--OTHER CURRENT ASSETS
Other current assets at May 31, 1998 and 1997 consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Prepaid expenses............................................... $ 511,191 $ 89,638
Pre-opening costs.............................................. 212,120 --
Other.......................................................... 36,058 134,186
------------- -------------
$ 759,369 $ 223,824
------------- -------------
------------- -------------
</TABLE>
NOTE 4--PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at May 31, 1998 and 1997 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Furniture, fixtures, and equipment............................. $ 4,396,024 $ 2,325,359
Leasehold improvements......................................... 1,895,681 1,061,304
Library and textbooks.......................................... 550,931 605,808
Aircraft....................................................... -- 1,510,455
Other.......................................................... 256,615 --
------------- -------------
7,099,251 5,502,926
Less accumulated depreciation and amortization................. 1,370,437 765,715
------------- -------------
$ 5,728,814 $ 4,737,211
------------- -------------
------------- -------------
</TABLE>
A subsidary of the Company sold the aircraft during the year ended May 31,
1998. The gain on the sale of approximately $991,000 is included in other income
Depreciation expense for property, plant, and equipment was $1,275,179,
$765,715, $1,224,711, and $390,983 for the year ended May 31, 1998, the period
from July 1, 1996 to May 31, 1997, the year ended May 31, 1996, and the period
from June 1, 1996 to October 8, 1996, respectively.
42
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997, PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND THE YEAR ENDED MAY 31, 1996
NOTE 5--LONG-TERM DEBT
Long-term debt at May 31, 1998 and 1997 is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <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...................................... $ 955,502 603,762
Directors and Officers Insurance and other..................... 285,817 25,682
------------- -------------
1,241,319 29,663,359
Less current portion........................................... 573,954 2,014,120
------------- -------------
$ 667,365 $ 27,649,239
------------- -------------
------------- -------------
</TABLE>
At May 31, 1998 and 1997, the Company had no amounts borrowed against its
$3.0 and $2.5 million lines of credit, respectively.
Future maturities of long-term debt excluding capital lease obligations for
years ending May 31 are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 238,128
2000.............................................. 47,689
---------
$ 285,817
---------
---------
</TABLE>
The extraordinary loss of $960,000 net of taxes ($1,600,000 less the related
income tax effect of $640,000) is from the retirement of the Company's term loan
with NationsBank, N.A. and its subordinate debt with Stratford Capital Partners,
L.P. and GMM Investors SBIC, L.P. The funds used to retire the debt represent a
portion of the proceeds from the sale of 2,990,000 shares of the Company's Class
A Common Stock.
NOTE 6--EMPLOYEE BENEFIT PLAN
The Company maintains a qualified 401(k) Plan available to full-time
employees who meet the Plan's eligibility requirements. This Plan, which is a
defined contribution plan, contains a profit sharing component, with
tax-deferred contributions to each employee based on an allocated portion of a
discretionary annual contribution. Company contributions to the Plan for
matching of employee contributions were approximately $77,000, $51,000, and
$44,000 for the year ended May 31, 1998, the period from July 1, 1996 to May 31,
1997, and the year ended May 31, 1996, respectively.
NOTE 7--LEASES
The Company leases office and classroom space, dormitories, and various
items of equipment under lease agreements with varying expiration dates through
January 2009. Many of the lease agreements contain renewal clauses with various
terms; however, none of the leases contain any significant restrictions.
43
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997, PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND THE YEAR ENDED MAY 31, 1996
NOTE 7--LEASES (CONTINUED)
Several of the lease agreements contain provisions for rent escalations which
are either tied to the Consumer Price Index or require a specific percentage
increase annually. These leases are classified as operating leases.
The Company also leases various other assets under agreements which are
classified as capital leases. The net book value of these assets at May 31, 1998
and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Furniture, fixtures, and equipment............................. $ 1,453,924 $ 895,076
Less accumulated amortization.................................. 291,354 52,226
------------- -------------
$ 1,162,570 $ 842,850
------------- -------------
------------- -------------
</TABLE>
For the years ending May 31, future minimum lease payments and present value
of net minimum lease payments under capital leases and future minimum lease
payments under noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------ -------------
<S> <C> <C>
Year ending May 31, 1999......................................... $ 418,175 $ 3,722,046
2000............................................................. 311,341 4,153,135
2001............................................................. 158,944 3,833,748
2002............................................................. 103,246 3,819,331
2003............................................................. 102,911 3,683,804
Thereafter....................................................... 51,239 21,002,529
------------ -------------
Total minimum lease payments................................... 1,145,856 $ 40,214,593
-------------
-------------
Less amount representing interest................................ 190,354
------------
Present value of net minimum lease payments.................... $ 955,502
------------
------------
</TABLE>
Rent expense incurred for the year ended May 31, 1998, the period from July
1, 1996 to May 31, 1997, the period from June 1, 1996 to October 8, 1996, and
the year ended May 31, 1996 under all operating leases was approximately
$5,444,000, $3,101,000, $1,337,000, and $3,997,800, respectively.
NOTE 8--CONSULTING AND EMPLOYMENT AGREEMENTS
In connection with the acquisition of the Predecessor, the Company entered
into consulting and employment agreements with the selling shareholders and
other officers of American European. The Company also entered into an employment
agreement with an officer of the Company. For the years ended May 31, 1998 and
1997, such payments, which were charged to operations, totaled $716,000 and
44
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997, PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND THE YEAR ENDED MAY 31, 1996
NOTE 8--CONSULTING AND EMPLOYMENT AGREEMENTS (CONTINUED)
$705,000, respectively. Future payments under these agreements for the years
ending May 31 are as follows:
<TABLE>
<S> <C>
1999.............................................. $ 642,000
2000.............................................. 593,000
2001.............................................. 525,000
2002.............................................. 258,000
</TABLE>
Of the above amounts, approximately $633,000 of future payments relate to a
continuing officer of the Company. Amounts paid to such officer totaled
approximately $165,000 and $27,500 for the years ended May 31, 1998 and 1997,
respectively.
NOTE 9--INCOME TAXES
Income tax expense for the year ended May 31, 1998 and for the period from
July 1, 1996 to May 31, 1997 consists of (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current:
Federal.................................................................. $ 2,238 $ 1,423
State.................................................................... 480 333
--------- ---------
Total current provision................................................ 2,718 1,756
Deferred:
Federal.................................................................. (117) 194
State.................................................................... (20) 31
--------- ---------
Total deferred provision............................................... (137) 225
--------- ---------
Total provision........................................................ $ 2,581 $ 1,981
--------- ---------
--------- ---------
</TABLE>
The following is a reconciliation of the statutory tax rate to the Company's
effective tax rate for the year ended May 31, 1998 and for the period from July
1, 1996 to May 31, 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Statutory rate........................................................... 34.00% 34.00%
State income taxes (net of federal benefit).............................. 4.40% 6.03%
Permanent differences:
Nondeductible goodwill................................................. 4.97% 9.69%
Nontaxable foreign earnings of minority interest....................... (5.90%)
--------- ---------
Effective rate....................................................... 37.47% 49.72%
--------- ---------
--------- ---------
</TABLE>
45
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997, PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND THE YEAR ENDED MAY 31, 1996
NOTE 9--INCOME TAXES (CONTINUED)
The effects of temporary differences which gave rise to the deferred tax
asset and liability at May 31, 1998 and 1997, respectively, are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Deferred tax assets arising from:
Unearned revenue................................ $ 94 $ 112
Deferred rent................................... $ 376 $ 339
Other........................................... 73 121 13 56
Deferred tax liabilities arising from:
Other........................................... (37) (30)
----- ----- ----- -----
$ 130 $ 497 $ 95 $ 395
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
As a result of its election to be treated as an S Corporation for income tax
purposes, the Predecessor has not been subject to federal and most state income
taxes. Accordingly, the historical provision for income taxes includes income
taxes only for those jurisdictions that do not recognize S Corporation status.
Distributions in the form of cash dividends have been made principally to assist
the shareholders with their income tax obligations arising from the
Predecessor's S Corporation status. Such distributions amounted to $1,889,694
and $4,500,000 for the period from June 1, 1996 through October 8, 1996 and for
the year ended May 31, 1996, respectively.
Significant components of the provision for income taxes for the period from
June 1, 1996 to October 8, 1996 and the year ended May 31, 1996 are as follows
(in thousands):
<TABLE>
<CAPTION>
PERIOD FROM JUNE 1, YEAR ENDED MAY
1996 TO OCTOBER 8, 1996 31, 1996
----------------------- ---------------
<S> <C> <C>
Domestic............................................... $ -- $ 23
Foreign................................................ -- 84
------ -----
$ -- $ 107
------ -----
------ -----
</TABLE>
NOTE 10--U.S. AND FOREIGN OPERATIONS
The Company's operations are located in the United States, the United
Kingdom, and Dubai, United Arab Emirates. The Company's operations in Dubai
represented management fees from a management agreement through August 1997 and
consolidated operations from September 1, 1997 through May 31, 1998 (see Note 2
on Consolidation). Net revenues and income (loss) from operations by geographic
area for fiscal year 1998 and for the period from October 8, 1996 (date of
acquisition of the Predecessor) to
46
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997, PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND THE YEAR ENDED MAY 31, 1996
NOTE 10--U.S. AND FOREIGN OPERATIONS (CONTINUED)
May 31, 1997 and for the year ended May 31, 1996 and identifiable assets by
geographic area at May 31, 1998, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net revenues:
United States.............................................. $ 22,453 $ 13,437 $ 14,630
United Kingdom............................................. 14,595 10,153 11,863
Dubai, UAE................................................. 4,866 -- --
Home Office................................................ -- -- --
--------- --------- ---------
Total.................................................... $ 41,914 $ 23,590 $ 26,493
--------- --------- ---------
--------- --------- ---------
Income (loss) from operations:
United States.............................................. $ 8,089 $ 10,533 $ 5,986
United Kingdom............................................. 5,873 4,385 4,888
Dubai, UAE................................................. 2,257 479 127
Home Office................................................ (9,541) (8,934) (5,966)
--------- --------- ---------
Total.................................................... $ 6,678 $ 6,463 $ 5,035
--------- --------- ---------
--------- --------- ---------
Identifiable assets:
United States.............................................. $ 55,241 $ 46,141 $ 5,690
United Kingdom............................................. 2,216 1,530 1,563
Dubai, UAE................................................. 828 -- --
Home Office................................................ -- -- --
--------- --------- ---------
Total.................................................... $ 58,285 $ 47,671 $ 7,253
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 11--STOCK OPTION PLANS
The Company has a stock incentive plan (the "Plan") for key employees and
directors under which it may grant incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock, or performance awards of
Class A Common Stock or cash. The maximum number of Class A Common Stock which
can be issued through awards granted under the Plan is 829,388.
Incentive stock options granted under the Plan expire on the tenth
anniversary of the date the option is granted or the fifth anniversary of the
date the option is granted in the event that the individual grantee owns more
than 10% of the total voting power of all classes of stock of the Company.
In fiscal year 1998, fixed stock options to purchase an aggregate of 299,644
shares of Class A Common Stock were granted to certain officers and employees of
the Company, exercisable at a weighted average exercise price of $17.07 per
share which was the fair market value at the grant date. Generally, these
options vest over a five-year period beginning on the first anniversary of the
date of grant.
In March 1997, incentive stock options to purchase an aggregate of 415,877
shares of Class A Common Stock were granted to certain officers and employees of
the Company, exercisable at $.77 per
47
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997, PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND THE YEAR ENDED MAY 31, 1996
NOTE 11--STOCK OPTION PLANS (CONTINUED)
share which was the fair market value at the grant date. Generally, these
options vest over a five-year period beginning on the first anniversary of the
date of grant. Of these options, 35,000 vest contingent on the Company meeting
certain financial goals (the "performance options").
The estimated weighted average fair value of options granted during 1998 and
1997 was $7.82 and $1.07, respectively. The Company applies Accounting
Principles Board Opinion 25 and related interpretations in accounting for the
Plan. Accordingly, no compensation cost has been recognized for the Plan. Had
compensation cost for the Plan been determined based on the fair value at the
grant dates for awards under the Plan consistent with the method of SFAS 123,
additional compensation expense of $730,000 and $22,000 would have been recorded
for the year ended May 31, 1998 and for the period from July 1, 1996 to May 31,
1997, respectively. Accordingly, the Company's net income and earnings per share
for the year ended May 31, 1998 and for the period from July 1, 1996 to May 31,
1997 would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net income:
As reported..................................................... $ 1,903,000 $ 2,002,690
Pro forma....................................................... $ 1,173,000 $ 1,980,690
Basic net income per share:
As reported..................................................... $ 0.20 $ 0.29
Pro forma....................................................... $ 0.12 $ 0.28
Diluted net income per share:
As reported..................................................... $ 0.19 $ 0.26
Pro forma....................................................... $ 0.11 $ 0.26
</TABLE>
The fair value of options granted under the Plan during the above periods
was estimated on the date of grant or modification using the Black-Scholes
option pricing model with the following weighted average assumptions used for
1998 and 1997, respectively: expected volatility of 52.62% and 0%, risk-free
interest rate of 5.76% and 6.16% for fixed options and 6.03% for the 1997
performance options, dividend yield of 0% for both years, and expected lives of
3.97 and 3.91 years for fixed options and 3.08 years for the 1997 performance
options. Annual forfeiture rates of 3% for both years were utilized, and the
likelihood of the 1997 performance options vesting was estimated to be 100%.
48
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AS OF MAY 31, 1998 AND 1997 AND FOR THE YEAR ENDED MAY 31, 1998, THE
PERIOD FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997, PREDECESSOR--FOR
THE PERIOD FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND THE YEAR ENDED MAY 31, 1996
NOTE 11--STOCK OPTION PLANS (CONTINUED)
The following table sets forth activity in the Company's Plan:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding, June 1, 1996
Granted.............................................. 415,877 $ 0.7714
---------
Outstanding, May 31, 1997 415,877 $ 0.7714
Granted.............................................. 299,644 $ 17.065
Exercised............................................ (16,360) $ 0.7714
Canceled............................................. (1,400) $ 0.7714
--------- ---------
Outstanding May 31, 1998............................... 299,644 $ 17.065 398,117 $ 0.7714
--------- ---------
--------- ---------
Exercisable May 31, 1998............................... 2,000 $ 18.500 97,335 $ 0.7714
Weighted average fair value of options granted:
1998................................................. $ 7.82
---------
---------
1997................................................. $ 1.07
---------
---------
</TABLE>
Exercise price for options outstanding as of May 31, 1998 ranged from $.7714
to $27.75. The weighted average remaining contractual life of those options is
9.2 years.
NOTE 12--SUBSEQUENT EVENTS
In June 1998, the Company entered into a 127-month lease for a 32,632 square
foot building in the District of Columbia. The Company began its occupancy in
July 1998 and will incur rent payments of approximately $500,000 for fiscal year
1999 and approximately $800,000 to $900,000 each fiscal year thereafter.
In July 1998, the Company entered into a 129-month lease for a 88,144 square
foot building in Los Angeles. The Company is to begin its occupancy in October
1998 and will incur rent payments of approximately $400,000 for fiscal year 1999
and approximately $2 to 3 million each fiscal year thereafter.
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no occurrence requiring a response to this item.
PART III
Except as to information with respect to executive officers which is
contained in a separate heading under Item 1 to this Form 10-K, the information
required by Part III of Form 10-K is, pursuant to General Instruction G(3) of
Form 10-K, incorporated by reference from the Company's definitive proxy
statement to be filed pursuant to Regulation 14A for the Company's 1998 Annual
Meeting of Shareholders (the "Proxy Statement"). The Company will, within 120
days of the end of its fiscal year, file with the Securities and Exchange
Commission a definitive proxy statement pursuant to Regulation 14A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers of the
Registrant is set forth in the Proxy Statement under the headings "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," which
information is incorporated herein by reference. The name, age, and position of
each executive officer of the Company is set forth under the heading "Executive
Officers" in Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions is
set forth in the Proxy Statement under the headings "Certain Transactions" and
"Compensation Committee Interlocks and Insider Participation," which information
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS. The following financial statements and
auditors' report have been filed with Item 8 in Part II of this
Report.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report.............................................................................. 33
Consolidated Balance Sheets............................................................................... 34
Consolidated Statements of Operations..................................................................... 35
Consolidated Statements of Changes in Shareholders' Equity................................................ 36
Consolidated Statements of Cash Flows..................................................................... 37
Notes to Consolidated Financial Statements................................................................ 38
</TABLE>
50
<PAGE>
(a)(2) FINANCIAL STATEMENT SCHEDULES. All financial statement schedules are
omitted as the required information is inapplicable.
(a)(3) EXHIBITS. The exhibits listed below are filed with or incorporated
by reference into this Report. The exhibits which are denominated
with an asterisk (*) were previously filed as part of, and are hereby
incorporated by reference from, either (i) the Company's registration
statement on Form S-1, Registration Number 333-29603, as amended,
declared effective by the Securities and Exchange Commission on
September 23, 1997 (the "S-1"); (ii) the Company's Quarterly Report
on Form 10-Q for the quarter ended August 31, 1997 (the "8/31/97
10-Q"); or (iii) the Company's Quarterly Report on Form 10-Q for the
quarter ended February 28, 1998 (the "2/28/98 10-Q"). Unless
otherwise indicated, the exhibit number corresponds to the exhibit
number in the referenced document.
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- --------------- ------------------------------------------------------------------------------ -----
<S> <C> <C>
* 2.1 Stock Purchase Agreement dated July 25, 1996 by and between EduTrek
International, Ltd., Thomas J. Barnette and Phillip J. Markert relating to
the acquisition of the Predecessor (S-1)
* 3(i) Articles of Incorporation (S-1)
* 3(i).1 Articles of Amendment to Articles of Incorporation, dated September 6, 1996
(S-1)
* 3(i).2 Articles of Amendment to Articles of Incorporation, dated June 17, 1996 (S-1)
* 3(ii) Bylaws (S-1)
* 4.1 Specimen Certificate of Class A Common Stock (S-1)
*10.1 1997 Incentive Plan (S-1)
*10.2 Amendment No. 1 to 1997 Incentive Plan (S-1)
*10.2.1 Amendment No. 2 to 1997 Incentive Plan (8/31/98)
*10.3 Form of Incentive Stock Option Agreement (S-1)
*10.4 Form of Non-qualified Stock Option Agreement (S-1)
*10.7 Employment Agreement, dated March 21, 1997, by and between E Holdings, Inc.
and Stephen G. Franklin, Sr. (S-1)
*10.8 Employment Agreement, dated October 8, 1996 by and between American European
Corporation and Phillip J. Markert (S-1)
*10.9 Consulting Agreement, dated October 8, 1996, by and between the Company and
The Phillip J. Markert Consulting Group, Inc. (S-1)
*10.10 Agreement, dated October 1, 1995, by and between American Middle East
Corporation, LLC and Middle East College, Ltd., relating to the formation
and operation of the University's campus in Dubai (S-1)
10.10.1 Agreement, dated September 1, 1997, relating to Agreements, dated October 1,
1995 and January 24, 1996, by and between American Middle East Corporation,
LLC and Middle East College, Ltd., relating to the formation and operation
of the University's campus in Dubai
*10.11 Financial Operations Agreement, dated October 1, 1995, by and between American
European Middle East Corporation, LLC and Middle East Colleges, Ltd.,
relating to the operation of the University's campus in Dubai (S-1)
*10.12 Memorandum of Understanding, dated January 24, 1996, by and between American
European Middle East Corporation, LLC and Middle East Colleges, Ltd. (S-1)
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE
- --------------- ------------------------------------------------------------------------------ -----
<S> <C> <C>
*10.13 Registration and Anti-Dilution Rights Agreement, dated October 8, 1996, by and
between E Holdings, Inc. and The Robinson-Humphrey Company, Inc. (S-1)
*10.14 Anti-Dilution Rights Agreement, dated October 8, 1996, by and between E
Holdings, Inc. and Phillip J. Markert (S-1)
*10.15 Agent Agreement, dated March 13, 1996, by and between Target Marketing
Systems, Inc. and EduTrek Systems, Inc. (S-1)
*10.16 License Agreement, dated July 26, 1997, by and between ITI Learning Systems,
Inc., American European Corporation and the Company (S-1)
*10.17 Lease: Embassy Row 500 Between EduTrek International, Inc., a Georgia
Corporation (Tenant) and a Maryland Corporation (Landlord) (2/28/98 10-Q)
10.18 Lease Agreement dated June 30, 1998 between 1770 G Street Limited Partnership
and American Intercontinental University, Inc.
*21.1 Subsidiaries of the Registrant (S-1)
23.1 Consent of Deloitte & Touche LLP
24.1 Power of Attorney of Stephen G. Franklin, Sr.
24.2 Power of Attorney of Paul D. Beckham
24.3 Power of Attorney of Fred C. Davison
24.4 Power of Attorney of Ronald P. Hogan
24.5 Power of Attorney of Gaylen D. Kemp
24.6 Power of Attorney of Gerald Tellefsen
27.1 Financial Data Schedule (SEC only)
27.2 Financial Data Schedule (SEC only)
27.3 Financial Data Schedule (SEC only)
</TABLE>
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
fourth quarter ended May 31, 1998.
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
<TABLE>
<S> <C> <C>
EDUTREK INTERNATIONAL, INC.
Date: August 31, 1998 By: /s/ STEVE BOSTIC
-----------------------------------------
Steve Bostic,
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: August 31, 1998 By: /s/ DONALD J. BLANKERS
-----------------------------------------
Donald J. Blankers,
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ STEVE BOSTIC
- ------------------------------ Chairman and Chief August 31, 1998
Steve Bostic Executive Officer
/s/ DONALD J. BLANKERS
- ------------------------------ Chief Financial Officer August 31, 1998
Donald J. Blankers
*
- ------------------------------ President, Chief Academic August 31, 1998
Stephen G. Franklin, Sr. Officer and Director
*
- ------------------------------ Director August 31, 1998
Paul D. Beckham
*
- ------------------------------ Director August 31, 1998
Fred C. Davison
*
- ------------------------------ Director August 31, 1998
Ronald P. Hogan
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
*
- ------------------------------ Director August 31, 1998
Gaylen D. Kemp
*
- ------------------------------ Director August 31, 1998
Gerald Tellefsen
</TABLE>
<TABLE>
<S> <C>
*By: /s/ DONALD J. BLANKERS
-------------------------
Donald J. Blankers,
AS ATTORNEY IN FACT
PURSUANT TO POWERS OF
ATTORNEY FILED AS
EXHIBITS TO THIS REPORT
</TABLE>
54
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------- -------------------------------------------------------------------------------------------------
<S> <C>
10.10.1 Agreement, dated September 1, 1997, relating to Agreements, dated October 1, 1995, and January
24, 1996, by and between American Middle East Corporation, LLC and Middle East College, Ltd.,
relating to the formation and operation of the University's campus in Dubai
10.18 Lease Agreement dated June 30, 1998 between 1770 G Street Limited Partnership and American
Intercontinental University, Inc.
23.1 Independent Auditors' Consent
24.1 Power of Attorney of Stephen G. Franklin, Sr.
24.2 Power of Attorney of Paul D. Beckham
24.3 Power of Attorney of Fred C. Davison
24.4 Power of Attorney of Ronald P. Hogan
24.5 Power of Attorney of Gaylen D. Kemp
24.6 Power of Attorney of Gerald Tellefsen
27.1 Financial Data Schedule (SEC only)
27.2 Financial Data Schedule (SEC only)
27.3 Financial Data Schedule (SEC only)
</TABLE>
55
<PAGE>
Exhibit 10.10.1
THIS ARRANGEMENT is made and entered into as of the 1st day of September 1997
between
(1) American European Middle East Corporation LLC (hereinafter referred to
as "AEMEC" a limited liability company in the state of Georgia, United
States of America, headquartered in Dubai, UAE; and
(2) Middle East Colleges LTD (hereinafter referred to as "MEC"), a BVI
company headquartered in Dubai, UAE.
(3) The terms of this arrangement shall terminate May 31, 1998 unless
extended by the mutual express written consent of both parties.
WHEREAS
(1) The parties hereto had entered into agreements dated October 1st 1995 &
January 24th 1996 (hereinafter known as the "Original Agreements")
governing the relationship between themselves in the opening and
operation of a branch campus of the American College now known as The
American Intercontinental University, located in Dubai, UAE.
(2) At the request of AEMEC, the parties hereto wish to enter into an
agreement to modify temporarily their fee and compensation entitlements
thereunder.
NOW THEREFORE, the parties hereto agree upon the following:
1. MEC for the purpose of this arrangement only, agrees to rearrange the
distribution of profits for Fiscal 1998 only (June 1, 1997 - May 31,
1998), such that the profit entitlements thereunder shall be
distributed to the parties as follows:
MEC 49.9%
AEMEC 50.1%
2. In consideration for such arrangement AEMEC agrees to MEC being
compensated in lieu of the above by way of the American University in
Dubai (AUD) reimbursing MEC for its capital contribution and services
rendered, in quarterly installments based upon the attached Exhibit A.
3. This Arrangement shall expires at the end of June 1998 but can be
renegotiated annually by the mutual express written consent of both
parties taking into consideration the capital Contribution and the
resources and services contributed by MEC.
4. In the event that MEC and AEMEC cannot reach a mutual agreed upon
reimbursement Arrangement in writing, then the agreement for the
following years will automatically revert to the previously agreed upon
formula (65% MEC and 35% AEMEC).
5. This temporarily Arrangement shall in no way, whether explicitly or
implicitly change or modify any other terms and conditions of the
original agreement which shall remain in full force and effect , nor
shall this Arrangement be construed to be a permanent amendment to the
original agreements nor to confer upon either party any rights, power
privileges which is otherwise not contained in the original agreements.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Arrangement on the date
and place above mentioned in two (2) copies, one of which shall be retained by
each signatory.
AMERICAN EUROPEAN MIDDLE EAST CORPORATION, LLC
By: /s/ Steve Bostic
------------------
Steve Bostic
Its: President
MIDDLE EAST COLLEGE, LTD.;
By: /s/ Elias Bou Saab
--------------------
Elias Bou Saab
Its: Director
EXHIBIT A
<TABLE>
<CAPTION>
FISCAL 1998 BUDGET NEW OLD
---------- ----------
<S> <C> <C>
REVENUES 5,723 5,723
REIMBURSEMENT FOR SERVICES TO MEC 807 -
EXPENSES 3,046 3,046
----- -----
TOTAL EXPENSES 3,853 3,046
----- -----
CONTRIBUTION 1,870 2,677
----- -----
----- -----
DISTRIBUTION TO OWNERS
MEC 933 1,740
---
AEMEC
-----
AEC 796 796
MARK BARNETTE 141 141
----- -----
TOTAL 937 937
</TABLE>
<PAGE>
Exhibit 10.18
Lease: 1770 G Street Between American Intercontinental University, Inc., a
Georgia Corporation (Tenant) and a District of Columbia limited partnership
(Landlord)
-------------------------------------
-------------------------------------
LEASE AGREEMENT
between
THE 1770 G STREET LIMITED PARTNERSHIP
as Landlord
and
AMERICAN INTERCONTINENTAL UNIVERSITY, INC.
as Tenant
June 30, 1998
-----------
-------------------------------------
-------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page
----
<S> <C> <C>
ARTICLE 1
THE PREMISES................................................................................................1
SECTION 1.1 Premises.............................................................................1
SECTION 1.2 Use of Common Areas..................................................................2
SECTION 1.3 Satellite Dishes.....................................................................2
ARTICLE 2
LEASE TERM..................................................................................................4
SECTION 2.1 Term.................................................................................4
SECTION 2.2 Lease Commencement Date..............................................................4
SECTION 2.3 Renewal..............................................................................5
ARTICLE 3
RENT........................................................................................................6
SECTION 3.1 Fixed Rent...........................................................................6
SECTION 3.2 Late Payment; Interest Charge........................................................7
SECTION 3.3 Rent Generally.......................................................................8
ARTICLE 4
ADDITIONAL RENT.............................................................................................8
SECTION 4.1 Increases in Annual Operating Charges and Increases in Real Estate
Taxes..............................................................................................8
SECTION 4.2 Annual Operating Charges Defined and Real Estate Taxes Defined.......................9
SECTION 4.3 Statement of Annual Operating Charges and Real Estate Taxes.........................13
SECTION 4.4 Installment Payments; Proration.....................................................13
SECTION 4.5 Additional Taxes or Governmental Charges............................................15
SECTION 4.6 Change In or Contest of Real Estate Taxes...........................................15
ARTICLE 5
SECURITY DEPOSIT...........................................................................................16
SECTION 5.1 Amount..............................................................................16
SECTION 5.2 Application.........................................................................16
SECTION 5.3 Third Parties.......................................................................17
SECTION 5.4 Letter of Credit....................................................................17
ARTICLE 6
USE........................................................................................................18
SECTION 6.1 Use.................................................................................18
SECTION 6.2 Compliance with Laws................................................................18
SECTION 6.3 Trash Sorting.......................................................................19
SECTION 6.4 Environmental Laws..................................................................19
</TABLE>
i
<PAGE>
Table of Contents (continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 7
PARKING....................................................................................................20
ARTICLE 8
ASSIGNMENT AND SUBLETTING..................................................................................20
SECTION 8.1 Landlord's Consent Required.........................................................20
SECTION 8.2 Transfers of Interests in Tenant....................................................22
ARTICLE 9
MAINTENANCE AND REPAIRS....................................................................................22
SECTION 9.1 Maintenance and Repairs.............................................................22
SECTION 9.2 Landlord's Maintenance and Repairs..................................................23
SECTION 9.3 Damage Caused by Tenant.............................................................23
ARTICLE 10
ALTERATIONS................................................................................................23
SECTION 10.1 As-Is Condition of Premises.........................................................23
SECTION 10.2 Tenant's Improvements...............................................................23
SECTION 10.3 Indemnification for Improvements....................................................25
ARTICLE 11
SIGNS......................................................................................................25
ARTICLE 12
TENANT'S EQUIPMENT.........................................................................................26
SECTION 12.1 Electrical Capacity.................................................................26
SECTION 12.2 Other Infrastructure................................................................26
ARTICLE 13
INSPECTIONS BY LANDLORD...................................................................................26
ARTICLE 14
INSURANCE..................................................................................................27
SECTION 14.1 Insurance To be Carried.............................................................27
SECTION 14.2 Indemnity ..........................................................................28
SECTION 14.3 Increases in Insurance Rates........................................................29
SECTION 14.4 Notice of Accidents.................................................................29
SECTION 14.5 Waiver of Subrogation...............................................................30
</TABLE>
ii
<PAGE>
Table of Contents (continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 15
SERVICES AND UTILITIES.....................................................................................30
SECTION 15.1 Services and Utilities..............................................................30
SECTION 15.2 Interruption of Services and Utilities..............................................32
SECTION 15.3 Conservation Controls...............................................................32
ARTICLE 16
LIABILITY OF LANDLORD......................................................................................33
SECTION 16.1 No Liability of Landlord............................................................33
SECTION 16.2 Transfer by Landlord................................................................33
SECTION 16.3 Disputed Payments...................................................................33
SECTION 16.4 Extent of Landlord's Liability......................................................34
ARTICLE 17
RULES AND REGULATIONS......................................................................................34
ARTICLE 18
DAMAGE OR DESTRUCTION......................................................................................35
SECTION 18.1 Casualty............................................................................35
SECTION 18.2 Limitations on Landlord's Obligations...............................................36
SECTION 18.3 Right to Terminate..................................................................36
ARTICLE 19
CONDEMNATION...............................................................................................36
SECTION 19.1 Termination for Condemnation........................................................36
SECTION 19.2 Award...............................................................................36
ARTICLE 20
DEFAULT ...................................................................................................37
SECTION 20.1 Defaults by Tenant..................................................................37
SECTION 20.2 Landlord's Rights...................................................................38
SECTION 20.3 Liquidated Damages..................................................................38
SECTION 20.4 Landlord's Rights Cumulative........................................................39
SECTION 20.5 No Waiver By Landlord...............................................................39
SECTION 20.6 Landlord's Right to Cure............................................................40
SECTION 20.7 Default by Landlord.................................................................40
SECTION 20.8 Attorney's Fees.....................................................................41
ARTICLE 21
SUBORDINATION AND ATTORNMENT...............................................................................41
SECTION 21.1 Subordination.......................................................................41
SECTION 21.2 Attornment..........................................................................42
</TABLE>
iii
<PAGE>
Table of Contents (continued)
-----------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 22
DELIVERY AT END OF LEASE TERM..............................................................................42
SECTION 22.1 Surrender of Premises...............................................................42
SECTION 22.2 Holding Over........................................................................42
ARTICLE 23
COVENANTS OF LANDLORD AND RESERVATION OF RIGHTS............................................................43
SECTION 23.1 Covenants of Landlord...............................................................43
SECTION 23.2 Landlord's Reservation of Rights....................................................43
ARTICLE 24
GENERAL PROVISIONS.........................................................................................44
SECTION 24.1 Representations by Landlord.........................................................44
SECTION 24.2 No Partnership......................................................................45
SECTION 24.3 Brokers.............................................................................45
SECTION 24.4 Tenant Estoppel Certificates........................................................45
SECTION 24.5 Waiver of Jury Trial................................................................46
SECTION 24.6 Notices.............................................................................46
SECTION 24.7 Partial Invalidity..................................................................47
SECTION 24.8 Pronouns............................................................................47
SECTION 24.9 Successors and Assigns..............................................................47
SECTION 24.10 Entire Agreement....................................................................47
SECTION 24.11 Governing Law.......................................................................47
SECTION 24.12 Section Headings....................................................................48
SECTION 24.13 No Offer............................................................................48
SECTION 24.14 Multiple Counterparts...............................................................48
SECTION 24.15 Time of Essence.....................................................................48
SECTION 24.16 Conflict............................................................................48
SECTION 24.17 [Intentionally Omitted].............................................................48
SECTION 24.18 Joint and Several Liability.........................................................48
SECTION 24.19 Force Majeure.......................................................................48
SECTION 24.20 No Construction of Lease Against Drafter............................................49
EXHIBITS
A-1 - The Phase I Premises
A-2 - The Permanent Premises
B - Certificate of Lease Commencement Date
C - Building Rules and Regulations
D - Janitorial Services
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
E - Contractor Rules and Regulations
F - Work Agreement
G - Form of Letter of Credit
H - Sample Form of Subordination, Nondisturbance and Attornment
Agreement
</TABLE>
v
<PAGE>
LEASE AGREEMENT
---------------
THIS LEASE AGREEMENT (the "Lease") is made as of the ____ day of
______________, 1998, by and between THE 1770 G STREET LIMITED PARTNERSHIP, a
District of Columbia limited partnership ("Landlord"), and AMERICAN
INTERCONTINENTAL UNIVERSITY, INC., a Georgia corporation ("Tenant").
RECITALS:
---------
A. Landlord is the owner of an office and retail building (the
"Building"), located at 1776 G Street, N.W., Washington, D.C. The land on which
the Building is located is known as Lot 70, Square 169 in the District of
Columbia ("Land"). The Land, the Building and all other improvements thereon and
the common areas and appurtenances thereto are collectively referred to herein
as the "Property".
B. Tenant desires to hire and lease space in the Building and Landlord
is willing to demise and lease space in the Building to Tenant, upon the terms,
conditions, covenants and agreements set forth herein.
NOW, THEREFORE, in consideration of the foregoing, One Dollar ($1.00),
the covenants and agreements herein set forth, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending legally to be bound, hereby covenant and agree as set
forth below.
ARTICLE 1
THE PREMISES
------------
SECTION 1.1 Premises
(a) Landlord hereby demises and leases to Tenant and Tenant hereby
hires and leases from Landlord, for the term and upon the terms, conditions,
covenants and agreements herein provided, space located on the lower level of
the Building as follows:
(i) Approximately 13,758 rentable square feet, measured in
accordance with the 1995 GWCAR Standard Method of Measurement, as shown on
Exhibit A-1 attached hereto (the "Phase I Premises").
(ii) Approximately 32,632 rentable square feet (which includes
the Phase I Premises), measured in accordance with the 1995 GWCAR Standard
Method of Measurement, as shown on Exhibit A-2 attached hereto (the "Permanent
Premises"). (The portion of the Permanent Premises that is not part of the Phase
I Premises is the "Phase II Premises").
<PAGE>
Whichever of the Phase I Premises or the Permanent Premises is then leased by
Tenant is hereinafter sometimes referred to as the "Premises". (The number of
rentable square feet of area in the Premises shall be subject to Tenant's right
to make a written request for a final measurement of the Premises before this
Lease is executed. If Tenant request a final measurement, such measurement shall
be conducted jointly by Landlord's architect and Tenant's architect or design
specialist before this Lease is executed and such measurement shall be based
upon the 1995 GWCAR Standard Method of Measurement.)
(b) Tenant shall not commence making Improvements in, or otherwise use
or occupy, the Phase II Premises until December 1, 1998; from and after December
1, 1998, all obligations thereafter arising under this Lease relating to the
Premises shall apply to both the Phase I Premises and the Phase II Premises, and
Tenant's rent obligations shall apply to both the Phase I Premises and the Phase
II Premises (subject to any abatement period applicable to the latter). Such
rent obligations include the obligation to pay additional rent under Article 4
below on both the Phase I Premises and the Phase II Premises.
SECTION 1.2 Use of Common Areas
The lease of the Premises includes the right, together with other
tenants of the Building and members of the public, to use the common public
areas of the Property but includes no other rights not specifically set forth
herein.
SECTION 1.3 Satellite Dishes
(a) Subject to the terms of this Section, Tenant may install, or
request Landlord to install at Tenant's expense and risk, one or more antenna(e)
or satellite communications dishes and appurtenant equipment (each, a "Satellite
Dish") on the roof of the Building. A Satellite Dish may be installed by Tenant
only for purposes incident to Tenant's use of the Premises, and not as a
separate business or for use by third parties other than permitted subtenants.
(b) Tenant shall bear all of the cost and expense of designing,
purchasing, installing, operating, maintaining, repairing, removing and
replacing any Satellite Dish, and for repairing and restoring any damage to the
Property or to Landlord's or any other tenant's property arising therefrom. No
Satellite Dish shall be permitted if its installation will void or adversely
affect any warranty of the roof or if its installation and/or operation would
otherwise materially adversely affect the Building. Landlord may require that
any Satellite Dish be installed at Tenant's expense by Landlord's contractors,
or that Tenant utilize contractors approved by Landlord for such purpose.
Provided that Landlord's personnel are available to escort Tenant and its
contractors (except in an emergency, when no escort shall be required), Tenant
and its contractors shall have access to the roof of the Building, subject to
Article 17 below and Exhibit C hereof, for the foregoing purposes.
(c) Tenant shall be responsible for obtaining any and all governmental
permits, approvals, licenses and certificates necessary for the installation and
operation of a Satellite Dish, and shall comply with all laws, statutes,
ordinances, codes, rules and regulations, and insurance requirements relating
thereto, including (without limitation) building and zoning codes. Without
2
<PAGE>
limiting Tenant's obligations under the preceding sentence, Tenant acknowledges
that the permission of the United States Commission on Fine Arts is required for
the installation of a Satellite Dish on the Building. Landlord shall cooperate
with Tenant in such efforts. All expenses shall be borne by Tenant.
(d) No Satellite Dish shall be permitted if it interferes with
transmissions to or from any other satellite communications dish, antenna, other
transmitting equipment, telecommunications system, or other computer or
electronic equipment then on, in or near the Building. Tenant shall be afforded
a reasonable opportunity to avoid, ameliorate or cure any such interference
problem, but shall be solely liable for any damage incurred by a third party as
a result of interference from any Satellite Dish. Landlord shall use reasonable
efforts, at Tenant's expense, to prevent any third party who installs a
Satellite Dish after Tenant has done so from interfering with transmissions to
or from any previously-installed Satellite Dish used by Tenant.
(e) Each Satellite Dish shall be installed in a manner reasonably
acceptable to Landlord. In addition to other factors set forth elsewhere in this
Section, Landlord may consider the quality of the proposed physical installation
and its safety, and the size, shape and appearance of each Satellite Dish and
its effect on the Building's appearance.
(f) Tenant shall pay Landlord, as additional rent, the sum of One
Thousand Five Hundred Dollars ($1,500) per month per Satellite Dish, such amount
to be increased at the commencement of each Lease Year by the rate of increase
between the last CPI published before the date of this Lease and the last CPI
published before the start of the then-applicable Lease Year. As used herein,
"CPI" means the Consumer Price Index for Washington, D.C.-Maryland-Virginia-West
Virginia (November 1996 = 100) as published from time to time by the United
States Bureau of Labor Statistics or, if such index is discontinued, a
comparable index selected by Landlord in its reasonable discretion and an
appropriate conversion factor shall be used to accommodate the transition
between the two indices.
(g) Notwithstanding any provision of this Lease to the contrary, in the
event Tenant breaches any of the provisions of this Section beyond the
expiration of any applicable notice and/or cure periods under Section 20.1
below, then, as an additional remedy, Landlord may require Tenant to remove the
offending Satellite Dish and, if Tenant does not promptly do so, Landlord may do
so at Tenant's expense as additional rent.
(h) Notwithstanding any provision of this Lease to the contrary, unless
agreed to by Landlord and Tenant at the time Tenant receives permission to
install a Satellite Dish, all Satellite Dishes shall remain the property of
Tenant during and after installation and shall be removed by Tenant at its
expense at the expiration or earlier termination of the Lease Term as if Section
22.1 below applied thereto. If Tenant does not promptly do so, Landlord may do
so at Tenant's expense as additional rent.
(i) Tenant's rights under this Section are non-exclusive.
3
<PAGE>
ARTICLE 2
LEASE TERM
----------
SECTION 2.1 Term
The term of this Lease ("Lease Term") shall commence on the Lease
Commencement Date (hereinafter defined) as determined pursuant to Section 2.2
hereof, and shall end on (a) the day preceding the one hundred twenty-seventh
(127th) monthly anniversary of the Lease Commencement Date, if the Lease
Commencement Date occurs on the first day of a month, or (b) the last day of the
month which includes the one hundred twenty-seventh (127th) monthly anniversary
of the Lease Commencement Date, if the Lease Commencement Date occurs on a day
which is other than on the first day of a month, unless the Lease Term is
terminated earlier in accordance with the provisions of this Lease. Except as
may otherwise be specified, if there is any renewal or extension of the Lease
Term, then the defined term "Lease Term" shall include any renewal or extension
term.
SECTION 2.2 Lease Commencement Date
(a) The Lease Commencement Date shall be July 1, 1998 or such later
date on which Landlord delivers possession of the Phase I Premises to Tenant
("Lease Commencement Date").
(b) It is presently anticipated that the Phase I Premises will be made
available to Tenant for occupancy on July 1, 1998 and the Phase II Premises will
be made available on December 1, 1998; provided, however, if Landlord is unable
for any reason to deliver possession of the Premises by such dates, Landlord
shall not have any liability whatsoever to Tenant on account of Landlord's
inability to deliver possession of the Premises to Tenant and this Lease shall
not be rendered void or voidable as a result of such delay except as provided
below. If Landlord fails, for any reason, to deliver exclusive possession of the
Phase I Premises to Tenant on or before October 31, 1998, then in addition to
any other remedies available to Tenant at law or in equity, Tenant may elect to
cancel this Lease by written notice to Landlord delivered at any time prior to
Landlord's delivery of exclusive possession of the Phase I Premises. If Landlord
fails, for any reason, to deliver exclusive possession of the Phase II Premises
to Tenant on or before March 31, 1999, then, in addition to any other remedies
available to Tenant at law or in equity, Tenant may elect to cancel this Lease
by written notice to Landlord delivered at any time prior to the first to occur
of April 30, 1999 or Landlord's delivery of exclusive possession of the Phase II
Premises. Landlord agrees to use diligent efforts to obtain possession of the
Phase I and Phase II Premises from the current tenant. Any Lease provision which
excuses delays for events of force majeure shall have no applicability to this
paragraph.
(c) Promptly after the Lease Commencement Date, Landlord and Tenant,
upon the request of either, shall execute a certificate in the form attached
hereto as Exhibit B setting forth the Lease Commencement Date and the date on
which the Lease Term shall expire.
4
<PAGE>
SECTION 2.3 Renewal
(a) Provided (i) no default under this Lease exists at the time notice
is given or at the expiration of the initial Lease Term and (ii) that Tenant or
an assignee permitted pursuant to Article 8 hereof is in occupancy of at least
seventy-five percent (75%) of the Premises at the expiration of the initial
Lease Term, Tenant shall have the right and option, exercisable by giving
written notice thereof at least twelve (12) months but not more than fifteen
(15) months prior to the expiration of the initial Lease Term, to extend the
Lease Term for one (1) period of five (5) years, and, upon the giving of such
notice, this Lease shall automatically be extended for such five (5) year period
and no instrument of extension need be executed. In the event that Tenant fails
to give such notice to Landlord as herein provided, this Lease shall
automatically terminate at the end of the initial Lease Term and Tenant shall
have no further right or option to extend this Lease.
(b) The extended Lease Term shall be upon the same covenants,
agreements, provisions, terms and conditions as the original Lease Term, except
that Tenant shall have no further options to renew or extend the Lease Term and
that fixed annual rent during the extended Lease Term shall equal the fair
market rental value of the Premises as of the commencement date of the extended
Lease Term. The fair market rental value shall be determined by comparison to
transactions involving other renewal, not new, tenants. If the parties cannot
agree on the fair market rental value within thirty (30) days after Tenant gives
notice of extension, the fair market rental value shall be determined by the
Three Broker Method (as defined below); provided, however, that if the fair
market rental is determined pursuant to the Three Broker Method, then upon the
rendering of such decision, Tenant shall be entitled to rescind its exercise of
its extension option provided such rescission is exercised by an irrevocable
written notice given to Landlord not more than ten (10) days after the fair
market rental has been determined and the parties have been notified thereof. No
such rescission shall be effective unless Tenant pays Landlord's reasonable
out-of-pocket expenses incurred in connection with such option, including,
without limitation, all costs incurred with respect to the determination of fair
market rental.
(c) The "Three Broker Method" used to determine fair market rental
value shall be applied as follows. Either Landlord or Tenant (the "First Party")
may initiate a determination of the fair market rental value by delivering
written notice to the other (the "Second Party") of the name of a real estate
broker or salesman who has at least ten (10) years of experience as a broker or
salesman for the leasing of office space in downtown Washington, D.C. Within ten
(10) days after receipt of such notice, the Second Party shall name a real
estate broker or salesman who meets the same criteria by written notice to the
First Party. If the Second Party fails to name such a broker or salesman within
such period, then the fair market rental value established by the broker or
salesman named by the First Party shall be the rental. If the Second Party does
name such a broker or salesman, then within fifteen (15) days the two brokers or
salesmen shall together appoint a third broker or salesman who meets the same
criteria and within an additional fifteen (15) days the three brokers or
salesmen shall jointly determine the fair market rental value, which shall be
the rental. Each broker or salesman shall consider all components of this Lease.
Fair market rental value shall be determined with reference to the average or
normal value being achieved by landlords in lease renewals entered into with
private sector tenants for comparable space in comparable buildings in equally
desirable locations within downtown
5
<PAGE>
Washington, D.C. assuming operating expense and real estate tax pass-throughs
and consumer price index or fixed increases corresponding to those contained in
this Lease (if any). If the three brokers or salesmen cannot agree to a fair
market rental value, the average of the determinations of the brokers or
salesmen who are closest to each other shall be binding and conclusive (or, if
the middle broker or salesman is exactly midway between the other two, the
middle determination shall be binding and conclusive). Each party shall pay all
costs, fees and expenses of the broker or salesman selected by it and the
parties shall equally share the costs, fees and expenses of the third broker or
salesman.
ARTICLE 3
RENT
----
SECTION 3.1 Fixed Rent
Tenant shall pay to Landlord as "fixed annual rent" for each Lease Year
for the Premises, without notice, set-off, counterclaim, deduction or demand
except as specifically provided for in this Lease, the following amounts:
<TABLE>
<CAPTION>
Lease Year Fixed Annual Rent Per Rentable Square Foot
---------- ------------------------------------------
<S> <C>
1 $23.25
2 23.72
3 24.19
4 24.67
5 25.17
6 27.42
7 27.96
8 28.52
9 29.09
10 29.68
11 30.27
(partial Lease Year)
</TABLE>
The foregoing amounts are subject to increase under Section 15.1(d) below. Fixed
annual rent shall be payable in equal monthly installments beginning on the
Lease Commencement Date and thereafter monthly, in advance, on the first day of
each month during the Lease Term (each such monthly installment being referred
to herein as "fixed monthly rent"); provided, however, that fixed monthly rent
shall be abated as follows:
6
<PAGE>
<TABLE>
<CAPTION>
Fixed Monthly Rent Is Abated/Payable
------------------------------------
Month* Phase I Premises Phase II Premises
- ------ ---------------- -----------------
<S> <C> <C>
July 1998 payable n/a
August 1998 payable n/a
September 1998 abated n/a
October 1998 abated n/a
November 1998 abated n/a
December 1998 abated abated
January 1999 payable abated
February 1999 payable abated
March 1999 payable abated
April 1999 payable abated
May 1999 payable abated
</TABLE>
*These dates assume a Lease Commencement Date of July 1, 1998 and delivery of
the Phase II Premises to Tenant on December 1, 1998. If the foregoing
assumption(s) proves to be incorrect, then the abatement shall be appropriately
adjusted to provide Tenant with the same economic benefit.
Commencing June 1, 1999 (or such later date as shall be applicable if the above
schedule is revised as set forth above), fixed monthly rent shall be due and
payable on the entire Premises. If rent should abate pursuant to the terms of
the Lease (for any reason other than foregoing "free rent" periods) at any time
when Tenant is intended to receive the economic benefits of "free rent," then
such abatement shall be continued for so long as is necessary for Tenant to
receive the economic benefits of the foregoing "free rent" period. Concurrently
with the signing of this Lease, Tenant shall pay to Landlord a sum equal to one
(1) month's fixed monthly rent for the Permanent Premises, forty-one percent
(41%) of which sum shall be credited by Landlord against the fixed monthly rent
due for the first full calendar month of the Lease Term, and fifty-nine percent
(59%) of which shall be credited by Landlord against the fixed monthly rent due
for the month of June 1999 (or such later date as shall be applicable if the
above schedule is revised as set forth above). If the Lease Commencement Date is
a date other than the first day of a month, rent from such date until the first
day of the following month shall be prorated at the rate of one-thirtieth
(1/30th) of the fixed monthly rent for each day. As used herein, the first
"Lease Year" shall mean the period commencing on the Lease Commencement Date and
continuing for any partial calendar month in which the Lease Commencement Date
occurs and for twelve (12) full calendar months thereafter. Each successive
twelve (12) month period thereafter during the Term shall constitute a
subsequent "Lease Year", except that the last Lease Year shall end on the
expiration of this Lease.
SECTION 3.2 Late Payment; Interest Charge
If Tenant fails to make any payment of rent within ten (10) days after
the date such payment is due and payable, as evidenced, with respect to fixed
annual rent, by a schedule to be provided by Landlord to Tenant (such schedule
to be subject to revision from time to time
7
<PAGE>
including, without limitation, if the Lease Commencement Date is other than July
1, 1998 and/or if the Phase II Premises are delivered to Tenant on a date after
December 1, 1998), Tenant shall pay to Landlord a late charge of five percent
(5%) of the amount of such payment, together with interest on said overdue
amount from the due date until paid at the Default Rate (as defined below). Such
late charges and interest shall constitute additional rent due hereunder, shall
be paid within five (5) days after demand therefor by Landlord and shall be in
addition to all other rights and remedies provided to Landlord in this Lease.
Past due amounts owed by Landlord to Tenant shall also accrue interest at the
Default Rate. For purposes of this Lease, the "Default Rate" shall mean the
"prime rate" published from time to time by The Wall Street Journal in its
"money rates" section plus two percentage points, but in no event at a rate
which is higher than the legal limit. The provisions of this Section are
separate from, and Landlord's rights and remedies are in addition to, the
provisions of Article 20 below.
SECTION 3.3 Rent Generally
As used in this Lease, "rent" includes all fixed annual rent, fixed
monthly rent, all sums payable under Article 4 below, all additional rent and
all other sums due to Landlord under this Lease, however called. All rent
payable by Tenant shall be paid to Landlord in lawful money of the United States
of America at the office of Landlord or to such other party or to such other
address as Landlord may designate from time to time by written notice to Tenant.
Unless specifically stated otherwise in this Lease, all rent payable under this
Lease shall be paid in full by Tenant, in advance, without notice or demand and
without set-off, deduction, recoupment, abatement, counterclaim or adjustment of
any kind; additional rent for which no due date is otherwise specified in this
Lease is due and payable as aforesaid but within ten (10) days after demand is
made (instead of in advance). Tenant's covenant to pay rent is an independent
covenant. If Landlord shall at any time or times accept rent to which Landlord
is entitled hereunder after the same shall become due and payable, such
acceptance shall not excuse a delay upon subsequent occasions, or constitute, or
be construed as, a waiver of any or all of Landlord's rights hereunder. Tenant's
obligation for the payment of rent shall survive the expiration or sooner
termination of this Lease.
ARTICLE 4
ADDITIONAL RENT
---------------
SECTION 4.1 Increases in Annual Operating Charges and Increases in Real Estate
Taxes
(a) From and after January 1, 2000, Tenant shall pay to Landlord
Tenant's proportionate share of the amount by which the Annual Operating Charges
(as hereinafter defined) incurred by Landlord in the operation of the Property
during each operating year falling entirely or partly within the Lease Term
exceed the Annual Operating Charges incurred by Landlord in the operation of the
Property during calendar year 1999 ("Operating Charges Base Year"). For purposes
of this Section 4.1(a), Tenant's proportionate share of such increase shall be a
percentage equal to the rentable square footage of the Premises divided by the
rentable square footage of the Building, excluding any retail space and storage
space. As used in this
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Lease, an "operating year" is the period beginning on January 1 and ending on
the next December 31, both dates inclusive, or any portion of such period.
(b) From and after January 1, 2000, Tenant shall pay to Landlord
Tenant's proportionate share of the amount by which the Real Estate Taxes (as
hereinafter defined) actually paid by Landlord during each operating year
falling entirely or partly within the Lease Term exceed the Real Estate Taxes
actually paid by Landlord during calendar year 1999 ("Real Estate Taxes Base
Year"). For purposes of this Section 4.1(b), Tenant's proportionate share of
such increase shall be a percentage equal to the rentable square footage of the
Premises divided by the rentable square footage of the Building, excluding
storage space.
SECTION 4.2 Annual Operating Charges Defined and Real Estate Taxes Defined
(a) The "Annual Operating Charges" are defined as the sum of all costs
and expenses incurred by or on behalf of Landlord in operating, owning,
managing, insuring, securing and maintaining the Property or any part thereof,
including, without limitation, all costs and expenses of: operating, equipping,
maintaining, repairing, replacing, policing, painting and cleaning, lighting,
heating, ventilating and air-conditioning equipment, signage and access control
for or of the Property; salaries, fringe benefits and other compensation,
however denominated, of all personnel engaged in operating and maintenance of
the Property (including, but not limited to, health, accident and group life
insurance and the cost of uniforms, equipment and employment taxes); alarm
systems; elevators and escalators; all insurance whatsoever, including, without
limitation, liability insurance for personal injury, death and property damage
(including, without limitation, to Landlord's personal property), insurance
against fire, extended coverage, theft or other casualties, worker's
compensation insurance covering personnel, fidelity bonds for personnel,
insurance against liability for defamation and claims of false arrest occurring
in the Building, or on and about the Property, rent loss insurance, sprinkler
leakage insurance, and plate glass insurance for glass serving the common areas
of the Property; all supplies and materials; maintenance, repair and replacement
of all exterior glass; storage, removal and other costs associated with debris;
the costs of any capital improvements or other costs (i) which are intended as a
labor-saving device or to effect other economies in the operation or maintenance
of the Property, or (ii) incurred after the date hereof that are required under
any governmental law or regulation enacted after the date hereof (provided,
however, that if any such costs described in (i) or (ii) above is a capital
expenditure, such costs shall be amortized [including interest on the
unamortized costs] over its useful life as Landlord shall reasonably determine);
coordination and use of any loading dock serving the Building; repair or
replacement of awnings, paving, curbs, walkways, interior and exterior
landscaping, drainage, pipes, ducts, conduits and similar items, lighting
facilities and the roof; the rental of music program services and loudspeaker
systems, and the maintenance and repair of such equipment; all costs and
expenses associated with Landlord's management office, Landlord's storage areas
and other management facilities in the Building and the equipment therein; lobby
attendant (if any) and concierge (if any); energy management services,
maintenance contracts, window cleaning, snow removal, elevator maintenance, char
and janitorial service and trash removal; personal property taxes on equipment
and supplies used in connection with the Property; costs of continuing education
and professional and trade association dues for Building management staff;
recycling expenses; the costs of any additional services not provided to the
Property at the Lease
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Commencement Date but thereafter provided by Landlord; cost of water and sewer
services; parcel pick-up and delivery services; any costs and expenses of
compliance with legal requirements; legal fees not recovered from other parties;
accounting fees; management fees and costs paid to the management company
managing the Property; fulfillment of Landlord's obligations under one or more
vault space or public space agreements with the District of Columbia and under
easements, covenants and cost-sharing agreements; and any costs, charges and
expenses, in addition to those set forth in this definition, which according to
generally accepted accounting principles and practice would be regarded as costs
to operate, own, manage, insure, secure or maintain the Property.
(b) If the Building is less than ninety-five percent (95%) occupied
during any operating year (including the Operating Charges Base Year) or part
thereof, Annual Operating Charges shall include all additional costs and
expenses of operation, management, insuring, securing and maintenance of the
Property which Landlord reasonably determines that it would have paid or
incurred during such operating year if the Building had been ninety-five percent
(95%) occupied.
(c) Annual Operating Charges shall not include the following:
(A) The cost of the original construction or any capital
addition made to the Building, including the cost to prepare space for
occupancy by a new tenant, except as specifically set forth above.
(B) Repairs or other work occasioned by fire, windstorm or
other insured casualty or hazard to the extent that Landlord receives
proceeds of such insurance to be used for such purpose.
(C) Leasing commissions, marketing and advertising expenses
and other costs incurred in leasing or procuring renewal or new
tenants, including (without limitation) attorney's fees and space
planning costs.
(D) Repairs or rebuilding necessitated by condemnation to the
extent that Landlord receives an award.
(E) Depreciation and amortization of the Building and its
equipment.
(F) Any ground or underlying lease rental.
(G) Debt expenses and interest, principal, points and fees on
debts, or amortization on any mortgage or other debt instrument
encumbering the Building or the Land.
(H) Rentals for items (except when needed in connection with
normal repairs and maintenance of permanent systems) which if
purchased, rather than
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rented, would constitute a capital improvement which is not
specifically included in Annual Operating Charges.
(I) Advertising and promotional expenditures, and costs of
signs in or on the Building identifying the owner of the Building or
other tenants' signs.
(J) Costs, including permit, license and inspection costs,
incurred with respect to the installation of improvements made for
tenants or other occupants in the Building or incurred in renovating or
otherwise improving, decorating, painting or redecorating vacant space
for tenants or other occupants of the Building.
(K) Expenses in connection with services or other benefits
which are not offered to Tenant or for which Tenant is charged directly
but which are provided to another tenant or occupant of the Building
without charge.
(L) Costs incurred by Landlord due to the violation by
Landlord or any tenant of the terms and conditions of any lease of
space in the Building.
(M) The amount of the management fee paid or charged by
Landlord in connection with the management of the Building to the
extent such management fee is in excess of the management fee
customarily paid or charged by landlords of first-class buildings in
downtown Washington, D.C.
(N) Salaries and other benefits paid to the employees of
Landlord to the extent customarily included in or covered by a
management fee paid or charged by landlords of first-class buildings in
downtown Washington, D.C. in connection with the management of such
properties, provided that in no event shall Annual Operating Charges
include salaries and/or benefits attributable to personnel above the
level of Building manager.
(O) The amount of rent for any office space occupied by
Building management personnel to the extent the size or fair market
rental value of such office space exceeds the size or fair market
rental value of office space occupied by management personnel of
first-class buildings in downtown Washington, D.C. (If any such office
space is used to manage more than one building, then the rent charged
hereunder shall be equitably apportioned.)
(P) Amounts paid to Landlord or to subsidiaries or affiliates
of Landlord for goods and/or services in the Building to the extent the
same exceeds the costs of such goods and/or services rendered by
unaffiliated third parties on a competitive basis.
(Q) Landlord's general corporate overhead and general and
administrative expenses.
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(R) Any compensation paid to clerks, attendants or other
persons in commercial concessions operated by Landlord unless made a
part of Tenant's base.
(S) Costs incurred in connection with upgrading the Building's
Common Areas to comply with laws, rules, regulations and codes in
effect and applicable to the Building's Common Areas prior to the date
hereof, including (without limitation) the Americans With Disabilities
Act.
(T) Tax penalties incurred as a result of Landlord's
negligence, inability or unwillingness to make payments and/or to file
any income tax or informational returns when due.
(U) Costs arising from Landlord's charitable or political
contributions.
(V) Costs arising from earthquake insurance unless landlords
of first-class buildings in downtown Washington, D.C. also carry it.
(W) Costs arising from latent defects in the base Building.
(X) Costs (including in connection therewith all attorneys'
fees and costs of settlement, judgments and payments in lieu thereof)
arising from claims, disputes, litigation or arbitration pertaining to
Landlord.
(Y) Costs associated with the operation of the business of the
partnership or entity which constitutes Landlord as the same are
distinguished from the costs of operation of the Building, including
partnership accounting and legal matters, costs of defending any
lawsuits with any mortgagee (except as the actions of Tenant may be in
issue), and costs of selling, syndicating, financing, mortgaging or
hypothecating any of Landlord's interest in the Building.
(Z) Any costs expressly excluded from Annual Operating Charges
elsewhere in this Lease.
(AA) Any Real Estate Taxes and any costs or taxes expressly
excluded from Real Estate Taxes in this Lease.
(BB) Any other costs not customarily included in Annual
Operating Charges (or the definitional equivalents) for other
first-class office buildings in downtown Washington, D.C.
(d) "Real Estate Taxes" means the total of all real estate taxes,
business improvement district assessments, ad valorem taxes, transit taxes and
other assessments and charges (including payments in lieu of taxes), general and
special, ordinary and extraordinary, foreseen or unforeseen, assessed, levied,
or imposed upon the Building or the Land which are
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actually paid during the operating year in question; provided, however, if any
assessment is payable in installments, Real Estate Taxes for any operating year
shall include only the installments payable in such operating year. Real Estate
Taxes shall also include legal costs and other costs and expenses incurred in
any appeal of the tax assessment upon which such Real Estate Taxes are based,
whether or not such appeal is successful. Such costs and expenses shall be
included in Real Estate Taxes for the operating year for which appeal is made
without regard to the date such costs are actually incurred. Real Estate Taxes
shall not include (i) franchise taxes, gift taxes, capital stock taxes,
inheritance taxes, estate taxes, federal and state net income taxes, and other
taxes attributable to Landlord's net income (as opposed to rents, receipts or
income attributable to the Building or Property), (ii) any items accounted for
in Annual Operating Expenses, (iii) any taxes paid directly to the taxing
authority by Tenant, and (iv) penalties, interest or late fees levied if
Landlord fails to timely pay its Real Estate Taxes if Tenant has paid its
proportionate share thereof.
SECTION 4.3 Statement of Annual Operating Charges and Real Estate Taxes
Except as provided in Section 4.4 below, Landlord shall submit to
Tenant each year a statement in reasonable detail setting forth the respective
amounts payable by Tenant pursuant to this Article for the preceding operating
year for increases in Annual Operating Charges and for increases in Real Estate
Taxes. Within thirty (30) days after receipt of such statement, Tenant shall pay
to Landlord the amount shown thereon. For all purposes under this Article,
Tenant's liability for increases in Annual Operating Charges and Tenant's
liability for increases in Real Estate Taxes shall each be calculated
separately.
SECTION 4.4 Installment Payments; Proration
(a) In lieu of accepting from Tenant one annual payment for Tenant's
proportionate share of the increase in the Annual Operating Charges and one
annual payment for Tenant's proportionate share of the increase in Real Estate
Taxes, Landlord shall have the right, from time to time, to require Tenant to
make estimated monthly payments on account of the respective amounts Tenant will
be obligated to pay pursuant to this Article for each operating year falling
entirely or partly within the Lease Term. If Landlord exercises such right,
Landlord shall submit to Tenant a statement setting forth Landlord's reasonable
estimate of each of the respective amounts Tenant will be obligated to pay
pursuant to this Article for the operating year in question, which estimates may
be revised by Landlord from time to time during the operating year, and Tenant
shall pay to Landlord on the first (1st) day of each month following receipt of
such statement during such operating year an amount (separately calculated and
payable for each of the estimated increase in Annual Operating Charges and the
estimated increase in Real Estate Taxes) equal to such respective estimated
amount multiplied by a fraction, the numerator of which is 1 and denominator of
which is the number of months during such operating year which fall within the
Lease Term and follow the date of the foregoing statement. After the expiration
of such operating year, Landlord shall submit to Tenant a statement showing
Tenant's proportionate share of the increase in the Annual Operating Charges
incurred during such operating year and Tenant's proportionate share of the
increase in Real Estate Taxes for such operating year, and the respective
aggregate amount of the estimated payments made by Tenant on account of each of
the increase in Annual Operating Charges and the increase in Real Estate Taxes.
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If the aggregate amount of such estimated payments paid by Tenant for the
increase in Annual Operating Charges exceeds Tenant's actual liability for such
increase, Landlord shall credit such excess to Tenant's account, subject to
Section 4.4(d) below. If Tenant's actual liability for such increase in the
Annual Operating Charges exceeds the estimated payments made by Tenant on
account thereof, then Tenant shall pay to Landlord the total amount of such
deficiency within thirty (30) days after demand. If the aggregate amount of such
estimated payments paid by Tenant for the increase in Real Estate Taxes exceeds
Tenant's actual liability for such increase, Landlord shall credit such excess
to Tenant's account, subject to Section 4.4(d) below. If Tenant's actual
liability for such increase in Real Estate Taxes exceeds the estimated payments
made by Tenant on account thereof, then Tenant shall pay to Landlord the total
amount of such deficiency within thirty (30) days after demand.
(b) In the event the Lease Term commences or expires during an
operating year, then each of the increase in the Annual Operating Charges to be
paid by Tenant for such operating year and the increase in Real Estate Taxes to
be paid by Tenant for such operating year shall be determined by multiplying the
amount of Tenant's proportionate share thereof for the full operating year by a
fraction, the numerator of which is the number of days during such operating
year falling within the Lease Term, and the denominator of which is 365. At
least thirty (30) days prior to the end of the Lease Term, Landlord may present
to Tenant a written statement containing a reasonable estimate of the amounts
Tenant would be obligated to pay under this Article if the actual Annual
Operating Charges and the actual Real Estate Taxes for the operating year had
been determined. Tenant shall be required to pay such estimated amounts on or
before the last day of the Lease Term, and if all or any portion of the payments
are not made, Landlord shall be entitled to deduct such amount from the Security
Deposit, if any. Once the Annual Operating Charges and the Real Estate Taxes for
the last operating year of the Lease Term have been determined, Landlord shall
provide Tenant with a statement of the actual increase in Annual Operating
Charges and the actual increase in Real Estate Taxes for which Tenant is liable.
If Tenant owes an additional amount, such amount is due on or before sixty (60)
days after receipt of the statement. If Tenant is entitled to a refund, Landlord
shall have sixty (60) days from the date of the statement within which to remit
payment to Tenant, subject to Section 4.4(d) below.
(c) The parties' obligation to reconcile increases in Annual Operating
Charges and Real Estate Taxes shall survive the expiration or termination of
this Lease, and shall be applicable even if no estimated statement is provided
under Section 4.4(a) above. Notwithstanding any dispute which may arise in
connection with the computation or estimate of the amount due under this
Article, Tenant shall be obligated to pay the amount specified by Landlord,
without set-off, recoupment, abatement, counterclaim, adjustment or deduction of
any kind, pending the resolution of any dispute.
(d) In the event Tenant is in default under this Lease at the time any
credit or payment is otherwise to be made to Tenant under this Section, Landlord
may offset against such credit or payment to compensate it for any amount owed
by Tenant or for damage incurred or that may be incurred by Landlord as a
consequence of said default.
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SECTION 4.5 Additional Taxes or Governmental Charges
In the event that any business, rent, or other taxes, or any
governmental charges (including mandates for energy savings) that are now or
hereafter levied upon Tenant's use or occupancy of the Premises or Tenant's
business at the Premises are charged, enacted, changed, or altered so that any
of such taxes are levied against Landlord, or the mode of collection of such
taxes is changed so that Landlord is responsible for collection or payment of
such taxes, Tenant shall pay any and all such taxes to Landlord upon written
demand from Landlord.
SECTION 4.6 Change In or Contest of Real Estate Taxes
In the event of any change by any taxing body in the period or manner
in which any of the Real Estate Taxes are levied, assessed or imposed, Landlord
shall have the right, in its sole discretion, to make equitable adjustments with
respect to computing increases in Real Estate Taxes. Real Estate Taxes which are
being contested by Landlord shall be included in computing Tenant's
proportionate share of the increases in Real Estate Taxes under this Article,
but if Tenant shall have paid additional rent on account of contested Real
Estate Taxes and Landlord thereafter receives a refund of such taxes, Tenant
shall receive a credit toward subsequent rent payments in an amount equal to
Tenant's proportionate share of such refund.
SECTION 4.7 Tenant Audit Right
Landlord shall maintain reasonably complete and accurate records of
matters relating to the calculation of the Annual Operating Charges and Real
Estate Taxes and Tenant's share thereof for a period of at least one (1) year.
Within sixty (60) days after receipt by Tenant of Landlord's annual
reconciliation statement (the "Statement"), Tenant shall advise Landlord whether
Tenant desires to conduct an audit of such Statement. If Tenant so advises
Landlord, a "Big Four" independent certified public accounting firm, designated
and paid for by Tenant, may, after reasonable notice to Landlord and at
reasonable times, inspect Landlord's records with respect to the Statement at
Landlord's offices, provided that Tenant's disputing or confirming a Statement
shall not relieve Tenant from paying the Additional Rent set forth in the
Statement during the pendency of the dispute. Tenant's failure to advise
Landlord of its intent to conduct such an audit within the aforesaid sixty (60)
day period or, in the event Tenant timely gives notice of its intent to conduct
such an audit, to dispute in writing with reasonable detail the amount of
Additional Rent set forth in any Statement within six (6) months of the date of
such Statement, shall be deemed to be Tenant's approval of such Statement and
Tenant thereafter waives the right or ability to dispute the amounts set forth
in such Statement. Tenant shall bear the expense of any audit or review
conducted; provided, however, that in the event that it is ultimately determined
that Landlord's Statement is overstated by eight percent (8%) or more, then
Landlord shall pay Tenant's reasonable audit or review expenses. Any overcharges
shown by any such inspection shall be credited against the next installment(s)
of Rent or other charges due from Tenant, or if none, shall be refunded to
Tenant. Any undercharges shown by any such inspection shall be paid by Tenant
within ten (10) days.
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ARTICLE 5
SECURITY DEPOSIT
----------------
SECTION 5.1 Amount
(a) Simultaneously with the execution of this Lease, Tenant shall
deposit with Landlord the sum of Six Hundred Forty-Three Thousand Dollars
($643,000.00) as a security deposit (the "Security Deposit").
(b) Provided Tenant has not failed to make any payment of rent within
five (5) days after the due date under this Lease (except that Tenant may fail
to make up to two (2) payments of rent per calendar year within ten (10) days
after their due dates under this Lease before the foregoing five-day proviso
goes into effect), regardless of any other applicable notice and/or cure period,
or otherwise been in default hereunder beyond the expiration of any applicable
notice and/or cure period, then, at the beginning of the second (2nd) and third
(3rd) Lease Years, Landlord shall reduce the amount of the then-outstanding
Security Deposit by one-third (1/3rd) at the beginning of each such Lease Year.
Provided Tenant has not failed to make any payment of rent within five (5) days
after the due date under this Lease (except that Tenant may fail to make up to
two (2) payments of rent per calendar year within ten (10) days after their due
dates under this Lease before the foregoing five-day proviso goes into effect),
regardless of any other applicable notice and/or cure period, or otherwise been
in default hereunder beyond the expiration of any applicable notice and/or cure
period, then, at the beginning of the fourth (4th) Lease Year, Landlord shall
reduce the Security Deposit to an amount equal to two (2) months' fixed monthly
rent. Provided Tenant has not failed to make any payment of rent within five (5)
days after the due date under this Lease (except that Tenant may fail to make up
to two (2) payments of rent per calendar year within ten (10) days after their
due dates under this Lease before the foregoing five-day proviso goes into
effect), regardless of any other applicable notice and/or cure period, or
otherwise been in default hereunder beyond the expiration of any applicable
notice and/or cure period, and Tenant renews the Lease Term in accordance with
the terms of this Lease, then, at the beginning of the renewal Lease Term,
Landlord shall refund the Security Deposit to Tenant.
(c) Landlord shall not be required to maintain the Security Deposit in
a separate account. The Security Deposit shall not earn interest unless required
by applicable law. The Security Deposit shall be security for the performance by
Tenant of all of Tenant's obligations, covenants, conditions and agreements
under this Lease.
SECTION 5.2 Application
In the event of any default by Tenant hereunder during the Lease Term,
Landlord shall have the right, but shall not be obligated, to use, apply, or
retain all or any portion of the Security Deposit for (a) the payment of any
rent as to which Tenant is in default, or (b) the payment of any amount which
Tenant may be obligated to pay to repair physical damage to the Premises or the
Building pursuant to this Lease, or (c) the payment of any amount which Tenant
may be obligated to pay for the compensation to Landlord for any losses incurred
by reason of Tenant's default, including, but not limited to, any damage or
deficiency arising in connection with the
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reletting of the Premises. If any portion of the Security Deposit is so used or
applied, then within ten (10) business days after written notice to Tenant of
such use or application, Tenant shall deposit with Landlord cash in an amount
sufficient to restore the Security Deposit to its original amount, and Tenant's
failure to do so shall constitute a default under this Lease. The Security
Deposit is not a measure of damages or liquidated damages, and Landlord's use of
the Security Deposit is not a waiver of its other rights and remedies. Provided
Tenant is not in default hereunder, Landlord shall return the Security Deposit
to Tenant, less such portion thereof as Landlord shall have applied or be
entitled to apply to satisfy any default by Tenant hereunder, after the last to
occur of the making of the payment of the final operating year's increase in
Annual Operating Charges and/or Real Estate Taxes under Section 4.4(b) above, or
within forty-five (45) days following the later to occur of the expiration of
the Lease Term or the vacating and surrendering of the Premises by Tenant to
Landlord.
SECTION 5.3 Third Parties
In the event of the sale or transfer of Landlord's interest in the
Building, Landlord shall have the right to transfer the Security Deposit to the
transferee of Landlord's interest, in which event Tenant shall look only to the
new landlord for the return of the security deposit, and the transferor Landlord
shall thereupon be released from all liability to Tenant for the return of the
Security Deposit.
SECTION 5.4 Letter of Credit
(a) Tenant shall have the right to deposit and maintain the Security
Deposit as an irrevocable commercial letter of credit in form and substance
reasonably acceptable to Landlord. (A letter of credit meeting the terms of this
Section is referred to as the "Letter of Credit.") The Letter of Credit must be
issued by NationsBank, N.A. or another commercial bank (the "Issuer") reasonably
acceptable to Landlord and must be presentable in the Washington, D.C.
metropolitan area. The Letter of Credit must also be payable at sight without
presentation of any other documents, statements, or authorizations (except for
the draw request form attached thereto), must allow for partial draws, and must
have a term of not less than one (1) year from the Commencement Date. The Letter
of Credit must also provide for its automatic renewal on a year-to-year basis
unless the Issuer gives Landlord at least two (2) months written notice of
nonrenewal, and the final expiration date of the Letter of Credit may not be any
earlier than the date which is three (3) months after the scheduled initial
Lease Term expiration date (or, in the case of a renewal when the Security
Deposit has not been refunded to Tenant, three (3) months after the scheduled
expiration date of the renewal Lease Term).
(b) The Letter of Credit must also be subject to being drawn upon in
the event of any default by Tenant under this Lease, or if the Issuer gives
notice of nonrenewal to Landlord and a replacement Letter of Credit (or the cash
equivalent) is not delivered to Landlord at least thirty (30) days prior to the
non-renewed Letter of Credit's expiration date, or if there is a dispute between
Landlord and Tenant on the date which is thirty (30) days prior to the stated
expiration date of the Letter of Credit over whether Landlord may draw on the
Letter of Credit, or if Landlord assigns this Lease to a third party and the
Issuer does not consent to the transfer of the Letter of Credit to the successor
Landlord, or if the Issuer is not solvent or the Issuer has been put
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into conservatorship or receivership (or any similar program) by any
governmental authority having regulatory oversight over the Issuer.
Notwithstanding any implication to the contrary contained in the foregoing, it
is understood and agreed that Landlord's willingness to accept a Letter of
Credit as the Security Deposit in lieu of cash is an accommodation to Tenant and
that Tenant bears all risk of the Issuer failing, refusing or being unable to
honor a proper draw thereon. If the Issuer fails, refuses or is unable to honor
a proper presentment of the Letter of Credit, Tenant shall be obligated to
immediately deliver a replacement Letter of Credit meeting the terms of this
paragraph (or the cash equivalent) to serve as the Security Deposit. A letter of
credit in the form attached hereto as Exhibit G meets the technical requirements
of this Section.
(c) In the event the Security Deposit is to be reduced pursuant to
Section 5.1 above, Landlord shall return the Letter of Credit it then possesses
upon delivery to it of cash or a replacement Letter of Credit in the appropriate
amount.
ARTICLE 6
USE
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SECTION 6.1 Use
Tenant shall use and occupy the Premises solely for an accredited
academic institution providing educational instruction to adults, and for
ancillary purposes including general office or professional support service uses
in connection therewith, but for no other use or purpose other than general
office or back room support services. Tenant shall not use or occupy the
Premises for any unlawful purpose or in any manner that will constitute waste,
nuisance or unreasonable annoyance to Landlord or other tenants of the Building.
Notwithstanding anything contained in this Lease to the contrary, Tenant shall
have no obligation to occupy the Premises during the Lease Term; provided,
however, that Tenant's ceasing to occupy the Premises shall not relieve Tenant
from its obligation to pay the rent pursuant to the terms of this Lease.
SECTION 6.2 Compliance with Laws
Tenant shall comply with all present and future laws, ordinances
(including zoning ordinances and land use requirements), regulations, and orders
of the United States of America, the District of Columbia, and any other public
or quasi-public authority having jurisdiction over the Premises concerning the
use, occupancy, facilities in and condition of the Premises and all machinery,
equipment, facilities, entrances thereto, exits therefrom and furnishings
therein (excluding any requirements for structural changes or matters affecting
the restrooms or base building systems, the responsibility for which shall
remain with Landlord, who shall comply with all applicable laws relating
thereto). It is expressly understood that Tenant, at Tenant's cost and expense,
will obtain an occupancy permit for the Premises. If any future law, ordinance,
regulation, or order requires another occupancy permit or other permit for the
Premises, Tenant will obtain such permit at Tenant's sole expense. Tenant shall
pay all costs, expenses, liabilities, losses, damages, fines, penalties, claims,
and demands, including reasonable counsel fees, that may in any manner arise out
of or be imposed because of the failure of Tenant to comply with the covenants
of this Section.
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SECTION 6.3 Trash Sorting
Tenant covenants and agrees, at its sole cost and expense: (a) to
comply with all present and future laws, orders, and regulations of the District
of Columbia, federal, municipal, and local governments, departments,
commissions, agencies and boards regarding the collection, sorting, separation,
and recycling of garbage, trash, rubbish and other refuse (collectively,
"trash"); (b) to sort and separate its trash into such categories as are
provided by law; (c) that each separately sorted category of trash shall be
placed in separate receptacles as directed by Landlord; (d) that Landlord
reserves the right to refuse to collect or accept from Tenant any trash that is
not separated and sorted as required by law, and to require Tenant to arrange
for such collection at Tenant's sole cost and expense, utilizing a contractor
satisfactory to Landlord; and (e) that Tenant shall pay all costs, expenses,
fines, penalties, or damages that may be imposed on Landlord or Tenant by reason
of Tenant's failure to comply with the provisions of this Section.
SECTION 6.4 Environmental Laws
(a) This Section shall survive the expiration or termination of this
Lease.
(b) Except as otherwise expressly permitted by this Lease, Tenant shall
not use any portion or all of the Property for the use, generation, treatment,
storage or disposal of "toxic substances," "contaminants," "pollutants,"
"hazardous materials", "hazardous waste", "hazardous substances" or "oil"
(collectively, "Materials") as such terms are defined under the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601
et seq., as amended, the Resource Conservation and Recovery Act of 1976, 42
U.S.C. 6901 et seq., as amended, and any and all other environmental statutes
which regulate the use of hazardous and/or dangerous substances, and the
regulations promulgated thereunder and any and all state and local laws,
statutes, codes, ordinances, rules and regulations, without the express prior
written consent of Landlord, and then only to extent that the presence and/or
discharge of the Materials is (i) properly licensed and approved by all
appropriate governmental officials and in accordance with all applicable laws
and regulations and (ii) in compliance with any terms and conditions stated in
said prior written approval by Landlord. Tenant may use such Materials as are
used for ordinary office purposes in the ordinary course of Tenant's business,
provided that such use is in accordance with all applicable statutes, laws,
codes, ordinances, rules and regulations, and any manufacturer's instructions;
and provided further that Tenant may not discharge any Materials except as
provided by applicable statutes, laws, codes, ordinances, rules and/or
regulations, and specifically may not discharge any Materials in any public
sewer or any drain and/or drainpipe leading or connected thereto. Tenant shall
promptly give written notice to Landlord of any communication received by Tenant
from any governmental authority or other person or entity concerning any
complaint, investigation or inquiry regarding any use, generation, treatment,
storage or disposal (or alleged use, generation, treatment, storage or disposal)
by Tenant of any Materials in or about the Premises or Property. Landlord shall
have the right (but not the obligation) to conduct such investigations or tests
(or both) as Landlord shall reasonably deem necessary with respect to any such
complaint, investigation or inquiry, and Tenant, at its expense, shall take such
action (or refrain from taking such action) as Landlord may request in
connection with such investigations and tests by Landlord.
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(c) Notwithstanding anything in this Lease to the contrary, Tenant
shall not materially adversely affect (as reasonably determined by Landlord) the
indoor air quality of the Premises or the Building; without limiting the
preceding clause, it shall apply to (and take precedence over any other
provision of this Lease concerning) the use of the Premises, the type of
equipment, furniture, furnishings, fixtures and personal property that may be
brought into the Premises, the construction materials used in Improvements, the
standard of maintenance required for the Premises, and compliance with any
smoking policy now or hereafter adopted for the Building by Landlord or required
by law.
(d) Tenant shall be responsible at its own cost for complying with the
provisions of the Americans with Disabilities Act or any similar federal or
District of Columbia statute, law, ordinance, or code, as they may be amended
from time to time, and the rules and regulations which may be adopted thereunder
from time to time, as the same may be applicable to the Premises. Landlord's
approval of any Improvement or other act by Tenant shall not be deemed to be a
representation by Landlord that said Improvement or act complies with applicable
law, and Tenant shall remain solely responsible for said compliance.
ARTICLE 7
PARKING
-------
Tenant shall have the right to purchase one (1) unreserved parking
contract in the Building's garage for every 1,500 square feet leased. Tenant
must exercise the foregoing right within thirty (30) days after the Lease
Commencement Date (or, with respect to any expansion of the Premises, within
thirty (30) days after the date such space is added to the Premises) or the
right shall expire with respect to any unexercised contracts. All parking
contracts and arrangements must be handled by Tenant directly with the operator
of the Building's garage and Landlord bears no responsibility or liability with
respect thereto (unless and to the extent Landlord self-manages the garage).
Parking contracts will be made available on a month-to-month basis and Tenant
agrees to pay prevailing prices therefor, as said prices may change from time to
time. Tenant agrees to abide by, and to cause anyone acquiring a parking
contract through Tenant to abide by, all rules and regulations now or thereafter
applicable to the garage. Tenant further agrees that, without limiting any other
right or remedy provided by this Lease or by applicable law, its rights under
this Article may be revoked in the event of any default under this Lease or
under the terms of any parking contract.
ARTICLE 8
ASSIGNMENT AND SUBLETTING
-------------------------
SECTION 8.1 Landlord's Consent Required
(a) Tenant shall not sell, assign, transfer, mortgage, or otherwise
encumber this Lease or its interest therein (collectively "assign" or
"assignment") or sublet, rent or permit anyone to occupy the Premises, or any
part thereof (collectively "sublet"), without obtaining the prior written
consent of Landlord, which consent shall not be unreasonably withheld,
conditioned or
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delayed; provided, however, that Landlord shall also have the rights set forth
in Section 8.1(b) below. Notwithstanding the foregoing to the contrary, Tenant
may assign this Lease or sublease the Premises to any partner, subsidiary, or
affiliated corporation of Tenant, to any corporation or person to whom Tenant
sells substantially all of its assets, or to any corporation with which Tenant
merges or consolidates, provided the resulting entity has a net worth equal to
or greater than the assignor Tenant's prior to such merger of consolidation. In
no event may this Lease be assigned in part. No assignment or sublet may be
effectuated by operation of law or otherwise without the prior written consent
of Landlord as aforesaid. The consent of Landlord to any assignment or
subletting shall not be construed as a waiver or release of Tenant from
liability for the performance of all covenants and obligations to be performed
by Tenant under this Lease, nor shall the collection or acceptance of rent from
any assignee or subtenant constitute a waiver or release of Tenant from any of
its liabilities or obligations under this Lease and the assignor Tenant shall
remain jointly and severally liable for the continued performance of Tenant's
obligations (all suretyship and similar technical defenses being waived by
Tenant). Landlord's consent to any assignment or subletting shall not be
construed as relieving Tenant from the obligation of obtaining Landlord's prior
written consent to any subsequent assignment or subletting. If Tenant is in
default hereunder beyond the expiration of any applicable notice and cure
period, Tenant hereby assigns to Landlord the rent due from any subtenant of
Tenant and hereby authorizes each such subtenant to pay said rent directly to
Landlord.
(b) In all cases where Tenant seeks to sublease the Premises or assign
this Lease and Landlord's consent is required under Section 8.1(a), Tenant first
shall give Landlord fifteen (15) days prior written notice of its intent to do
so. For fifteen (15) days following receipt of said notice, Landlord shall have
the right, exercisable by sending notice to Tenant, to retake from Tenant: (i)
all of the Premises for the balance of the Term in the event Tenant notified
Landlord of its intention to assign or transfer this Lease; or (ii) only so much
of the Premises for so much of the Term as Tenant intends to sublet in the event
Tenant notified Landlord of its intention to sublet the Premises or a portion
thereof. In either of the events described in clause (i) or (ii) above, this
Lease shall be terminated as of the date specified for such termination in
Landlord's notice aforesaid as to the portion or all of the Premises so retaken;
provided that any and all liabilities of Tenant which accrued and remained
unsatisfied prior to the date of such termination shall survive such
termination. In the event Landlord does not exercise its aforesaid right within
fifteen (15) days of receipt of said notice, Tenant then may assign or sublet,
as the case may be, provided Tenant has obtained the prior written consent of
Landlord, which may be given or withheld according to the standard set forth in
Section 8.1(a) above.
(c) Anything herein to the contrary notwithstanding, if Landlord shall
not elect to exercise the right set forth in the immediately preceding
paragraph, such election shall not under any circumstances be deemed a consent
to the proposed subletting or assignment of Tenant's interest in and to this
Lease and/or the Premises and it is expressly understood that any determination
by Landlord not to exercise such right shall not preclude Landlord from
withholding its consent to such proposed subletting or assignment.
(d) In the event of any assignment or sublet, then half (1/2) of any
purchase price, assignment fee, furniture or equipment purchase or rental
payment, incremental monthly rent or other payment due to Tenant, if any, net of
Tenant's reasonable third-party expenses in
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connection with such assignment or sublet, as the result of any such assignment
or sublease which is in excess of the rent (or pro rata portion thereof) then
payable by Tenant under this Lease shall be paid by Tenant to Landlord as
additional rent as and when received by Tenant.
(e) Tenant shall be responsible for and agrees to pay any costs and
expenses, including (without limitation) reasonable legal fees, incurred by
Landlord in connection with any actual, proposed or purported assignment or
sublease, whether or not Landlord consents thereto.
SECTION 8.2 Transfers of Interests in Tenant
If Tenant is a partnership, a withdrawal or change, whether voluntary,
involuntary or by operation of law, of partners owning a controlling or majority
interest in Tenant shall be deemed a voluntary assignment of this Lease and
subject to the provisions of Section 8.1. If Tenant is a corporation, any
dissolution, merger, consolidation or other reorganization of Tenant, or the
sale or transfer (whether by way of one or more sales or transfers) of a
controlling interest of the capital stock of Tenant shall be deemed a voluntary
assignment of this Lease and subject to the provisions of Section 8.1. However,
the preceding sentence shall not apply to corporations the stock of which is
traded through a national or regional exchange or over-the-counter. It is
understood and agreed that a controlling interest for purposes of this Article
may be less than a majority interest.
ARTICLE 9
MAINTENANCE AND REPAIRS
-----------------------
SECTION 9.1 Maintenance and Repairs
Subject to Landlord's obligations, Tenant will keep and maintain the
Premises and all fixtures and equipment located therein in a clean, safe and
sanitary condition, will take good care thereof and make all required repairs
and replacements thereto (whether structural or non-structural, foreseen or
unforeseen), will suffer no waste or injury thereto, and will, at the expiration
or other termination of the Lease Term, surrender the Premises, broom clean, in
the same order and condition they were in on the Lease Commencement Date (unless
otherwise directed by Landlord), ordinary wear and tear and insured damage by
the elements excepted. Landlord shall provide and install all original tubes for
Building standard lighting fixtures within the Premises (standard lighting
fixtures include four foot fluorescent and two foot horseshoe fluorescent
fixtures consistent with existing lighting) and all replacement tubes for such
lighting as an Annual Operating Charge; all other bulbs, tubes, and lighting
fixtures for the Premises (including, without limitation, incandescent bulbs)
shall be provided and installed by Tenant at Tenant's cost and expense. Tenant
is responsible for providing its own janitorial service to the Premises at its
own expense in accordance with the standard set forth above, at least five (5)
days per week, on a schedule approved by Landlord.
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SECTION 9.2 Landlord's Maintenance and Repairs
Subject to Section 9.3 below, Landlord shall (a) maintain and keep in
good order and repair the roof, foundation, exterior walls and other structural
elements of the Building, the building-standard restrooms, and the Building
heating, ventilating and air-conditioning, plumbing, electrical, elevator, life
safety and other base building systems, and shall make such repairs as become
necessary after obtaining actual knowledge of the need for such repairs, and (b)
make (i) repairs which are required as a result of latent defects present in the
Premises, (iii) repairs to the Premises covered by insurance carried by Landlord
and (iii) repairs reasonably required with respect to common areas of the
Building which Tenant is entitled to use hereunder.
SECTION 9.3 Damage Caused by Tenant
All injury, breakage and damage to the Premises and to any other part
of the Building caused by any act or omission of Tenant or any agent, employee,
subtenant, licensee, contractor, customer, client, family member, or invitee of
Tenant, shall be repaired by and at the sole expense of Tenant, except that
Landlord shall have the right, at its sole option, to make such repairs and to
charge Tenant for all costs and expenses incurred in connection therewith as
additional rent hereunder. The liability of Tenant for such costs and expenses
shall be reduced by the amount of any insurance proceeds received by Landlord on
account of such injury, breakage, or damage.
ARTICLE 10
ALTERATIONS
-----------
SECTION 10.1 As-Is Condition of Premises
The improvements, if any, to be made to the Premises by Landlord to
make the Premises ready for Tenant's use and occupancy or, in lieu thereof, the
allowance, if any, to be provided by Landlord toward such improvements to the
Premises to be performed by Tenant, shall be solely to the extent and subject to
the conditions set forth in Exhibit F (the "Work Agreement") attached to this
Lease. Except as so provided in Section 24.1 below and in the Work Agreement,
Tenant agrees to and shall lease the Premises in its "AS IS" condition as of the
date of this Lease, and it is understood and agreed that Landlord will not make
or pay for, and is under no obligation to make or pay for, any structural or
other alterations, decorations, additions, or improvements in or to the
Premises. Notwithstanding the foregoing, however, Landlord shall furnish one (1)
submeter (not read by the local utility provider, PEPCO) to monitor Tenant's
electrical usage. The cost to install such submeter shall be at Tenant's expense
as part of the Tenant Improvement Allowance.
SECTION 10.2 Tenant's Improvements
(a) Tenant's obligations with respect to the improvements necessary to
make the Premises ready for Tenant's use and occupancy shall be as set forth in
the Work Agreement.
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Both as to such work, if any, by Tenant pursuant to the Work Agreement and as to
any Improvements (as hereinafter defined) thereafter, Tenant and Tenant's
contractors shall abide by Landlord's "Contractor Rules and Regulations"
attached hereto as Exhibit E and any reasonable modifications thereto by
Landlord.
(b) Except for the work, if any, to be performed by Tenant pursuant to
the Work Agreement (as to which the Work Agreement shall be controlling), Tenant
will not make or permit anyone to make any alterations, decorations, additions,
or improvements (hereinafter referred to collectively as "Improvements"),
structural or otherwise, in or to the Premises or the Building without the prior
written consent of Landlord; provided, however, that Tenant may make cosmetic
alterations, such as recarpeting and repairing, not costing more than Fifteen
Thousand Dollars ($15,000) for any individual cosmetic alterations (or series of
contemporaneous cosmetic alterations) without the necessity of obtaining
Landlord's consent. When granting its consent, Landlord may impose any
conditions it deems appropriate, including without limitation, the approval of
plans and specifications, approval of the contractor or other persons to perform
the work, and the obtaining of a performance bond in an amount specified by
Landlord and specified insurance. All Improvements permitted by Landlord must
conform to all rules and regulations established from time to time by the Board
of Fire Underwriters having jurisdiction or any similar body exercising similar
functions, and to all laws, statutes, ordinances, codes, rules, regulations, and
requirements of the Federal and/or District of Columbia governments.
(c) As a condition precedent to such written consent of Landlord,
Tenant agrees to obtain and deliver to Landlord written, unconditional waivers
of mechanic's and materialmen's liens against the Building and the Land from all
work, labor, and services to be performed and materials to be furnished in
connection with Improvements. It is further understood and agreed that any
Improvements, other than those made by Landlord directly, shall be conducted on
behalf of Tenant and not on behalf of Landlord, and that Tenant shall not be
deemed to be the agent of Landlord. It is further understood and agreed that in
the event Landlord shall give its written consent to the making of any
Improvements, such written consent shall not be deemed to be an agreement or
consent by Landlord to subject its interest in the Premises, or any leasehold or
other interest of Tenant in the Premises, the Building or the Land, to any
mechanic's or materialmen's liens which may be filed in connection therewith.
If, notwithstanding the foregoing, any mechanic's or materialmen's lien is filed
against the Premises, Tenant's interest therein, the Building, and/or the Land
for work claimed to have been done for, or materials claimed to have been
furnished to, the Premises or to Tenant, such lien shall be discharged by Tenant
within fifteen (15) days after notice, at Tenant's sole cost and expense, by the
payment thereof or by the filing of a bond. If Tenant shall fail to discharge
any such mechanic's or materialmen's lien, Landlord may, at its sole option,
discharge such lien and treat the cost thereof (including attorney's fees
incurred in connection therewith) as additional rent payable with the next fixed
monthly rent payment falling due. It is expressly agreed that such discharge by
Landlord shall not be deemed to waive or release the default of Tenant in not
discharging such lien.
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SECTION 10.3 Indemnification for Improvements
Tenant shall defend, indemnify and hold Landlord harmless from and
against any and all expenses, suits, actions, proceedings, costs, losses, liens,
claims, liabilities, judgments, and damages based on or arising directly or
indirectly by reason of the making of any Improvements. If any Improvements are
made without the prior written consent of Landlord, Landlord shall have the
right to remove and correct such Improvements and restore the Premises and the
Building to their condition immediately prior thereto and Tenant shall be liable
for all expenses incurred by Landlord in connection therewith. All Improvements
to the Premises or the Building made by either party shall remain upon and be
surrendered with the Premises as part thereof at the end of the Lease Term
except that (a) if Tenant is not in default under this Lease, Tenant shall have
the right to remove, prior to the expiration of the Lease Term, all movable
furniture, furnishings and equipment installed in the Premises solely at the
expense of Tenant, and (b) Landlord shall have the right to require Tenant to
remove all Improvements and fixtures at the end of the Lease Term at the sole
cost of Tenant but only if such Improvement differs materially from typical
tenant improvements for office use and Landlord has stated in writing, at or
prior to the time Tenant requests the right to make such Improvement that such
item must be removed by Tenant at the expiration or early termination of the
Term. All damage and injury to the Premises or the Building caused by such
removal shall be repaired by Tenant, at Tenant's sole expense. If such property
of Tenant is not removed by Tenant prior to the expiration or termination of
this Lease, the same shall be deemed to have been abandoned by Tenant and to
have become the property of Landlord and shall be surrendered with the Premises
as a part thereof, which property may be retained by Landlord or disposed of at
Tenant's expense. Tenant's obligation to pay for any costs incurred by Landlord
for the disposal of such abandoned property shall survive the expiration or
earlier termination of this Lease.
ARTICLE 11
SIGNS
-----
No sign, advertisement, or notice shall be inscribed, painted, affixed,
or otherwise displayed by Tenant on any part of the exterior or the interior (if
visible from the exterior) of the Premises or the Building except on the
directories and the doors of offices and such other areas as are designated by
Landlord. All signage, advertisements or notices on the exterior or, if visible
from the exterior, the interior of the Premises or the Building must be only in
such place, number, size, color, and style as are approved by Landlord in its
sole and absolute discretion. Landlord acknowledges that Tenant may install a
sign at the 18th Street entrance to the Permanent Premises and that, if Tenant
uses Building-standard signage in doing so, Landlord will not unreasonably
withhold, condition or delay its consent to such sign. However, in no event are
any free-standing sidewalk signs allowed. All of Tenant's signs that are
approved by Landlord shall be obtained by Tenant at its sole cost and expense
and installed by Landlord at Tenant's sole cost and expense. Tenant shall
reimburse Landlord for such amount upon written demand from Landlord. If any
sign, advertisement or notice that has not been approved by Landlord is
exhibited or installed by Tenant, Landlord shall have the right to remove the
same at Tenant's expense. Landlord shall have the right to prohibit any
advertisement of or by Tenant which in Landlord's reasonable opinion tends to
impair the reputation of the Building or its
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desirability as a high-quality office building and, upon written notice from
Landlord, Tenant shall immediately refrain from and discontinue any such
advertisement. Landlord reserves the right to affix, install, and display signs,
advertisements, and notices on any part of the exterior or interior of the
Building except in the Premises.
ARTICLE 12
TENANT'S EQUIPMENT
------------------
SECTION 12.1 Electrical Capacity
Tenant will not install or operate in the Premises any electrically
operated equipment or machinery that operates on greater than 110 volt power or
anything other than normal office equipment, computers and appliances, without
first obtaining the prior written consent of Landlord, which consent may be
withheld in Landlord's reasonable discretion. Without limitation, Landlord may
condition such consent upon the payment by Tenant of the cost of any base
building upgrades or other Improvements, including additional wiring or
apparatus, that may be occasioned by the installation or operation of such
equipment or machinery.
SECTION 12.2 Other Infrastructure
Tenant shall not install any equipment of any type or nature that will
or may necessitate any changes, replacement or additions to, or in the use of,
the water system, heating system, plumbing system, air-conditioning system or
electrical system of the Premises or in the Building, without first obtaining
the prior written consent of Landlord, which consent may be withheld in
Landlord's reasonable discretion. Without limitation, Landlord may condition
such consent upon the payment by Tenant of the cost of any base building
upgrades or other Improvements that may be occasioned by the installation or
operation of such equipment or machinery. Any machines and mechanical equipment
belonging to Tenant which causes noise or vibrations that may be transmitted to
the structure of the Building or to any space therein to such a degree as to be
objectionable to Landlord or to any tenant in the Building shall be installed
and maintained by Tenant, at Tenant's expense, on vibration eliminators or other
devices sufficient to reduce such noise and vibration to a level satisfactory to
Landlord.
ARTICLE 13
INSPECTIONS BY LANDLORD
Tenant shall permit Landlord or its agents or representatives to enter
the Premises, at any time and from time to time, without charge therefor to
Landlord and without diminution of the rent payable by Tenant, to examine,
inspect, and protect the Premises and the Building, to make such alterations
and/or repairs as in Landlord's sole judgment may be deemed necessary, or to
exhibit the same to prospective purchasers and mortgagees and, during the last
twelve (12) months of the Lease Term or at any time following the initiation of
any eviction proceeding, to exhibit the same to prospective tenants. In
connection with any such entry, Landlord shall endeavor to minimize the
disruption to Tenant's use of the Premises, but Landlord shall not be
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required to perform any alterations or repairs or make any entry at a time other
than normal working hours unless Tenant has agreed to pay for the incremental
cost increase incurred for overtime work. Landlord shall give reasonable prior
notice to Tenant before making an entry pursuant to this Article, which notice
may be written or oral; provided, however, in situations reasonably determined
by Landlord to be emergencies, no such prior notice shall be required.
ARTICLE 14
INSURANCE
---------
SECTION 14.1 Insurance To be Carried
(a) Tenant covenants and agrees to procure at its expense on or before
the Lease Commencement Date and to keep in force during the Lease Term the
following insurance naming Tenant as insured party and Landlord and its
management agent for the Property (the "Agent") as additional insureds:
(i) a commercial general liability insurance policy or such
successor comparable form of coverage in the broadest form then available (a
"Liability Policy") written on an "occurrence basis" including, without
limitation, blanket contractual liability coverage, business interruption,
automobile, broad form property damage, independent contractor's coverage and
personal injury coverage, protecting Landlord, the Agent and Tenant against any
liability whatsoever occasioned by any occurrence on or about the Premises or
any appurtenances thereto;
(ii) a fire and other casualty policy (a "Fire Policy")
insuring the full replacement value of Tenant's leasehold improvements,
regardless of by whom installed, and all of the furniture, trade fixtures and
other personal property of Tenant located in the Premises against loss or damage
by fire, theft and such other risks or hazard; and
(iii) a policy of insurance against loss or damage to the
major components of the air-conditioning and heating system, flywheels, steam
pipes, steam turbines, steam engine, steam boilers, and other pressure vessels,
high pressure piping and machinery, if any, such as are installed by or on
behalf of Tenant in the Premises.
Such policies shall also insure against physical damage to the Premises arising
out of an accident covered thereunder; such policies are to be written by good
and solvent insurance companies licensed to do business in the District of
Columbia satisfactory to Landlord, shall have not less than a Best's A+ 10
rating and shall be in such limits and with such maximum deductibles as Landlord
may reasonably require. As of the date of this Lease, Landlord reasonably
requires limits of liability under: (x) the Liability Policy of not less than
$3,000,000 combined single limit per occurrence for bodily or personal injury
(including death) and property damage combined; (y) the Fire Policy equal to the
value of Tenant's leasehold improvements, furniture, trade fixtures and other
personal property with a deductible of no more than $1,000.00; and (z) machinery
insurance for full replacement cost of equipment with a deductible of no more
than $1,000.00. Tenant will furnish Landlord with such information as Landlord
may reasonably request from time to time as to the value of the items specified
in clause (y) above within thirty
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(30) days after request therefor. Such insurance may be carried under a blanket
policy covering the Premises and other locations of Tenant, if any, provided
that each such policy shall in all respects comply with this Article and shall
specify (I) that the portion of the total coverage of such policy that is
allocated to the Premises is in the amounts required pursuant to this Section
and (II) any sublimits in such blanket policy and such policy shall also
specify, or Tenant shall furnish Landlord a written statement from the insurer
under such policy, that the protection afforded Tenant under any such blanket
policy shall be no less than that which would have been afforded under a
separate policy relating only to the Premises. Prior to the time insurance under
this Section is first required to be carried by Tenant, and thereafter at least
fifteen (15) days prior to the expiration date of any such policy, Tenant agrees
to deliver to Landlord a certificate evidencing such insurance and payment of
the premium therefor. Said certificate shall contain an endorsement that such
insurance may not be canceled or amended except upon thirty (30) days' prior
written notice to Landlord. Subject to all applicable notice and cure rights,
Tenant's failure to provide and keep in force the aforementioned insurance shall
be regarded as a material default hereunder entitling Landlord to exercise any
or all of the remedies provided in this Lease in the event of Tenant's default.
Notwithstanding anything to the contrary contained in this Lease, the carrying
of insurance by Tenant in compliance with this Section shall not modify, reduce,
limit or impair Tenant's obligations and liabilities under any and every
indemnity by Tenant to Landlord set forth in this Lease.
(b) Landlord shall carry, at its expense (which expense is includable
in Annual Operating Charges), all risk insurance (including coverage against
boiler related damages), comprehensive general commercial liability insurance
insuring Landlord against liability for injury to or death of a person or
persons and for damage to property occasioned by or arising out of the
maintenance, operation and/or management of the Property by Landlord, or its
equivalent, insuring the Building (exclusive of any component thereof which
Tenant is required to insure pursuant to the terms of this Lease). The all risk
insurance coverage shall be in an amount equal to one hundred percent (100%) of
the replacement cost of the Building, as such may increase from time to time,
not including footers or foundations. Landlord's liability policy shall have
limits that are not less than those required of Tenant under this Lease. All
said insurance policies shall be carried with companies licensed to do business
in the District of Columbia. Upon Tenant's request from time to time, duly
executed certificates of such insurance shall be delivered to Tenant.
SECTION 14.2 Indemnity
(a) To the extent Landlord's waiver of subrogation under Section 14.5
does not apply, Tenant shall indemnify and defend Landlord and save it harmless
from and against any and all claims, suits, actions, proceedings, liabilities,
damages, losses, costs or expenses, including attorneys' fees, arising (i) from
any act, omission, or negligence of Tenant or its officers, contractors,
licensees, agents, employees, guests, invitees, or visitors in or about the
Property, (ii) from Tenant's use or occupancy of the Premises or the business
conducted by Tenant therein, (iii) from any breach or default under this Lease
by Tenant, (iv) from, or relating to, the enforcement by Landlord of the
provisions of this Lease as against Tenant, or (v) from any accident, injury, or
damage, howsoever and by whomsoever caused, to any person or property, occurring
in or about the Premises. This provision shall not be construed to make Tenant
responsible for loss, damage,
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liability or expense resulting from injuries (or death) to third parties to the
extent caused by the negligence of Landlord or its officers, contractors,
licensees, agents, employees, or invitees. The provisions of this Section shall
survive the expiration or termination of this Lease.
(b) To the extent Tenant's waiver of subrogation in Section 14.5 does
not apply, and to the extent Landlord's insurance covers the same, Landlord
shall indemnify and hold harmless Tenant from and against any and all
liabilities, damages, obligations, losses, costs and expenses (including
attorneys' fees) incurred or imposed upon Tenant (i) in connection with or based
upon any breach by Landlord of any of the covenants, representation or
warranties of Landlord contained in this Lease; (ii) arising out of any act or
omission of Landlord, Landlord's employees, agents, or representatives; or (iii)
as a result of any injury to or death of any person or persons or any damage to
property in any way arising out of or in connection with the condition, use or
occupancy of any of the Property outside the Premises. This provision shall not
be construed to make Landlord responsible for loss, damage, liability or expense
resulting from injuries (or death) to third parties or damage to property to the
extent caused by the negligence of Tenant or its officers, contractors,
licensees, agents, employees or invitees.
SECTION 14.3 Increases in Insurance Rates
Tenant shall not do or permit to be done any act or thing upon or about
the Premises or the Property which will (i) result in the assertion of any
defense by the insurer to any claim under, (ii) invalidate, or (iii) be in
conflict with, the policies covering the Property, and fixtures and property
therein, or which would increase the rate of fire insurance applicable to the
Property to an amount higher than it otherwise would be; and Tenant shall
neither do nor permit to be done any act or thing, upon or about the Property
which shall or might subject Landlord to any liability or responsibility for
injury to any person or persons or to property; but nothing in this Section
shall prevent Tenant's use of the Premises for the purposes stated in this
Lease. If, as a result of any act or omission by or on the part of Tenant or
violation of this Lease by Tenant, whether or not Landlord has consented to the
same, the rate of "All Risk" or other type of insurance maintained by Landlord
on the Property shall be increased to an amount higher than it otherwise would
be, Tenant shall reimburse Landlord for all increases of Landlord's insurance
premiums so caused; such reimbursement to be additional rent payable within
thirty (30) days after demand therefor by Landlord. In any action or proceeding
wherein Landlord and Tenant are parties, a schedule or "make-up" of rates for
the Property or Premises issued by the body making fire insurance rates or
established by the insurance carrier providing coverage for the Property or
Premises shall be presumptive evidence of the facts stated therein, including
the items and charges taken into consideration in fixing the "All Risk"
insurance rate then applicable to the Building or Premises.
SECTION 14.4 Notice of Accidents
Tenant shall give Landlord notice in case of fire or other damage or
personal injury resulting from casualty events in the Premises promptly after
Tenant is aware of such event.
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SECTION 14.5 Waiver of Subrogation
Notwithstanding anything to the contrary contained in this Lease,
Tenant agrees that it will, at its sole cost and expense, include in its
property insurance policies appropriate clauses pursuant to which the insurance
companies (a) waive all right of subrogation against Landlord, and any tenant of
space in the Building, with respect to losses payable under such policies, and
(b) agree that such policies shall not be invalidated should the insured waive
in writing prior to a loss any or all right of recovery against any party for
losses covered by such policies. Tenant shall furnish Landlord evidence
satisfactory to Landlord evidencing the inclusion of said clauses in Tenant's
property insurance policies. Landlord hereby waives any and all right of
recovery which it might otherwise have against Tenant, its servants, agents and
employees, for loss or damage occurring to the Building and fixtures,
appurtenances and equipment therein to the extent to the same is covered by
Landlord's insurance, notwithstanding that such loss or damage may result from
the negligence or fault of Tenant, its servants, employees or agents. Landlord
warrants, represents and agrees that its insurance policies shall not be
invalidated by the foregoing waiver. Tenant hereby waives any and all right of
recovery which it might otherwise have against Landlord, its agents, servants
and employees, and against every other tenant in the Building which shall have
executed a similar waiver in favor of Landlord and other tenants as set forth in
this Section, for loss or damage to Tenant's furniture, furnishings, fixtures
and other property removable by Tenant under the provisions hereof to the extent
that same is covered by Tenant's insurance as required by this Lease whether or
not such insurance is maintained, notwithstanding that such loss or damage may
result from the negligence or fault of Landlord, its servants, agents or
employees, or such other tenant or the servants, agents or employees thereof.
ARTICLE 15
SERVICES AND UTILITIES
----------------------
SECTION 15.1 Services and Utilities
(a) Landlord shall furnish to the Premises (through the existing
Building system), during normal hours of operation of the Building,
air-conditioning and heat (as separately submetered) during the seasons when
they are required, as and to the extent determined in Landlord's reasonable
judgment. Landlord shall also provide separately metered electricity to the
Premises and water, 24 hours per day, for standard office equipment, as and to
the extent determined by Landlord. Landlord is not providing any janitorial
services to the Premises. Tenant shall have access to the Building and the
Premises twenty-four (24) hours per day, every day of the year, subject to
exclusion during emergencies or repairs if, in Landlord's sole judgment, such
exclusion is necessary; provided, however, that access through the Building's
main lobby shall be subject to security procedures (e.g. the presentation of
identification) as may be adopted by Landlord or the International Bank for
Reconstruction and Development (a/k/a The World Bank) from time to time and that
elevator access outside normal business hours may be restricted by requiring the
use of electronic access cards or similar means. All electronic access cards,
keys, or their equivalents will be provided at Tenant's expense. Landlord shall
have the right to remove elevators from service as may be required for moving
freight or for servicing or maintaining the elevators and/or the Building;
provided, however, that except in emergencies
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or following a casualty, Landlord will also provide at least one elevator
subject to call; and, provided further, that elevators shall be used for access
to the Permanent Premises only for disabled persons, when the staircase
identified in the following sentence is under repair, or as may otherwise be
required by law. In lieu of greater elevator access to the Permanent Premises,
Tenant shall be afforded access 24 hours per day, every day, except in
emergencies or when Landlord is performing repairs thereon, via a staircase that
leads from the Permanent Premises to the 18th Street street entrance to the
Building.
(b) The normal hours of operation of the Building will be 7:00 a.m. to
7:00 p.m. on Monday through Friday (except legal holidays) and 9:00 a.m. to noon
on Saturday (except legal holidays), subject, however, to the right of the
International Bank for Reconstruction and Development (a/k/a The World Bank) to
change the same to be any consecutive twelve (12) hour period Monday-Friday and
any consecutive three (3) hour period on Saturdays. There will be no normal
hours of operation of the Building on Sundays or legal holidays and Landlord
shall not be obligated to maintain or operate the Building at such times unless
special arrangements are made by Tenant. Such special arrangements shall
include, but are not limited to, the activation of the air-conditioning units as
well as an additional hourly charge to activate the cooling towers; such charge
includes components for Landlord's electric charges, chemical treatment costs,
labor and overhead, and the cost of water, but does not include any profit to
Landlord. Landlord will furnish all services and utilities required by this
Lease only during the normal hours of operation of the Building unless otherwise
specified herein.
(c) Tenant shall also be responsible for and agrees to pay the cost of
all above-standard or non-standard uses of the utilities and services provided
to the Premises. The parties acknowledge and agree that the Premises is
separately metered for all electrical usage, and that the Premises' HVAC service
is powered by electrical consumption measured on such separate meter. Except (i)
for the electrical costs associated with the provision of HVAC service to the
Premises (which costs Tenant agrees to pay to Landlord promptly when billed), or
(ii) to the extent such charges are permitted to be included in the sums
constituting Annual Operating Charges, Landlord shall not charge Tenant for the
electrical portion of HVAC service to the Premises.
(d) Tenant shall pay Landlord as additional rent for all electrical
usage in the Premises as measured by the submeter installed therein. If such
submeter covers an area (e.g., the Permanent Premises) that is larger than the
area to which this Lease then applies (e.g., if possession of the Phase II
Premises has not yet been delivered to Tenant), then electrical usage for the
area covered by the submeter shall be equitably apportioned based on relative
square footage (unless usage differs widely so that such an apportionment would
itself be inequitable, in which event Landlord may make an allocation based upon
its own reasonable judgment of what would be equitable under the circumstances).
Prior to the installation of such submeter and the levying of additional rent
for the use of electricity under the preceding sentences, Tenant shall pay
Landlord, as additional rent for electric usage during normal hours of Building
operation and at a building-standard level, Seventeen Cents ($0.17) per year per
rentable square foot in any part of the Premises for which fixed monthly rent is
not then abated under Section 3.1 above, such rent to be payable in equal
monthly installments in advance on the Lease Commencement Date and thereafter on
the first day of each calendar month until the submeter is operational (with a
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per diem refund if the submeter becomes operational on a day other than the
first day of a calendar month); there shall be no charge for electrical usage
under this sentence for any part of the Premises for which fixed monthly rent is
abated under Section 3.1 above.
(e) Tenant shall provide, at its own cost and expense, janitorial
services in the Premises in compliance with the cleaning specifications attached
hereto as Exhibit D.
SECTION 15.2 Interruption of Services and Utilities
Unless resulting from the willful misconduct or gross negligence of
Landlord, it is understood and agreed that Landlord shall not have any liability
whatsoever to Tenant as a result of Landlord's failure or inability to furnish
any of the utilities or services required to be furnished by Landlord hereunder,
whether resulting from breakdown, removal from service for maintenance or
repairs, strikes, scarcity of labor or materials, acts of God, governmental
requirements or from any other cause whatsoever. In the event that Landlord
fails to provide services to Tenant or to make and complete any repair as
required by this Lease for a continuous period in excess of five (5) business
days after Landlord learns of such failure in the case of failures arising from
matters within Landlord's reasonable control, or in excess of ten (10) business
days after Landlord learns of such failure with respect to failures not arising
from matters within Landlord's reasonable control, and such failure materially
interferes with Tenant's use and enjoyment of all or a portion of the Premises
such that the same becomes untenantable and is, in fact, not utilized by the
Tenant, then, and in such event, Landlord shall provide Tenant a credit against
the fixed annual rent and additional rent under Article 4 next owing, in an
amount equal to the fixed annual rent and additional rent under Article 4 due
under the Lease (with the amount of such rent being prorated in the event such
failure does not affect Tenant's ability to use the entire Premises) from and
after the expiration of such five (5) or ten (10) business day period, as the
case may be, and until such time as the affected Premises becomes tenantable or
Tenant resumes utilization of the affected Premises, whichever is earlier.
Notwithstanding anything contained herein to the contrary, no abatement shall be
allowed (i) if the event which would otherwise give rise to abatement arises
from an act or omission of Tenant, its assignees or subtenants or any of their
respective contractors, agents, employees or invitees, or (ii) with respect to a
de minimis portion of the Premises (i.e., 100 rentable sq. ft. or less) or with
respect to areas not actively utilized by Tenant in the conduct of its business
(i.e., janitorial closets and similar spaces). In no event shall Landlord be
liable for incidental or consequential damages.
SECTION 15.3 Conservation Controls
The parties hereto agree to comply with all mandatory and voluntary
energy, water, or other conservation controls or requirements applicable to
office buildings required by the Federal or District of Columbia governments or
any public utility or insurance carrier including, without limitation, controls
on the permitted range of temperature settings in office buildings or
requirements necessitating curtailment of the volume of energy consumption or
the hours of operation of the Building. Any terms or conditions of this Lease
that conflict or interfere with compliance by Landlord with such controls or
requirements shall be suspended for the duration of such controls or
requirements. It is further agreed that compliance with such controls or
requirements shall not be considered an eviction, actual or constructive, of
Tenant from the
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Premises and shall not entitle Tenant to terminate this Lease or to an abatement
or reduction of any rent payable hereunder.
ARTICLE 16
LIABILITY OF LANDLORD
---------------------
SECTION 16.1 No Liability of Landlord
Except as provided in Section 15.2 above, Landlord shall not be liable
to Tenant, its employees, agents, business invitees, licensees, customers,
clients, family members or guests for any damage, injury (including death),
loss, compensation, or claim, including, but not limited to, claims for the
interruption or loss of Tenant's business, based on, arising out of, or
resulting from any cause whatsoever, including, but not limited to, the
following: repairs to any portion of the Premises or the Building; the
negligence of Landlord or any of its servants, agents, contractors or employees;
interruption in the use of the Premises; any accident or damage resulting from
the use or operation (by Landlord, Tenant, or any other person or persons) of
elevators, or of the heating, air-conditioning, electrical, or plumbing
equipment or apparatus; the termination of this Lease by reason of the
destruction of the Premises; any fire, explosion, falling plaster, steam, gas,
robbery, theft, mysterious disappearance, and/or any other casualty; the actions
of any other tenants of the Building or of any other person or persons; any
failure or inability to furnish any of the utilities or services required to be
furnished by Landlord hereunder; any leakage in any part or portion of the
Premises or the Building, or from water, rain or snow that may leak into, or
flow from, any part of the Premises or the Building, or from drains, pipes,
appliances or plumbing work in the Building or from the roof, street or
subsurface or resulting from dampness or from any other cause of whatsoever
nature. Except as provided in Section 15.2 above, the occurrence of any of the
foregoing items described in this Section shall not entitle Tenant to an
abatement, set-off, counterclaim against, or reduction of, any rent payable
hereunder. Any goods, property, or personal effects stored or placed by Tenant
or its employees in or about the Premises or Building shall be at the sole risk
of Tenant, and Landlord shall not in any manner be held responsible therefor. It
is understood that the employees of Landlord are prohibited from receiving any
packages or other articles delivered to the Building for Tenant, and if any such
employee receives any such package or articles, such employee shall be acting as
the agent of Tenant for such purposes and not as the employee or agent of
Landlord. In no event shall Tenant make any claim against Landlord for
consequential, indirect or special damages. Notwithstanding the foregoing
provisions of this Section, Landlord shall not be released from liability to
Tenant for any damage or injury caused by the willful misconduct of Landlord or
its employees.
SECTION 16.2 Transfer by Landlord
In the event that at any time Landlord shall sell or transfer the
Building, the transferor Landlord shall not be liable to Tenant for any
obligations or liabilities based on or arising out of events or conditions
occurring on or after the date of such sale or transfer.
SECTION 16.3 Disputed Payments
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In the event that at any time during the Lease Term Tenant shall have a
claim against Landlord, Tenant shall not have the right to deduct the amount
allegedly owed to Tenant from any rent payable to Landlord hereunder, it being
understood that Tenant's sole method for recovering upon such claim shall be to
institute an independent action against Landlord.
SECTION 16.4 Extent of Landlord's Liability
Notwithstanding any other provision of this Lease whatsoever, no
recourse shall be had on any of Landlord's obligations hereunder or for any
claim based thereon or otherwise in respect thereof against any incorporator,
subscriber to the capital stock, shareholder, officer or director, past, present
or future, of any corporation, or any partner or joint venturer of any
partnership or joint venture, or any member or manager of any limited liability
company, which shall be Landlord hereunder or included in the term "Landlord" or
of any successor of any such corporation, limited liability company, partnership
or joint venture, or against any principal, disclosed or undisclosed, or any
affiliate of any party which shall be Landlord or included in the term
"Landlord", whether directly or through Landlord or through any receiver,
assignee, trustee in bankruptcy or through any other person, firm or
corporation, whether by virtue of any constitution, statute or rule of law or by
enforcement of any assessment or penalty or otherwise, all such liability being
expressly waived and released by Tenant. Tenant shall look solely to Landlord's
estate and interest in the Property and all rent or other proceeds relating
thereto, or the lease of the Building or of the Property, and the Premises for
the satisfaction of any right or remedy of Tenant for the collection of a
judgment or other judicial process or arbitration award requiring the payment of
money by Landlord. No other property or assets of Landlord, Landlord's agents,
incorporators, shareholders, officers, directors, partners, members, managers,
principals (disclosed or undisclosed) or affiliates shall be subject to levy,
lien, execution, attachment, or other enforcement procedure for the satisfaction
of Tenant's rights and remedies under or with respect to this Lease, the
relationship of Landlord and Tenant hereunder or under law, or Tenant's use and
occupancy of the Premises, or any other liability of Landlord to Tenant.
ARTICLE 17
RULES AND REGULATIONS
---------------------
Tenant and its agents, employees, invitees, licensees, customers,
clients, family members, guests and subtenants shall at all times abide by and
observe the rules and regulations promulgated by Landlord and attached hereto as
Exhibit C. In addition, Tenant and its agents, employees, invitees, licensees,
customers, clients, family members, guests and subtenants shall abide by and
observe all other rules or regulations that Landlord may reasonably promulgate
from time to time for the operation and maintenance of the Building, provided
that notice thereof is given to Tenant, that such rules and regulations are not
inconsistent with provisions of this Lease, and that such additional rules and
regulations are not enforced in a discriminatory manner against Tenant. Nothing
contained in this Lease shall be construed as imposing upon Landlord any duty or
obligation to enforce such rules and regulations or the terms, conditions, or
covenants contained in any other lease as against any other tenant, and Landlord
shall not be liable to Tenant for the violation of such rules or regulations or
lease by any other tenant or its
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employees, agents, business invitees, licensees, customers, clients, family
members, guests or subtenants.
ARTICLE 18
DAMAGE OR DESTRUCTION
---------------------
SECTION 18.1 Casualty
If during the Lease Term the Premises or the Building are totally or
partially damaged or destroyed by a casualty, thereby rendering the Premises
totally or partially inaccessible or unusable, Landlord shall diligently (taking
into account the time necessary to effectuate a satisfactory settlement with any
insurance company involved) restore and repair the Premises and the Building to
substantially the same condition they were in prior to such damage; provided,
however, if Landlord reasonably believes that the repairs and restoration cannot
be completed despite reasonable efforts within ninety (90) days after the
occurrence of such damage, Landlord shall promptly notify Tenant of the
estimated repair time and either Landlord or Tenant shall have the right, at its
sole option, to terminate this Lease by giving written notice of termination to
the other within forty-five (45) days after the occurrence of such damage. If
this Lease is terminated pursuant to the preceding sentence, all rent payable
hereunder shall be apportioned and paid to the date of the occurrence of such
damage. Until the repair and restoration of the Premises is completed Tenant
shall be required to pay rent only for that part of the Premises that Tenant is
able to use while repairs are being made, based on the ratio that the amount of
usable rentable area bears to the total rentable area in the Premises; provided
that if the damages result from the negligence or willful misconduct of Tenant
or its employees or contractors, Landlord shall only allow Tenant a proportional
abatement of rent to the extent Landlord is reimbursed from the proceeds of
rental interruption insurance purchased by Landlord. Landlord shall bear the
costs and expenses of repairing and restoring the Premises, except that if such
damage or destruction was caused by the act or omission of Tenant or any of its
employees, agents, licensees, subtenants, customers, clients, family members, or
guests, upon written demand from Landlord Tenant shall pay to Landlord the
amount by which such costs and expenses exceed the insurance proceeds, if any,
received by Landlord on account of such damage or destruction. Nothing in this
Lease shall be construed as requiring Landlord to spend more than the net
proceeds of any insurance available to it for any restoration, repair or
rebuilding. If Landlord fails to timely substantially complete such repair and
restoration within the longer of ninety (90) days or thirty (30) days after the
expiration of the repair time estimated by Landlord (notice to which was
provided to Tenant within thirty (30) days after the casualty), then Tenant
shall have the option, upon written notice to Landlord given before the first to
occur of such substantial completion or fourteen (14) days after the expiration
of the aforesaid period, to elect to terminate this Lease; Tenant's failure to
timely exercise such termination right shall be a conclusive waiver of such
right. Notwithstanding anything contained in this Section to the contrary, if
Tenant is deprived of the use of all or any portion of the Premises by reason of
such damage or destruction and such damage or destruction occurs during the last
twelve (12) months of the Lease Term (giving due consideration to any extension
thereof), and if, in Landlord's reasonable judgment, the time needed for such
repair and restoration is sixty (60) days or more, then either party shall have
the right to terminate this Lease, effective as of the date of such damage or
destruction, by
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giving written notice of such election to the other party within sixty (60) days
after the occurrence of such damage or destruction and, if such notice of
termination is given, Landlord shall not be obligated to repair the damage and
restore the Property.
SECTION 18.2 Limitations on Landlord's Obligations
Notwithstanding anything in Section 18.1 or any other part of this
Lease, if Landlord is obligated to repair and restore the Premises as provided
in Section 18.1, Landlord shall not be required to repair or restore any
decorations, alterations, or improvements to the Premises (regardless of by whom
made) or any trade fixtures, furnishings, equipment, or personal property
belonging to Tenant. It shall be Tenant's sole responsibility to repair and
restore all such items.
SECTION 18.3 Right to Terminate
Notwithstanding anything to the contrary contained herein, if there is
a destruction of the Building that exceeds twenty-five percent (25%) of the
replacement value of the Building from any risk, whether or not the Premises are
damaged or destroyed, Landlord shall have the right to terminate this Lease by
written notice to Tenant.
ARTICLE 19
CONDEMNATION
------------
SECTION 19.1 Termination for Condemnation
If the whole or a substantial part (as hereinafter defined) of the
Premises and/or the Building or the use or occupancy of the Premises shall be
taken or condemned by any governmental or quasi-governmental authority for any
public or quasi-public use or purpose (including a sale thereof under threat of
such taking), then this Lease shall terminate on the date title thereto vests in
such governmental or quasi-governmental authority, and all rent payable
hereunder shall be apportioned as of such date. If less than a substantial part
of the Premises (or the use and occupancy thereof) is taken or condemned by any
governmental or quasi-governmental authority for any public or quasi public use
or purpose (including a sale thereof under threat of such a taking), this Lease
shall continue in full force and effect, but the rent thereafter payable
hereunder shall be equitably adjusted (on the basis of the ratio of the number
of square feet of rentable area taken to the total rentable area in the Premises
prior to such taking) as of the date title vests in the governmental or
quasi-governmental authority. For purposes of this Section, a substantial part
of the Premises or the Building shall be considered to have been taken if more
than twenty-five percent (25%) of the Premises or Building is rendered unusable
as a result of such taking.
SECTION 19.2 Award
All awards, damages, and other compensation paid by the condemning
authority on account of the taking or condemnation (or sale under threat of such
a taking) shall belong to Landlord, and Tenant hereby assigns to Landlord all
rights to such awards, damages and
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compensation. Tenant agrees not to make any claim against Landlord or the
condemning authority for any portion of such award or compensation
attributable to damages to the Premises, the value of the unexpired term of
this Lease, the loss of profits or goodwill, leasehold improvements or
severance damages. Nothing contained herein, however, shall prevent Tenant
from pursuing a separate claim against the condemning authority for the value
of furnishings, equipment and trade fixtures installed in the Premises at
Tenant's expense and for relocation expenses, provided that such claim shall
in no way diminish the award or compensation payable to or recoverable by
Landlord in connection with such taking or condemnation.
ARTICLE 20
DEFAULT
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SECTION 20.1 Defaults by Tenant
The occurrence of any of the following shall constitute a default by
Tenant under this Lease:
(a) If Tenant fails to make any payment of fixed annual rent or other
rent (i) for which a due date is specified in this Lease up to two (2) times in
any calendar year within five (5) days after notice is given that such rent is
overdue and thereafter during that calendar year within five (5) days after the
date due (without notice) or, (ii) if no due date is specified in this Lease for
such payment, within ten (10) days after notice is given.
(b) If Tenant violates or fails to perform any obligation set forth in
Article 8, Section 10.2, Section 21.1, Section 24.2 or Section 24.5 of this
Lease beyond the expiration of any performance, notice or cure period set forth
therein.
(c) If Tenant violates or fails to perform any other term, condition,
covenant or agreement to be performed or observed by Tenant under this Lease
(other than as specified in this Section), and such violation or failure shall
continue for ten (10) days after written notice from Landlord to Tenant of such
violation or failure, however, if Tenant promptly commences to cure such
violation or failure and diligently prosecutes such cure, and if such violation
or failure is not reasonably curable in ten (10) days, Tenant shall have a
reasonable additional period, not to exceed an aggregate of twenty (20) days to
effect such cure, provided that Tenant must commence its cure within the
original ten (10) day period and thereafter diligently prosecute the cure to
completion.
(d) If Tenant or any guarantor (i) is voluntarily adjudicated a
bankrupt or insolvent, (ii) seeks or consents to the appointment of a receiver
or trustee for itself or for all or a part of its property, (iii) files a
petition seeking relief under the bankruptcy or similar laws of the United
States or any state or any other jurisdiction, (iv) makes a general assignment
for the benefit of creditors, or (v) admits in writing its inability to pay its
debts as they mature.
(e) If a petition is filed against Tenant or any guarantor seeking any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution, or similar relief under any
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present or future federal or state law or other statute, law, or regulation and
shall remain undismissed or unstayed for sixty (60) days, or if any trustee,
receiver or liquidator of Tenant or any guarantor, or of all or any substantial
part of its properties, shall be appointed without the consent or acquiescence
of Tenant or any guarantor and such appointment shall remain unvacated or
unstayed for sixty (60) days.
(f) If any attachment or execution of any type is issued against Tenant
or any guarantor, or Tenant's property located on the Premises, or Tenant's
rights or interest in the Lease, or guarantor's or Tenant's assets of any type
or nature whatsoever, including but not limited to federal, state, or municipal
tax liens, and such is not dismissed or released within ten (10) days
thereafter.
SECTION 20.2 Landlord's Rights
If Tenant shall be in default under this Lease, Landlord shall have the
right, at its sole option, to terminate this Lease. With or without terminating
this Lease, Landlord may re-enter and take possession of the Premises and the
provisions of this Article shall operate as a notice to quit, any other notice
to quit or notice of Landlord's intention to re-enter the Premises is hereby
expressly waived. If necessary, Landlord may proceed to recover possession of
the Premises under and by virtue of the laws of the District of Columbia, or by
such other proceedings, including re-entry and possession, as may be applicable.
If Landlord elects to terminate this Lease, everything contained in this Lease
on the part of the Landlord to be done and performed shall cease without
prejudice, subject, however, to the right of Landlord to recover from Tenant all
rent accrued up to the time of termination or recovery of possession by
Landlord, whichever is later. Whether or not this Lease is terminated by reason
of Tenant's default, the Premises may be relet by Landlord for such rent and
upon such terms as Landlord deems reasonable under the circumstances and, if the
full rent provided herein plus the costs, expenses, and damages described below
shall not be realized by Landlord, Tenant shall be liable for all damages
sustained by Landlord, including, without limitation, deficiency in fixed and
additional rent, reasonable attorneys' fees, brokerage fees, and the expenses of
placing the Premises in first-class rentable condition. Any damages or loss of
rent sustained by Landlord may be recovered by Landlord, at Landlord's option,
at the time of the reletting or in separate actions, from time to time, as said
damage shall have been made more easily ascertainable by successive relettings,
or, at Landlord's option, may be deferred until the expiration of the Lease
Term, in which event Tenant hereby agrees that the cause of action shall not be
deemed to have accrued until the date of expiration of the Lease Term. The
provisions contained in this Section shall be in addition to, and shall not
prevent the enforcement of, any claim Landlord may have against Tenant for
anticipatory breach of this Lease.
SECTION 20.3 Liquidated Damages
If Landlord recovers possession of the premises or terminates this
Lease pursuant to Section 20.2, Landlord shall forthwith upon such termination,
any other provisions of this Lease to the contrary notwithstanding, become
entitled to recover from Tenant as and for liquidated damages for Tenant's
default hereunder, the difference, discounted to present value by applying a
discount rate equal to eight percent (8%), between (a) the annual fixed rent
reserved hereunder
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for what, but for such termination, would have been the unexpired portion of the
Lease Term, and (b) the cash rental value of the Premises for such unexpired
portion of the Lease Term (unless the statute that governs or shall govern the
proceedings in which such damages are to be proved limits the amount of such
claim capable of being so proved, in which case Landlord shall be entitled to
prove as and for liquidated damages an amount equal to that allowed by or under
any such statute). In calculating such liquidated damages, the then cash rental
value of the Premises shall be deemed prima facie to be the actual rent received
by Landlord for the Premises or, if not received, the estimated cash rental
value of the Premises upon any reletting, as determined by a broker or an
appraiser selected by Landlord and approved by Tenant, such approval not to be
unreasonably withheld, conditioned or delayed; if Tenant fails to object to a
proposed broker or nominee and give the reason for its objection within ten (10)
days after Landlord gives notice of a proposed broker or nominee, Tenant's
consent shall be deemed given. Tenant shall not be entitled to receive any
excess of any such rents collected from a third party over the rent reserved
herein. The provisions of this Section shall be without prejudice to Landlord's
right to prove and collect, in full, damages for all rent accrued prior to the
termination of this Lease but not paid. In the event of a default by Tenant
hereunder, if Landlord does not seek or obtain recovery in the nature of
liquidated damages pursuant to this Section 20.3, Landlord will act in such a
manner intended to reasonably mitigate the damages caused by Tenant's default.
In any judicial proceeding, the burden of proof shall be on Tenant to show by
clear and convincing evidence that Landlord failed to reasonably attempt to
mitigate its damages.
SECTION 20.4 Landlord's Rights Cumulative
All rights and remedies of Landlord set forth herein are in addition to
all other rights and remedies available to Landlord at law or in equity. All
rights and remedies available to Landlord hereunder or at law or in equity are
expressly declared to be cumulative. The exercise by Landlord of any such right
or remedy shall not prevent the concurrent or subsequent exercise of any other
right or remedy.
SECTION 20.5 No Waiver By Landlord
No delay in the enforcement or exercise of any right or remedy shall
constitute a waiver of any default by Tenant hereunder or of any of Landlord's
rights or remedies in connection therewith. Landlord shall not be deemed to have
waived any default by Tenant hereunder unless such waiver is set forth in a
written instrument signed by Landlord. If Landlord waives in writing any default
by Tenant, such waiver shall not be construed as a waiver of any covenant,
condition, or agreement set forth in this Lease except as to the specific
circumstances described in such written waiver. If Landlord institutes
proceedings against Tenant and a compromise or settlement thereof is made, the
same shall not constitute a waiver of the same or any other covenant, condition,
or agreement set forth herein or of any of Landlord's rights hereunder. Neither
the payment by Tenant of a lesser amount than the rent due hereunder nor any
endorsement or statement on any check or letter accompanying a check for payment
of rent shall be deemed an accord and satisfaction, and Landlord may accept such
check or payment without prejudice to Landlord's right to recover the balance of
such rent or to pursue any other remedy available to Landlord. No reentry by
Landlord, and no acceptance by Landlord of keys from Tenant, shall be considered
an acceptance of a surrender of this Lease.
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SECTION 20.6 Landlord's Right to Cure
If Tenant defaults in the making of any payment or in the doing of any
act herein required to be made or done by Tenant, then Landlord may, but shall
not be required to, make such payment or do such act. If Landlord elects to make
such payment or do such act, all costs and expenses incurred by Landlord, plus
interest thereon at the rate of eighteen percent (18%) per annum from the date
paid by Landlord to the date of payment thereof by Tenant, shall be immediately
paid by Tenant to Landlord upon demand; provided, however, that nothing
contained herein shall be construed as permitting Landlord to charge or receive
interest in excess of the maximum legal rate then allowed by law. The making of
any payment or the taking of such action by Landlord shall not be considered as
a cure of such default by Tenant or prevent Landlord from pursuing any remedy it
is otherwise entitled to pursue in connection with such default.
SECTION 20.7 Default by Landlord
(a) In the event Landlord shall default in the payment, when due, of
any monetary obligations to be paid by Landlord hereunder (including any
interest or Tenant Improvement Allowance [as defined in Exhibit F] due
hereunder), and Landlord has acknowledged the existence of its obligation to
make the payment and the actual amount due, and Landlord fails to cure said
default within fifteen (15) days after written notice thereof from Tenant, or if
Tenant has obtained a final, nonappealable judgment against Landlord for a
liquidated sum and Landlord fails to pay such amount within fifteen (15) days
after written notice thereof from Tenant, Tenant shall be entitled to offset the
amount owed by Landlord (including any interest due hereunder) against rent next
accruing hereunder. If Landlord shall default in performing any of the
covenants, terms or provisions of this Lease (other than the payment, when due,
of any of Landlord's monetary obligations hereunder to which the preceding
sentence applies), and fails to cure such default within fifteen (15) days after
written notice thereof from Tenant (or such longer period as may be reasonably
necessary to cure such default if such default is not reasonably susceptible to
being cured within such fifteen (15) day period and Landlord commences its
efforts promptly to cure the same and thereafter diligently, continuously and in
good faith pursues the curing of the same to completion as soon as possible and
in any event within forty-five (45) days), then, and in any of said events,
Tenant shall be entitled to exercise any other right or remedy available to
Tenant under law or equity, except for self-help or set-off. The remedies set
forth above are in addition to and cumulative with Tenant's rental abatement
rights set forth elsewhere in the Lease. Such rental abatement rights are
independent of any rights or remedies set forth above.
(b) No waiver of any provision of this Lease shall be implied by any
failure of Tenant to enforce any remedy on account of the violation of such
provision, even if such violation shall continue or be repeated subsequently,
any waiver by Tenant of any provision of this Lease may only be in writing, and
no express waiver shall affect any provision other than the one specified in
such waiver and that one only for the time and in the manner specifically
stated.
(c) In addition to and not in lieu of any cure rights given to Landlord
herein in the event that Landlord defaults under this Lease, each and every
mortgagee and ground lessor
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having an interest in the Property shall have the right (but not the obligation)
to cure any such defaults on the part of Landlord hereunder in accordance with
and subject to the terms of any separate subordination, nondisturbance and
attornment between it and Tenant or, in the absence of such a separate
agreement, the following terms and conditions:
(i) The rights granted hereunder to a mortgagee or a ground
lessor shall be given to any mortgagee or ground lessor of which Tenant has
written notice prior to the occurrence of such default in accordance with the
notice provisions specified herein. Such notice shall specify the name and
address for such notice purposes of the mortgagee or ground lessor in question,
and the instrument or document from which the interest of the mortgagee or
ground lessor derives.
(ii) Tenant shall deliver to all such mortgagee or ground
lessors a copy of any notice of default or demand to perform on the part of
Landlord hereunder at the time such notice or demand is delivered to Landlord,
and no such notice shall be effective as to the mortgagee or ground lessor
unless and until it has been so delivered to such mortgagee or ground lessor;
(iii) The mortgagee or ground lessor in question shall have
the same amount of time from the date of default that Landlord has (without
duplication) to cure any default on the party of Landlord under this Lease; and
(iv) Tenant shall accept a cure of the mortgagee or the ground
lessor in question within any applicable cure period as if such cure were the
cure of Landlord.
SECTION 20.8 Attorney's Fees
If, as the result of any alleged breach or default in the performance
of the other party's obligations under this Lease, either party uses the service
of an attorney in order to secure compliance with such provisions or to recover
damages therefor or possession of the Premises, or if either party is made a
party to an action as a result of any alleged act or failure to act of the other
party, then the prevailing party in any suit, action, proceeding, arbitration,
mediation or other dispute resolution mechanism shall be entitled to be paid the
reasonable attorneys' fees and costs incurred by it as a result of the foregoing
circumstances.
ARTICLE 21
SUBORDINATION AND ATTORNMENT
----------------------------
SECTION 21.1 Subordination
(a) This Lease and Tenant's interest hereunder is and shall remain
subject and subordinate to the lien of any and all current and future mortgages
and/or any ground leases (which term "mortgages" shall include both construction
and permanent financing and shall include deeds of trust, similar security
instruments, and ground leases) which may now or hereafter encumber the Building
and/or the Land, or any part thereof, and to all and any renewals, extensions,
modifications, recastings, or refinancings thereof, if the holder or beneficiary
thereof enters into a subordination, nondisturbance and attornment agreement on
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terms reasonably acceptable to Tenant. Without limiting such holder's or
beneficiary's rights to request other terms or use a different form, Tenant
hereby agrees that the terms in the form attached hereto as Exhibit H are
reasonably acceptable to it. At any time after the execution of this Lease, the
holder of any mortgage to which this Lease is subordinate shall have the right
to declare this Lease to be superior to the lien of such mortgage and Tenant
agrees to execute all documents required by such holder in confirmation thereof.
(b) Landlord hereby subordinates its statutory lien rights, if any, as
landlord, in the personal property of Tenant located at the Premises to any bona
fide third party lender making financing available to Tenant and agrees to
execute an instrument reasonably acceptable to it confirming such subordination
upon the request of Tenant in connection with any such financing.
SECTION 21.2 Attornment
Tenant agrees that in the event any proceedings are brought for the
foreclosure of any mortgage encumbering the Building, the Land, or any part
thereof, or the termination of any ground lease affecting the Building, the
Land, or any part thereof, Tenant shall attorn to the purchaser at such
foreclosure sale or any ground lessor, as the case may be, if requested to do so
by such party, and shall recognize such party as Landlord under this Lease, and
Tenant waives the provisions of any statute or rule of law now or hereafter in
effect which may give or purport to give Tenant any right to terminate or
otherwise adversely affect this Lease and the obligations of Tenant hereunder in
the event any such foreclosure proceeding is prosecuted or completed.
ARTICLE 22
DELIVERY AT END OF LEASE TERM
-----------------------------
SECTION 22.1 Surrender of Premises
On the date of the expiration or termination of the Lease Term, Tenant
shall quit and surrender the Premises broom clean and in good condition and
repair (ordinary wear and tear and insured damage by fire or other casualty
excepted), together with all Improvements which may have been made in or
attached to the Premises, unless otherwise directed by Landlord pursuant to
Section 10.3 hereof.
SECTION 22.2 Holding Over
In the event that Tenant or any party claiming under Tenant shall not
immediately surrender the Premises on the date of the expiration or termination
of the Lease Term, Tenant shall become a tenant by the month at one hundred
fifty percent (150%) of the fixed monthly rent in effect during the last month
of the Lease Term, plus one hundred percent (100%) of all additional rent in
effect during the last month of the Lease Term (subject to increases thereafter
as determined by Landlord in accordance with the provisions of this Lease). Said
monthly tenancy shall commence on the first day following the expiration of the
Lease Term. As a monthly tenant, Tenant shall be subject to all the terms,
conditions, covenants, and agreements of this Lease, except as to the amount of
the monthly rent, which shall be in the amount specified in
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this Section. As a monthly tenant, Tenant shall give to Landlord at least thirty
(30) days' written notice of any intention to quit the Premises, and Tenant
shall be entitled to thirty (30) days' written notice to quit the Premises,
unless Tenant is in default hereunder, in which event Tenant shall not be
entitled to any notice to quit, the usual thirty (30) days' notice to quit being
hereby expressly waived. Notwithstanding the foregoing provisions of this
Section, in the event Tenant shall hold over after the expiration of the Lease
Term and if Landlord shall desire to regain possession of the Premises promptly
at the expiration of the Lease Term, then at any time prior to Landlord's
acceptance of rent from Tenant as a monthly tenant hereunder Landlord, at its
option, may forthwith re-enter and take possession of the Premises by any legal
process in force in the District of Columbia. Landlord may accept rent in the
holdover amount and concurrently commence legal proceedings to regain possession
of the Premises. Tenant shall also pay to Landlord all damages sustained by
Landlord resulting from retention of possession by Tenant, including the loss of
any proposed subsequent tenant for all or any portion of the Premises. Force
majeure is not an excuse to holding over.
ARTICLE 23
COVENANTS OF LANDLORD AND RESERVATION OF RIGHTS
-----------------------------------------------
SECTION 23.1 Covenants of Landlord
Landlord covenants that it has the right to make this Lease for the
Lease Term and that if Tenant shall pay all rent when due and punctually perform
all of the covenants, terms, conditions, and agreements of this Lease to be
performed by Tenant, Tenant shall have the right, during the Lease Term, to
freely, peaceably, and quietly occupy and enjoy the full possession of the
Premises without molestation or hindrance by Landlord or any party claiming
through or under Landlord, subject to the provisions of this Lease.
SECTION 23.2 Landlord's Reservation of Rights
Landlord hereby reserves to itself and its successors and assigns the
following rights (all of which are hereby consented to by Tenant): (a) to change
the street address and/or name of the Building (provided, however, that Landlord
agrees to reimburse Tenant for is reasonable costs in printing change-of-address
notices and for replacing obsolete stationary, brochures or other similar
printed materials if such change is at Landlord's initiative and not the
initiative of the U.S. Postal Service or any other governmental authority),
and/or the arrangement and/or location of entrances, passageways, doors,
doorways, corridors, elevators, stairs, toilets, or other public parts of the
Building and to change the design or configuration of the Building; (b) to
erect, use, and maintain pipes and conduits in and through the Premises; and (c)
to grant to anyone the exclusive right to conduct any particular business or
undertaking in the Building. Landlord may exercise any or all of the foregoing
rights without being deemed to be guilty of an eviction, actual or constructive,
or a disturbance or interruption of the business of Tenant or of Tenant's use or
occupancy of the Premises.
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ARTICLE 24
GENERAL PROVISIONS
------------------
SECTION 24.1 Representations by Landlord
(a) Tenant acknowledges that neither Landlord nor any broker, agent, or
employee of Landlord has made any representations or promises with respect to
the Premises or the Property except as herein expressly set forth, and no
rights, privileges, easements, or licenses are acquired by Tenant except as
herein expressly set forth.
(b) Landlord hereby represents and warrants to Tenant that
(i) Landlord is the owner of the Premises in fee simple
absolute and the Premises are not subject to the lien of any deed of trust,
mortgage or other similar encumbering instrument except a deed of trust and
related security instrument benefitting G Street Funding Company, an affiliate
of J.P. Morgan & Co.;
(ii) Landlord's title to the Premises is not subject to any
lien, easement, covenant or encumbrance which prohibits the use of the Premises
as contemplated in this Lease;
(iii) to the best of Landlord's knowledge and belief, no
existing zoning ordinance prevents the use of the Premises for the specific
purpose set forth in this Lease;
(iv) to the best of Landlord's knowledge and belief, no
Materials exist on, under or about the Premises as of the date hereof nor have
any Materials been transported to or from the Premises or used, generated,
manufactured, stored or disposed of on, under or about the Premises except in
compliance with all applicable laws;
(v) subject to the consent of G Street Funding Company,
Landlord has full authority to enter into this Lease;
(vi) subject to the consent of G Street Funding Company, no
joinder or approval of another party is required with respect to Landlord's
right and authority to enter into this Lease
(vii) to the best of Landlord's knowledge and belief, the
Building structure is in good condition and repair and has no structural defects
nor are there any defects affecting any base building systems;
(viii) to the best of Landlord's knowledge and belief, the
structure (specifically including without limitation all restrooms and other
base building items) has been (or as of the Lease Commencement Date will be)
constructed in accordance with, and is otherwise in full compliance with, all
applicable federal, state and local laws, statutes, ordinances, rules,
regulations and other requirements; and
(ix) a permanent certificate of occupancy has been issued for
the Building.
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As used herein, "to the best of Landlord's knowledge and belief" means to the
best knowledge and belief of the general partner(s) therein.
SECTION 24.2 No Partnership
Nothing contained in this Lease shall be construed as creating a
partnership or joint venture of or between Landlord and Tenant, or to create any
other relationship between the parties hereto other than that of landlord and
tenant.
SECTION 24.3 Brokers
Landlord and Tenant recognize Cushman & Wakefield of Washington, D.C.,
Inc. as the sole broker procuring this Lease on behalf of Tenant and Cassidy &
Pinkard, Inc. as the sole broker procuring this Lease on behalf of Landlord.
Landlord shall pay said broker(s) a commission therefor pursuant to a separate
agreement between said broker(s) and Landlord. Landlord and Tenant each
represent and warrant to the other that, except as provided above, neither of
them has employed or dealt with any broker, agent, or finder in carrying on the
negotiations relating to this Lease. Landlord shall indemnify and hold Tenant
harmless, and Tenant shall indemnify and hold Landlord harmless, from and
against any claim or claims for brokerage or other commissions arising from or
out of any breach of the foregoing representation and warranty by the respective
indemnitor. No broker is a third party beneficiary of this Lease.
SECTION 24.4 Tenant Estoppel Certificates
Tenant agrees, at any time from time to time, upon not less than ten
(10) days' prior written notice by Landlord, to execute, acknowledge and deliver
to Landlord a statement in writing: (a) certifying that this Lease is unmodified
and in full force and effect (or if there have been modifications, that the
Lease is in full force and effect as modified and stating the modifications);
(b) stating whether any rent abatements remain under this Lease and the dates to
which the rent has been paid by Tenant; (c) stating whether or not, to the best
knowledge of Tenant, Landlord is in default in the performance of any covenant,
agreement, or condition contained in this Lease and, if so, specifying the
nature of such default; (d) if any improvements are required to be performed by
Landlord under this Lease, stating that all such work has been satisfactorily
completed or, if not, providing a list of items excepted; (e) stating the
address to which notices to Tenant are to be sent; (f) stating the Lease
Commencement Date, the rent commencement date, and the scheduled expiration date
of the Lease Term; (g) stating whether any security deposit has been posted; (h)
stating whether Tenant has any knowledge of any environmental problem affecting
the Premises or the Property; (i) stating whether Tenant has any expansion,
contraction, renewal, or termination options of any sort or any right to
purchase the Building and/or the Land and, if Tenant does have any of the
foregoing, stating whether Tenant has exercised such option(s); and (j)
certifying as to such other matters as may reasonably be requested. Any such
statement delivered by Tenant may be relied upon by Landlord, any owner of the
Building or the Land, any prospective purchaser of the Building or Land, any
mortgagee or prospective mortgagee of the Building or Land or of Landlord's
interest therein, or any prospective assignee of any such mortgagee. Any failure
by Tenant to execute, acknowledge and deliver within the aforesaid ten (10) day
period any estoppel certificate shall be deemed a default
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under this Lease. If Tenant fails to deliver such certificate within the ten
(10) day period described above and within the ten (10) day period following a
second notice from Landlord, then Tenant hereby irrevocably constitutes and
appoints Landlord as Tenant's attorney-in-fact to execute, acknowledge and
deliver any such certificate. Any such statement delivered by Landlord as
Tenant's attorney-in-fact may be relied upon as aforesaid.
SECTION 24.5 Waiver of Jury Trial
LANDLORD AND TENANT EACH HEREBY WAIVE TRIAL BY JURY IN ANY ACTION,
PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER OF THEM AGAINST THE OTHER IN
CONNECTION WITH ANY MATTER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS
LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT HEREUNDER, TENANT'S USE OR
OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE.
SECTION 24.6 Notices
(a) Whenever any notice, demand or request is required or permitted
hereunder, such notice, demand or request shall be hand-delivered (which term
includes delivery by overnight courier services), sent by facsimile, or sent by
United States Mail, registered or certified, return receipt requested, postage
prepaid, to the addresses set forth below:
TENANT: American InterContinental University
Tower Place
Suite 2000
3340 Peachtree Road, N.E.
Atlanta, Georgia 30326
Attn: Ms. Stephanie Kirkpatrick
Facsimile: (404) 812-8204
with a copy to: Arthur Jay Schwartz, Esq.
Smith, Gambrell & Russell
Suite 3100, Promenade II
1230 Peachtree Street, N.E.
Atlanta, Georgia 30309
Facsimile: (404) 815-3509
LANDLORD: The 1770 G Street Limited Partnership
c/o Robert T. Foley Company
5530 Wisconsin Avenue
Suite 945
Chevy Chase, Maryland 20815
Facsimile: (301) 951-0248
Tenant shall also send a copy of any notice to any mortgagee pursuant to Section
21.3 above.
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(b) Either Landlord or Tenant shall have the right from time to time to
designate by written notice to the other party such other persons or places in
the United States as Landlord or Tenant may desire written notice to be
delivered or sent in accordance herewith; provided, however, at no time shall
either party be required to send more than an original and two copies of any
such notice, demand, or request required or permitted hereunder.
(c) Any notice, demand, or request which shall be served upon either of
the parties in the manner aforesaid shall be deemed sufficiently given for all
purposes hereunder (i) at the time such notice, demand, or request is
hand-delivered, or (ii) if first sent by facsimile before 5:00 pm (recipient's
local time) on a Monday-Friday (except federal holidays), upon receipt, or if
sent by facsimile at any other time, then on the first (1st) business day after
being sent, or (iii) on the third (3rd) day after the mailing of such notice,
demand, or request in accordance with the preceding portions of this Section.
SECTION 24.7 Partial Invalidity
If any provision of this Lease or the application thereof to any person
or circumstances shall to any extent be invalid or unenforceable, the remainder
of this Lease, or the application of such provision to persons or circumstances
other than those as to which it is invalid or unenforceable, shall not be
affected thereby, and each provision of this Lease shall be valid and enforced
to the fullest extent permitted by law.
SECTION 24.8 Pronouns
Feminine or neuter pronouns shall be substituted for those of masculine
form, and the plural shall be substituted for the singular number in any place
or places herein in which the context may require such substitution.
SECTION 24.9 Successors and Assigns
The provisions of this Lease shall be binding upon, and shall inure to
the benefit of, the parties hereto and each of their respective representatives,
successors, and assigns, subject to the provisions hereof prohibiting assignment
or subletting by Tenant.
SECTION 24.10 Entire Agreement
This Lease contains the entire agreement of the parties, and no
representations, inducements, or agreements, oral or otherwise, not contained in
this Lease shall be of any force or effect. This Lease may not be modified or
changed in whole or in part in any manner other than by an instrument in writing
duly signed by both parties hereto.
SECTION 24.11 Governing Law
This Lease shall be governed by and construed in accordance with the
laws of the District of Columbia without regard to conflicts of laws.
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SECTION 24.12 Section Headings
Article and Section headings are used herein for the convenience of
reference and shall not be considered when construing or interpreting this
Lease.
SECTION 24.13 No Offer
The submission of an unsigned copy of this document to Tenant for
Tenant's consideration does not constitute an offer to lease the Premises or an
option to or for the Premises. This document shall become effective and binding
only upon the execution and delivery of this Lease by both Landlord and Tenant.
SECTION 24.14 Multiple Counterparts
This Lease may be executed in multiple counterparts, each of which
shall be deemed an original and all of which together shall constitute one and
the same document.
SECTION 24.15 Time of Essence
TIME IS OF THE ESSENCE WITH RESPECT TO THE CARRYING OUT BY EACH
PARTY HERETO OF EACH TERM OR PROVISION OF THIS LEASE TO BE PERFORMED
BY SUCH PARTY.
SECTION 24.16 Conflict
In the event of any conflict between the main text of this Lease and
any Exhibit hereto, the provisions of the main text of this Lease shall prevail.
SECTION 24.17 [Intentionally Omitted]
SECTION 24.18 Joint and Several Liability
If more than one person or entity signs this Lease as Tenant, the
liability of each such person and entity shall be joint and several.
SECTION 24.19 Force Majeure
Except with respect to Tenant's monetary obligations hereunder, in the
event that Landlord or Tenant shall be delayed or hindered in or prevented from
the performance of any act or obligation required of it hereunder by reason of a
labor strike, lockout, inability to procure materials, failure of power, riot,
insurrection, war, or other reason not within the reasonable control of the
party so affected, then performance of such act or obligation by the party so
affected shall be excused for a period equivalent to the period of such delay.
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SECTION 24.20 No Construction of Lease Against Drafter
Should any provision of this Lease require judicial interpretation, it
is agreed that the court interpreting or considering same shall not apply the
presumption that the terms hereof shall be more strictly construed against a
party by reason of the rule or conclusion that a document should be construed
more strictly against the party who itself or through its agent prepared the
same, it being agreed that all parties hereto have participated in the
preparation of this Lease and that legal counsel was consulted by each party
hereto (or opportunity for such legal consultation afforded to each party)
before the execution of this Lease.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease under
seal as of the day and year first above written.
LANDLORD:
THE 1770 G STREET LIMITED
PARTNERSHIP
ATTEST: By: Robert T. Foley Company, general partner
Susan Shirsoc By: /s/ Robert T. Foley
- ---------------------- -------------------------
[Corporate Seal] Name: Robert T. Foley
Title: General Partner
TENANT:
ATTEST: AMERICAN INTERCONTINENTAL UNIVERSITY,
INC.
Douglas C. Chait By: /s/ Steve Bostic
- ---------------------- -------------------------
[Corporate Seal] Name: Steve Bostic
Title: President
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Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-41543 and 333-46655 of EduTrek International, Inc. on Form S-8 of our report
dated August 7, 1998 appearing in the Annual Report on Form 10-K of EduTrek
International, Inc. for the year ended May 31, 1998.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
August 31, 1998
<PAGE>
Exhibit 24.1
Power of Attorney of Stephen G. Franklin, Sr.
STATE OF GEORGIA
COUNTY OF COBB
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Stephen G. Franklin, Sr., a Director
of EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute
and appoint Steve Bostic and Donald J. Blankers, jointly and severally,
my true and lawful attorneys-in-fact, each with full power of
substitution and resubstitution, for me in any and all capacities, to
sign the Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for
the fiscal year ended May 31, 1998, pursuant to the requirements of the
Securities Exchange Act of 1934, and to file such document with the
Securities and Exchange Commission, together with all exhibits thereto
and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments to said
Annual Report, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26th day of
August 1998.
/s/ Stephen G. Franklin, Sr.
------------------------------
Stephen G. Franklin, Sr.
ACKNOWLEDGMENT
--------------
BEFORE me this 26th day of August 1998, came Stephen G. Franklin, Sr.,
personally known to me, who in my presence did sign and seal the above
and foregoing Power of Attorney and acknowledged the same as his true
act and deed.
/s/ Cynthia Gardere
-------------------
NOTARY PUBLIC
State of Georgia
-------
My Commission Expires:
September 11, 1999
------------------
<PAGE>
Exhibit 24.2
Power of Attorney of Paul D. Beckham
STATE OF GEORGIA
COUNTY OF COBB
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Paul D. Beckham, a Director of
EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and
appoint Steve Bostic and Donald J. Blankers, jointly and severally, my
true and lawful attorneys-in-fact, each with full power of substitution
and resubstitution, for me in any and all capacities, to sign the
Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for the
fiscal year ended May 31, 1998, pursuant to the requirements of the
Securities Exchange Act of 1934, and to file such document with the
Securities and Exchange Commission, together with all exhibits thereto
and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments to said
Annual Report, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26th day of
August 1998.
/s/ Paul D. Beckham
---------------------
Paul D. Beckham
ACKNOWLEDGMENT
--------------
BEFORE me this 26th day of August 1998, came Paul D. Beckham, personally known
to me, who in my presence did sign and seal the above and foregoing
Power of Attorney and acknowledged the same as his true act and deed.
/s/ Cynthia Gardere
---------------------
NOTARY PUBLIC
State of Georgia
My Commission Expires:
September 11, 1999
------------------
<PAGE>
Exhibit 24.3
Power of Attorney of Fred C. Davison
STATE OF GEORGIA
COUNTY OF COBB
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Fred C. Davison, a Director of
EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and
appoint Steve Bostic and Donald J. Blankers, jointly and severally, my
true and lawful attorneys-in-fact, each with full power of substitution
and resubstitution, for me in any and all capacities, to sign the
Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for the
fiscal year ended May 31, 1998, pursuant to the requirements of the
Securities Exchange Act of 1934, and to file such document with the
Securities and Exchange Commission, together with all exhibits thereto
and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments to said
Annual Report, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26th day of
August 1998.
/s/ Fred C. Davison
---------------------
Fred C. Davison
ACKNOWLEDGMENT
--------------
BEFORE me this 26th day of August 1998, came Fred C. Davison, personally known
to me, who in my presence did sign and seal the above and foregoing
Power of Attorney and acknowledged the same as his true act and deed.
/s/ Cynthia Gardere
---------------------
NOTARY PUBLIC
State of Georgia
My Commission Expires:
September 11, 1999
------------------
<PAGE>
Exhibit 24.4
Power of Attorney of Ronald P. Hogan
STATE OF GEORGIA
COUNTY OF FAYETTE
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Ronald P. Hogan, a Director of
EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and
appoint Steve Bostic and Donald J. Blankers jointly and severally, my
true and lawful attorneys-in-fact, each with full power of substitution
and resubstitution, for me in any and all capacities, to sign the
Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for the
fiscal year ended May 31, 1998, pursuant to the requirements of the
Securities Exchange Act of 1934, and to file such document with the
Securities and Exchange Commission, together with all exhibits thereto
and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments to said
Annual Report, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 25th day
of August 1998.
/s/ Ronald P. Hogan
-------------------
Ronald P. Hogan
ACKNOWLEDGMENT
--------------
BEFORE me this 25th day of August 1998, came Ronald P. Hogan, personally known
to me, who in my presence did sign and seal the above and foregoing
Power of Attorney and acknowledged the same as his true act and deed.
/s/ Janice Wallace
--------------------
NOTARY PUBLIC
State of Georgia
My Commission Expires:
May 29, 2000
------------
<PAGE>
Exhibit 24.5
Power of Attorney of Gaylen D. Kemp
STATE OF GEORGIA
COUNTY OF COBB
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Gaylen D. Kemp, a Director of
EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and
appoint Steve Bostic and Donald J. Blankers jointly and severally, my
true and lawful attorneys-in-fact, each with full power of substitution
and resubstitution, for me in any and all capacities, to sign the
Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for the
fiscal year ended May 31, 1998, pursuant to the requirements of the
Securities Exchange Act of 1934, and to file such document with the
Securities and Exchange Commission, together with all exhibits thereto
and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments to said
Annual Report, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26th day of
August 1998.
/s/ Gaylen D. Kemp
--------------------
Gaylen D. Kemp
ACKNOWLEDGMENT
--------------
BEFORE me this 26th day of August 1998, came Gaylen D. Kemp, personally known
to me, who in my presence did sign and seal the above and foregoing
Power of Attorney and acknowledged the same as his true act and deed.
/s/ Cynthia Gardere
---------------------
NOTARY PUBLIC
State of Georgia
-------
My Commission Expires:
September 11, 1999
------------------
<PAGE>
Exhibit 24.6
Power of Attorney of Gerald Tellefsen
STATE OF GEORGIA
COUNTY OF COBB
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Gerald Tellefsen, Director of
EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and
appoint Steve Bostic and Donald J. Blankers jointly and severally, my
true and lawful attorneys-in-fact, each with full power of substitution
and resubstitution, for me in any and all capacities, to sign the
Annual Report on Form 10-K for EDUTREK INTERNATIONAL, INC. for the
fiscal year ended May 31, 1998, pursuant to the requirements of the
Securities Exchange Act of 1934, and to file such document with the
Securities and Exchange Commission, together with all exhibits thereto
and other documents in connection therewith, and to sign on my behalf
and in my stead, in any and all capacities, any amendments to said
Annual Report, incorporating such changes as any of the said
attorneys-in-fact deems appropriate, hereby ratifying and confirming
all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 26th day of
August 1998.
/s/ Gerald Tellefsen
----------------------
Gerald Tellefsen
ACKNOWLEDGMENT
--------------
BEFORE me this 26th day of August 1998, came Gerald Tellefsen, personally
known to me, who in my presence did sign and seal the above and
foregoing Power of Attorney and acknowledged the same as his true act
and deed.
/s/ Cynthia Gardere
---------------------
NOTARY PUBLIC
State of Georgia
-------
My Commission Expires:
September 11, 1999
------------------
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