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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM JUNE 1, 1998 TO DECEMBER 31, 1998
COMMISSION FILE NUMBER: 0-23021
EDUTREK INTERNATIONAL, INC.
A GEORGIA CORPORATION
500 EMBASSY ROW 58-2255472
6600 PEACHTREE DUNWOODY ROAD (IRS Employer Identification No.)
ATLANTA, GEORGIA 30328
404-965-8000
Securities Registered Pursuant to Section 12(b)
of the Securities Exchange Act of 1934:
NONE
Securities Registered Pursuant to Section 12(g)
of the Securities Exchange Act of 1934:
CLASS A COMMON STOCK, WITHOUT PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the Class A Common Stock of the registrant
held by nonaffiliates of the registrant (4,302,155) on March 1, 1999 was
$27,426,238. For the purposes of this response, officers, directors, and
holders of 5% or more of the registrant's Class A Common Stock are considered
the affiliates of the registrant at that date.
The number of shares outstanding of the registrant's Common Stock as of
March 1, 1999: 4,371,005 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 1999 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 PAGE
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Item 1. Business 1
Item 2. Properties 19
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 20
Item 6. Selected Consolidated Financial Data 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 52
PART III
Item 10. Directors and Executive Officers of the Registrant 52
Item 11. Executive Compensation 52
Item 12. Security Ownership of Certain Beneficial Owners and Management 52
Item 13. Certain Relationships and Related Transactions 52
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 52
SIGNATURES 55
EXHIBIT INDEX 57
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PART I
ITEM 1. BUSINESS
This Transition Report on Form 10-K contains forward-looking statements.
Additional written or oral forward-looking statements may be made by the Company
from time to time in filings with the Securities and Exchange Commission or
otherwise. The words "believe," "plan," expect," "anticipate," "project," and
similar expressions identify forward-looking statements, which speak only as of
the date the statement was made. Such forward-looking statements are within the
meaning of that term in Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements may include, but are not limited to, projections of revenues, income
or loss, expenses, capital expenditures, plans for future operations, financing
needs or plans, the impact of inflation, and plans relating to products or
services of the Company, as well as assumptions relating to the foregoing. The
Company undertakes no obligation to publicly update or revise any forward-
looking statements, whether as a result of new information, future events, or
otherwise.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking statements. Statements in this Transition
Report, including Notes to Consolidated Financial Statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
describe factors, among others, that could contribute to or cause such
differences. Additional factors that could cause actual results to differ
materially from those expressed in such forward-looking statements include,
without limitation, new or revised interpretations of other applicable laws,
rules and regulations, failure to maintain or renew required regulatory
approvals, accreditation or state authorizations, failure to obtain the Southern
Association of Colleges and Schools' ("SACS") approval to operate in new
locations, changes in student enrollment, and other factors set forth in this
Transition Report on Form 10-K and other reports or materials filed or to be
filed with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company or its management).
OVERVIEW
EduTrek International, Inc. ("EduTrek" or the "Company"), through its
subsidiary American InterContinental University, Inc. ("AIU"), is a leading
provider of global, career-oriented higher education programs. AIU offers
accredited associate's, bachelor's, and master's degree programs in information
technology ("IT"), international business, digital media communications, and
design to over 3,800 students from over 100 countries. AIU maintains seven
campuses located in Atlanta (Buckhead and Dunwoody), Los Angeles, Miami,
Washington, D.C., London, and Dubai, United Arab Emirates. In 1987, AIU became
the first for-profit four-year university to be accredited by the Commission on
Colleges of the Southern Association of Colleges and Schools ("SACS"), one of
the six regional accrediting agencies recognized by the U.S. Department of
Education. The education programs are designed to help graduates prepare for
careers. AIU offers an authentic international education environment with over
half of its students from outside the United States. Through its Study Abroad
program, AIU enrolled approximately 629 students from U.S. universities in
calendar 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 four new campuses in calendar 1998. The number of students
attending AIU has increased 32.2% to 3,839 students at January 31, 1999 from
2,903 students at January 31, 1998. The Company intends to continue expanding
by opening new campuses (including new campuses in northern Virginia and Dubai
in calendar 1999). Each new 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 offers 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"), Master of Business Administration
("MBA") in International Business, and Bachelor of Business Administration
("BBA") in International Business. Each program is offered during the day for
full-time
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students and in the evenings for working adults in order to provide flexibility
for students and to maximize capacity utilization. Enrollment at AIU's "Power
Campuses" (students enrolled in the four new business and information technology
programs) at January 31, 1999 was 1,008 students, as compared to 80 students at
the same time last year. The average annual tuition revenue per student for
these programs is approximately $16,000, and the retention rate for these
students is in excess of 92%.
In July 1997, the Company licensed the core IT curriculum from ITI
Education Corporation ("ITI"). This licensing arrangement was expanded in March
1998, and EduTrek acquired rights to ITI's information technology education
system for 11 major markets in the U.S. and internationally. During 1998, the
Company decided to phase out the licensed ITI curriculum in favor of its own
internally developed IT curriculum, and in December 1998, EduTrek and ITI began
negotiations relating to the termination of the licensing agreement. AIU is
currently working with Oracle and Microsoft to develop state-of-the-art
university curricula for bachelor's and master's degrees. In conjunction with
this effort, AIU was selected as a charter member of the Oracle Academic
Initiative ("OAI"). The OAI partnership will provide AIU with software,
support, and instructor education and certification to develop cutting edge
technology courses and programs. Other OAI institutions include Rochester
Institute of Technology, Washington State University, and San Francisco State
University. AIU has also been named to the Microsoft Authorized Academic
Training Program, which allows students to prepare for industry-recognized
certification through AIU's new curriculum.
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 a new centralized
campus management information system to integrate its operations and financial
data including admissions, financial aid, student services, placement services,
and default management. AIU is also implementing a total quality management
program aimed at assessing and improving the quality of academic and
administrative services for AIU's students.
The United States education market may be divided into distinct segments:
kindergarten through twelfth grade schools ("K-12"), vocational and technical
training schools, workplace and consumer training, and degree-granting colleges
and universities ("higher education"). The Company operates 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. The
Company believes that it is well positioned to take advantage of the increasing
demand for postsecondary education programs for the following reasons:
Better Quality Educational Programs. AIU's primary goal is to deliver
better quality educational programs at a fast pace, resulting in a greater
return on students' investment. Quality educational programs provide students
with the learning skills to compete successfully for high potential employment
opportunities. 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.
Therefore, students can earn a degree at AIU much more rapidly than at a
traditional university and begin their careers sooner. By reducing the
opportunity cost of foregone income while in school, AIU graduates can increase
the return on their educational investment.
AIU's new programs are targeted to careers with high growth potential. The
MIT and BIT degree programs educate students to become IT professionals.
Nationwide, wages for IT positions are over 70% higher than other jobs in
private industry, according to the Information Technology Association of
America. The average salary of AIU's first MIT graduating class (October 1998)
was approximately $42,000. AIU also offers advanced business programs at the
undergraduate and graduate levels for full-time students and working adults.
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Better Quality Learning Environment. AIU's new campuses are equipped with
state-of-the-art technologies which aid in accelerating student learning. They
are "plug-and-play" environments, with hundreds of ports to give students easy
access to the Internet and electronic learning resources. The interiors are
also configured with classroom/team room modules to complement student learning.
Working Adult Programs. AIU's programs for working adults in business and
information technology are designed to meet the unique needs of this market
segment. They are offered in the evenings and during the day at convenient
times, can be completed at a faster pace, and provide practical education based
upon solving problems likely to be encountered in the workplace.
International Programs. AIU's Global Studies program is composed of the
Study Abroad and Study in America programs. The Study in America program
recruits international students to attend AIU's U.S. campuses. Marketing
efforts are targeted to those countries most likely to send students to U.S.
universities. The Study Abroad program provides students from U.S. universities
the opportunity to earn a degree from their home university while studying at
AIU's international campuses. Program advisors for both programs ensure a
smooth transition for students studying at an international campus.
BUSINESS STRATEGY
EduTrek's strategic goal is to become the high quality, 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.
Opening New Campuses
The Company opened four new campuses during 1998: Atlanta (Dunwoody) in
July, Los Angeles and Washington, D.C. in October, and Miami in November.
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 population of working adults, the number of university
graduates, the number of IT employers and their educational reimbursement
policies, the number of and projected growth in IT jobs, the availability of
similar programs offered by other institutions, and the timing of attaining
state licenses to do business in the area. EduTrek plans to open two new
campuses in calendar 1999: northern Virginia (October) and Dubai (October). In
calendar 2000, EduTrek plans to open two to four additional campuses. Given
sufficient market demand, EduTrek will open campuses in markets where the
Company currently has campuses in order to enhance operating and marketing
efficiencies.
Developing or Acquiring Additional Degree Programs
EduTrek plans to introduce degree programs in additional fields of study
and at different degree levels. In calendar 1998, AIU introduced four new
programs, including the MIT (day and evening), BIT, BBA in International
Business for working adults, and MBA in International Business (day and
evening). A total of 1,008 students were enrolled in these programs on January
31, 1999. The average annual tuition revenue per student for these new programs
is $16,230, as compared to $11,520 for students enrolled in AIU's traditional
programs. The retention rate for students in new programs is in excess of 92% as
of December 31, 1998. EduTrek believes that the development and introduction of
new high quality programs will result in higher retention rates and higher
revenues and operating profits per student.
Increasing Enrollment at Existing Campuses
In an effort to increase enrollment at existing campuses, EduTrek has
implemented an integrated marketing program which utilizes direct mail, print
and radio advertising, television, Internet advertising, direct sales to 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
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information technology and business. In addition, EduTrek, through its Study in
America program, markets to students from countries outside of the United
States.
PROGRAMS OF STUDY
AIU offers the following degree programs and related areas of
specialization. Unless otherwise noted, each of the degree programs is offered
at all of AIU's campuses.
TRADITIONAL CAMPUSES (ATLANTA (BUCKHEAD), LOS ANGELES, LONDON, AND DUBAI)
- -------------------------------------------------------------------------
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ACADEMIC DISCIPLINE DEGREE DEGREE PROGRAMS
(Winter 1999 enrollment) OFFERED (WINTER 1999 ENROLLMENT)
- --------------------------------------------- ------- ------------------------------------
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International Business (934 students) A.A., B.S. International Business (861)
M.B.A. * International Business (73)
International Design (1,529 students) A.A., B.A. Fashion Design (153)
Fashion Marketing (207)
Fashion Design and Marketing (239)
Interior Design (365)
Visual Communications (390)
Video Production ** (175)
Other (368) Study Abroad Program (237)
English as a Second Language (73)
Undecided (58)
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Total Students - 2,831
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* Offered at London and Dubai campuses only
** Offered at Atlanta (Buckhead) and London campuses only
POWER CAMPUSES (ATLANTA (DUNWOODY), LOS ANGELES, MIAMI, AND WASHINGTON, D.C.)
- -----------------------------------------------------------------------------
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ACADEMIC DISCIPLINE DEGREE DEGREE PROGRAMS
(Winter 1999 enrollment) OFFERED (WINTER 1999 ENROLLMENT)
- --------------------------------------------- -------------- --------------------------------------
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Information Technology (715 students) B.I.T. Information Technology (41)
M.I.T. Information Technology (674)
International Business (293 students) A.A., B.S. International Business (279)
M.B.A. International Business (14)
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Total Students - 1,008
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SACS accredits all of AIU's degree programs. AIU's interior design program
at the Atlanta (Buckhead) 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 in the evening. The full-time program
is 10 1/2 months in length, and the evening program is 21 months. Both programs
educate university graduates from a variety of backgrounds to become IT
professionals. The IT curriculum is market-driven and changes frequently in
response to
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advances in technology. The technical portion of the curriculum includes
Microsoft Access(R), Oracle(R), Visual Basic(R), JAVA(TM) plus network
administration for Windows 95(TM), Windows NT(TM), network and hardware support,
and Windows NT(TM) Internet Information Server. Students also learn professional
development skills and business strategy, including financial accounting,
marketing, and professional sales. The program features a method of delivery
that emphasizes problem-based, collaborative learning. Class size is limited to
cohorts, or groups, of 24 students to ensure interactive learning and one-on-one
attention from the faculty. MIT students enjoy new, state-of-the-art facilities,
including classrooms and team rooms designed specifically for the MIT program.
AIU also offers an undergraduate BIT program for full-time students and working
adults.
International Business. AIU offers associate's, bachelor's, and master's
degrees in international business. The associate's and bachelor's degree
programs for working adults are focused on the unique needs of the adult
learner. Working adults can earn an accelerated BBA degree in about four years
or less, depending upon previously earned transfer credits. Classes meet one
evening per week, and class size is limited to 24 students to encourage group
discussion and the exchange of information and ideas. In addition to the regular
class meetings, students participate in weekly project team sessions. These
sessions give students the opportunity to find solutions to real-life problems,
applying their business knowledge in a collaborative learning environment. AIU
also offers a master's degree program in international business for working
adults.
The international business programs for traditional students provide
students with a broad exposure to international business from the basic elements
through technical and functional areas. Students may follow a general business
track or choose advanced classes leading to a concentration in areas such as
marketing and management. The master's degree program in international business
was introduced at AIU's London campus in 1994 and the Dubai campus in 1995.
Students learn about the business environment on a global scale, focusing on
areas such as international banking, business ethics, and international law, as
well as accounting, information technology, management, marketing, and business
strategy.
International Design. The international design program educates students
in the fields of fashion design and marketing, commercial and residential
interior design, and multimedia communications, including advertising art,
graphic design, photography, illustration, and video production. The fashion
design program offers students a solid foundation in designing and the
opportunity to develop their own design collection. The fashion marketing
program prepares students for executive careers in the retail and wholesale
fashion industry and related businesses. The interior design programs, which at
the Atlanta (Buckhead) and Los Angeles campuses are accredited by FIDER, provide
students with a thorough understanding of the fundamentals and advanced
principles of interior design. Taught by working professionals, the multimedia
communications programs offer a balance of practical experience and theoretical
concepts, providing a firm grounding in the business aspects of the multimedia
communications industry.
TUITION AND FEES
AIU's undergraduate tuition is priced between the tuition levels of non-
profit private universities and the comparatively lower tuition charged to
resident students at public universities. The tuition is comparable to the
tuition of public universities for non-resident and international students. For
traditional programs, the tuition ranges from $3,625 to $4,675 per academic
term, or $10,875 to $14,025 for the full academic year, depending upon campus
location.
The tuition for the Power Campus programs is as follows:
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ANNUAL TUITION
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Program DAY EVENING
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Master's in Information Technology (MIT) $24,950 $12,925
Master's in Business Administration (MBA) $19,800 $10,350
Bachelor's in Information Technology (BIT) $18,850 $ 9,875
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Bachelor's of Business Administration (BBA) $17,850 $ 9,375
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AIU offers a number of institutional scholarships for selected students who
meet specific eligibility requirements, ranging from $500 to full tuition
scholarships. For the seven months ended December 31, 1998, institutional
scholarships had a value of approximately $471,000, or 2.0% of EduTrek's net
revenues.
Historically, AIU has increased tuition and fees without consumer
resistance. AIU increased tuition and fees by approximately 5% for both the
1997-98 and 1998-99 academic years. EduTrek anticipates that future tuition
increases will at least keep pace with inflation.
FACULTY
Faculty members are hired in accordance with criteria established by AIU,
accrediting bodies, and applicable federal and state regulatory authorities.
The critical measures of faculty competence are 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 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 the AIU faculty provides students with a practical education that
can be directly applied to their chosen careers.
Most faculty members are employed on a contract 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 1998 for AIU's campuses in Atlanta, Los Angeles, London, and
Dubai, respectively) and the absence of a faculty tenure track promote a
student-focused environment. In AIU's Power Campus programs, students rotate
from classroom instruction with a maximum of 24 students to 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 marketing activities, including print and radio advertising, Internet
advertising, direct mail, and direct contact with targeted corporations, high
schools, and community colleges. EduTrek also attempts to locate its campuses
near major highways to provide high visibility and easy access. Alumni,
employers, embassies, and currently enrolled students refer a substantial
portion of new students. EduTrek also has Web sites (www.edutrek.com,
www.aiuniv.edu) that allow electronic access to company and program information.
AIU's advertising is controlled centrally and is targeted at local markets
where the campuses are located, U.S. universities (for the Study Abroad
program), and international markets to attract students from other countries.
Direct responses to advertising and direct mail are received, tracked, and
forwarded promptly to the appropriate admissions officers. All responses are
analyzed in order to improve AIU's marketing efforts continually.
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 and marketing efforts and referrals. Representatives
pursue leads by arranging interviews with prospective students at the campus and
generally assist students with clarifying their career goals and completing the
application process. The interview is designed to establish the student's
qualifications, academic background, and goals, to determine his or her
suitability for specific programs, and to administer any required tests.
Recruiting
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policies and processes are established centrally but implemented at the campus
level through a director of admissions.
To supplement its advertising efforts, AIU employs personnel who recruit
students at high schools, community colleges, universities, embassies, college
fairs, and corporations. AIU's international student recruiters visit
international high schools, college fairs, embassies, and consulates. Study
Abroad recruiters visit selected university professors and study abroad
advisors, who most directly influence a student's decision to study abroad.
STUDENT RETENTION
The ability to retain students until graduation is a critical indicator of
AIU's success and early academic intervention is crucial to improving student
completion rates. To minimize student withdrawals, AIU devotes staff and other
resources to assist and advise students regarding academic and financial
matters, part-time employment, and housing. AIU employs guidance counselors at
all its campuses to advise students.
Students must pass special examinations and successfully complete an
admissions interview in order to gain admittance to AIU's Power Campus programs.
As a result of these careful screening efforts, retention in AIU's Power Campus
programs was approximately 92% at December 31, 1998.
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. graduates from AIU's traditional programs 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 bachelor's degree graduates from
AIU's traditional programs was $27,900, as compared to $24,000 in 1996.
Over 80% of AIU's first MIT graduating class have obtained employment in
the IT field since graduating in October 1998, with an average starting salary
of $42,000.
To increase placement rates and starting salaries, AIU increased its
placement staff in calendar 1998. As a standard component of AIU's curriculum
in all programs, placement personnel assist students in developing
individualized career plans, selecting classes to further these plans, obtaining
internships, and formulating job search strategies. Students also receive
instruction during their program of study on basic job search skills, including
identifying potential employment opportunities, writing resumes and letters of
introduction, and preparing for interviews.
COMPETITION
The higher education market is highly fragmented and competitive, with no
private or public institution having a significant market share. In the U.S.
and London, EduTrek competes primarily with four-year and two-year degree
granting public and private regionally accredited colleges and universities.
Many of these institutions have far greater financial resources than 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 are government sponsored and charge a lower tuition than AIU.
AIU competes primarily at a local and regional level with other regionally
accredited colleges and universities based on the quality of the academic
programs, the accessibility of the programs and learning resources, the cost of
the program, the perceived quality of the instruction, the employability of its
graduates, and the time necessary to earn a degree.
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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 Department of Education relies on accrediting agencies to determine
whether institutions' educational programs qualify them to participate in Title
IV Programs. The HEA specifies certain standards that all recognized
accrediting agencies must adopt in connection with their review of postsecondary
institutions. Accrediting agencies that meet Department of Education standards
are recognized as the arbiters of the quality of the education or training
offered by an institution. Each of AIU's campuses is accredited by SACS, an
accrediting agency recognized by the Department of Education. In addition,
AIU's interior design programs in Atlanta (Buckhead) and Los Angeles are
accredited by FIDER, and the advertising program in Dubai is accredited by the
International Advertising Association.
The HEA requires each recognized accrediting agency to submit to a periodic
review of its procedures and practices by the Department of Education as a
condition of its continued recognition. SACS, AIU's regional accreditor for
purposes of participation in Title IV Programs, has been reviewed within the
last 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 has been placed on
reporting status by its respective accrediting agencies.
STUDENT FINANCIAL ASSISTANCE
Students attending AIU finance their education through a combination of
family contributions, individual resources, financial aid, and employer tuition
reimbursement. As at most other postsecondary institutions, many students
enrolled at AIU must rely, at least in part, on financial assistance to pay the
cost
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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
Department of Education, and (iii) certified as an eligible institution to
participate in the Title IV Programs by the Department of Education. In
addition, that school must ensure that Title IV Program funds are properly
accounted for and disbursed in the correct amounts to eligible students.
Under the HEA and its implementing regulations, AIU must comply with
certain standards on an institutional basis. For purposes of these standards,
the Regulations define an institution as a main campus with additional locations
(formerly called branch campuses), if any. Under this definition, all of AIU's
campuses are treated as one institution for purposes of complying with the HEA
with the main campus located in Atlanta (Buckhead), GA.
NATURE OF FEDERAL SUPPORT FOR POSTSECONDARY EDUCATION
While states support public colleges and universities primarily through
direct state subsidies, the federal government provides a substantial part of
its support for postsecondary education in the form of grants and loans to
students enrolled at eligible institutions. Title IV Programs have provided aid
to students for more than 30 years and, since the enactment of the HEA in 1965,
the scope and size of such programs have steadily increased. Since 1972,
Congress has expanded the scope of the HEA to provide for the needs of the
changing national student population. Among other things, the amended HEA
provides that students at proprietary schools are eligible for assistance under
Title IV Programs, establishes a program for loans to parents of eligible
students, opens Title IV Programs to part-time students, increases maximum loan
limits, and eliminates the requirement that students demonstrate financial need
to obtain unsubsidized federally guaranteed student loans. Most recently, the
Direct Loan program was enacted, enabling students to obtain loans from the
federal government rather than from commercial lenders.
Students at AIU participate in the following Title IV Programs.
Pell. The Federal Pell Grant ("Pell") program is the principle means by
which the Department of Education makes grants to students who demonstrate
financial need. Every eligible student is entitled to receive a Pell grant;
there is no institutional allocation or limit. Grants presently range from $400
to $3,000 per year. Amounts received by students enrolled in AIU for the seven
months ended December 31, 1998 under the Pell program equaled approximately
$464,000 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 for all FSEOG program funds
disbursed. Resources for this institutional contribution may include
institutional grants and scholarships and, in certain states, portions of state
scholarships. Amounts received by students enrolled in AIU under the FSEOG
program for the seven months ended December 31, 1998 equaled approximately
$39,000 or 0.2% of the Company's net revenues.
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FFEL and Federal Direct Student Loans. The Federal Family Education Loans
("FFEL") programs include the Federal Stafford Loan Program ("Stafford Loan")
and the Federal PLUS Loan Program ("PLUS"), whereby private lenders make loans
to a student or his or her parents to pay the cost of attendance at a
postsecondary school.
The FFEL Program is administered through state and private non-profit
guarantee agencies that insure loans directly, collect loans in default, and
provide various services to lenders. The federal government provides interest
subsidies in some cases and reinsurance payments for borrower default, death,
disability, and bankruptcy.
The Direct Loan program is substantially the same as the FFEL program in
providing Stafford and PLUS loans. Under the Direct Loan program, however, funds
are provided directly by the federal government to the students, and the loans
are administered through the school. For schools electing to participate, the
Direct Loan program replaces the FFEL program (unless participation in both
programs is permitted by the Department of Education), although loans are made
on the same general terms and conditions.
Direct and FFEL Stafford Loan Program. Undergraduate students may borrow
an aggregate of $2,625 for their first undergraduate academic year, $3,500 for
their second academic year, and $5,500 for their third and fourth academic years
under the FFEL Stafford Loan or Direct Stafford Loan program. Graduate students
may borrow up to $8,500 each academic year. If the student qualifies for a
subsidized loan, based on financial need, the federal government pays interest
on the loan while the student is attending school and during certain grace and
deferment periods. If the student does not qualify for a subsidized loan, the
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.
For the seven months ended December 31, 1998, AIU participated in both the
FFEL and Direct Stafford Loan programs. FFEL and Direct Stafford loans amounted
to approximately $6.9 million and $1.7 million, respectively, or approximately
28.9% and 7.1%, respectively, of the Company's net revenues for the seven months
ended December 31, 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 $547,000 and $6,000, respectively, or
approximately 2.3% and 0.03%, respectively, of the Company's net revenues for
the seven months ended December 31, 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. For the seven months ended December 31, 1998, FWS
funds amounted to approximately $37,000 or 0.2% of the Company's net revenues.
AVAILABILITY OF LENDERS
Five lending institutions currently provide over 85% of all federally
guaranteed loans to students attending AIU. While the Company believes that
other lenders would be willing to make federally guaranteed student loans to its
students if loans were no longer available from its current lenders, there can
be no assurance in this regard. In addition, the HEA requires the establishment
of lenders of last resort in every state to make loans to students at any school
that cannot otherwise identify lenders willing to make
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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.
FOREIGN SOURCES OF FINANCIAL AID
For the seven months ended December 31, 1998, 43 international students, or
less than 2% of total enrollment, received financial assistance from their
respective foreign governments in the form of either loans or grants. The
foreign governments providing loans to AIU's students were Iceland and Sweden
and the foreign governments awarding grants to AIU's students were Bahrain,
Botswana, Saudi Arabia, 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.
For the seven months ended December 31, 1998, approximately $223,000 or 0.9% of
the Company's net revenues was derived from state grant programs. In addition,
certain students attending AIU receive financial aid provided by the United
States Department of Veterans Affairs, the United States Department of the
Interior (Bureau of Indian Affairs), and the Rehabilitative Services
Administration of the Department of Education (vocational rehabilitation
funding). For the seven months ended December 31, 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. For the
seven months ended December 31, 1998, institutional scholarships had a value
equal to approximately $471,000 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 Department of Education to increase its level of regulatory
oversight of schools to ensure that public funds are properly used. Therefore,
to obtain and maintain eligibility to participate in the Title IV Programs, AIU
must comply with the rules and regulations set forth in the HEA and the
Regulations thereunder. An institution must obtain certification by the
Department of Education as an "eligible institution" to participate in Title IV
Programs. Certification as an "eligible institution" to participate in Title IV
Programs requires, among other things, that the institution be authorized to
offer its educational programs by the state in which it operates. It must also
be accredited by an accrediting agency recognized by the Department of
Education.
The HEA provides standards for institutional eligibility to participate in
the Title IV Programs. The standards are designed, among other things, to limit
dependence on Title IV Program funds, prevent schools with unacceptable student
loan default rates from participating in Title IV Programs, and, in general,
require institutions to satisfy certain criteria intended to protect the
integrity of the federal programs, including criteria regarding administrative
capability and financial responsibility. A school that has been certified as
eligible to participate in the Title IV Programs continues to remain eligible
for the period of its certification, which is generally up to six years. A
school must apply for a renewal of its certification prior to its expiration,
and must demonstrate compliance with the eligibility requirements in its
application.
Under certain circumstances, the Department of Education may provisionally
certify a school to participate in Title IV Programs. Provisional certification
may be imposed when a school undergoes a change in ownership resulting in a
change of control or when a school is reapplying for certification, if the
school (i) does not satisfy all the financial responsibility standards, (ii) has
a cohort default rate of 25% or more in any single fiscal year of the three most
recent federal fiscal years for which data is available, and (iii) under other
circumstances determined by the Secretary of Education. Provisional
certification may last no longer than three years. Provisional certification
differs from certification in that a provisionally certified school may be
terminated from eligibility to participate in the Title IV Programs without the
same opportunity for a hearing before an independent hearing officer and an
appeal to the Secretary of Education
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as is afforded to a fully certified school faced with termination, suspension,
or limitation of eligibility prior to expiration of its certification.
Additionally, the Department of Education may impose such further conditions on
a provisionally certified institution's eligibility to continue participating in
the Title IV Programs as the Department of Education deems necessary. In
connection with the Company's acquisition of American European Corporation in
October 1996 which resulted in a change of control of AIU, the Company 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 Department of Education began to impose sanctions
on institutions with cohort default rates above certain levels, more than 600
institutions have lost their eligibility to participate in some or all Title IV
Programs. However, many institutions, including AIU, have responded by
implementing aggressive student loan default management programs aimed at
reducing the likelihood of student defaults.
A school's cohort default rate under the FFEL and Direct Loan program is
calculated on an annual basis as the rate at which student borrowers scheduled
to begin repayment on their loans in one federal fiscal year default on those
loans by the end of the next federal fiscal year. Any institution whose FFEL
and Direct Loan cohort default rates equal or exceed 25% for three consecutive
years will no longer be eligible to participate in that program or the Direct
Loan program for the remainder of the federal fiscal year in which the
Department of Education determines that such institution has lost its
eligibility and for the two subsequent federal fiscal years. In addition, an
institution whose FFEL and Direct Loan cohort default rate for any federal
fiscal year exceeds 40% may have its eligibility to participate in all Title IV
Programs limited, suspended, or terminated. Since the calculation of FFEL and
Direct Loan cohort default rates involves the collection of data from many non-
governmental agencies (i.e., lenders and private guarantors), as well as the
Department of Education, the HEA provides a formal process for the review and
appeal of the accuracy of FFEL and Direct Loan cohort default rates before the
Department of Education takes any action against an institution based on its
FFEL and Direct Loan cohort default rates. An institution may continue to
participate in the FFEL and Direct Loan programs during the pendency of the
appeal process.
AIU has had average FFEL and Direct Loan cohort default rates of less than
25% for three consecutive federal fiscal years. AIU had a published 1995 FFEL
and Direct Loan cohort default rate and a 1994 rate below 25%. For federal
fiscal 1993 and 1994, the FFEL and Direct Loan cohort default rate for all
borrowers at AIU was 14.3% and 14.0%, respectively. The average FFEL and Direct
Loan 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 and Direct Loan cohort default rate for all borrowers at
AIU was 18.5%. Preliminary cohort default rates are subject to revision by the
Department of Education based on information that schools and guaranty agencies
identify and submit to the Department of Education for review, in order to
correct errors. Any such adjustment will be made by the Department of Education
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%. AIU submitted corrections
for its preliminary cohort default rate for 1996 and the Department of Education
reduced AIU's cohort default rate from a preliminary rate of 14.1% to a final
rate of 13.1%. AIU expects preliminary federal fiscal year 1997 FFEL and Direct
Loan cohort default rates to be issued in early April of 1999.
If an institution's FFEL and Direct Loan cohort default rate equals or
exceeds 25% in any of the three most recent federal fiscal years, that
institution may be placed on provisional certification status for up to six
years. Provisional certification does not limit an institution's access to
Title IV Program funds; however, an institution with provisional status is under
closer review by the Department of Education and may be subject to summary
adverse action if it commits violations of Title IV Program requirements. To
the Company's knowledge, the Department of Education reviews an institution's
compliance with the cohort default rate thresholds only when that school is
otherwise subject to a Department of Education certification review. AIU has
not had a FFEL and Direct Loan cohort default rate of 25% or greater during any
of the last three fiscal years.
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Increased Regulatory Scrutiny. The 1992 reauthorization of the HEA
contained a three-part initiative, referred to as the Program Integrity Triad,
intended to increase regulatory scrutiny of postsecondary education
institutions. Part one of that initiative required each state to establish a
State Postsecondary Review Entity ("SPRE") to review certain institutions to
determine their eligibility to continue participating in Title IV Programs.
However, the United States Congress has declined to provide funding for SPREs in
appropriations legislation that has been signed into law, and the Department of
Education has not requested any future funding for SPREs. With the enactment of
the Higher Education Amendments of 1998, the provision for SPREs has been
repealed and the statute renames the Title, Program Integrity. While there
continues to be a role for the State as a member of the Triad, it is less
encompassing than the provisions which had existed under the SPREs.
Part two of the Program Integrity Triad, now Program Integrity, expanded
the role of accrediting agencies in the oversight of institutions participating
in Title IV Programs. As a result, the accrediting agencies that accredit AIU
have increased the depth and intensity of reviews and have expanded examinations
in such areas as financial responsibility and timeliness of student refunds.
The Program Integrity provisions also require each accrediting agency recognized
by the Department of Education to undergo comprehensive periodic reviews to
ascertain whether such accrediting agency is adhering to required standards. No
accrediting agency or association may be approved by the Department of Education
for a period of more than five years. SACS, AIU's primary accrediting agency,
has been reviewed by the Department of Education under the Program Integrity
provisions and reapproved for continued recognition by the Department of
Education.
Part three of the Program Integrity tightened the standards to be applied
by the Department of Education in evaluating the financial responsibility and
administrative capability of institutions participating in Title IV Programs,
and mandated that the Department of Education periodically review the
eligibility and certification to participate in Title IV Programs of every such
eligible institution. The Higher Education Amendments of 1992 required all
institutions to undergo a recertification review by the Department of Education
by 1997 and every four years thereafter. With the enactment of the Higher
Education Amendments of 1998, institutions may be recertified for up to six
years. Under these standards, AIU would be evaluated by the Department of
Education more frequently than in the past. A denial of recertification would
preclude AIU from continuing to participate in Title IV Programs.
Financial Responsibility Standards. All institutions participating in
Title IV Programs must satisfy a series of specific standards of financial
responsibility. Institutions are evaluated for compliance with those
requirements as part of the Department of Education's recertification process
and also annually as each institution submits its audited financial statements
to the Department of Education.
In November 1997, the Department of Education published new regulations
regarding financial responsibility, which were effective on July 1, 1998. The
new regulations took effect for audited financial statements submitted to the
Department of Education on or after July 1, 1998 and applied to the
institution's fiscal years commencing June 1, 1997 and thereafter. The new
standards replace the acid test ratio, the tangible net worth standard, and the
net operating results test with three different ratios: an equity ratio, a
primary reserve ratio, and a net income ratio. The equity ratio measures an
institution's capital resources, ability to borrow, and financial viability.
The primary reserve ratio measures an institution's ability to support current
operations from expendable resources. The net income ratio measures the ability
to operate at a profit. The results of each ratio are assigned a strength
factor on a scale from negative 1.0 to positive 3.0, with negative 1.0
reflecting financial weakness and a positive 3.0 reflecting financial strength.
An institution's strength factors are then evaluated based on an assigned
weighting percentage for each ratio. The weighted scores for the three ratios
are then added together to produce a composite score for the institution. The
composite score must be at least 1.5 for the institution to be deemed
financially responsible by the Department of Education without the need for
further financial monitoring. If the institution's composite score is less than
1.5, but equal to or greater than 1.0, the institution may continue in the Title
IV Programs for a maximum period of three years, subject to more rigorous
financial aid disbursement and financial monitoring requirements by the
Department of Education. While the Company is required to notify the Department
of Education of a change in fiscal years, the audited financial statements for
the
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seven months ended December 31, 1998 are not required to be submitted until the
audited financial statements for the twelve months ended December 31, 1999 are
submitted, which must be submitted no later than June 30, 2000. The composite
score will be based on the audited financial statements for the twelve months
ended December 31, 1999. Based on the audited financial statements for the year
ended May 31, 1998, the Company's composite score met the minimum standard of
1.5.
An institution that is determined by the Department of Education not to
meet the standards of financial responsibility on the basis of failing to meet
one or more of the specified numeric indicators is nonetheless entitled to
participate in Title IV Programs if it can demonstrate to the Department of
Education that it is financially responsible on an alternative basis. An
institution may do so by demonstrating, with the support of a statement from a
certified public accountant, proof of prior compliance with the numeric
standards and other information specified in the regulations, and that its
continued operation is not jeopardized by its financial condition.
Alternatively, an institution may post surety either in an amount equal to one-
half of the total Title IV Program funds received by students enrolled at such
institution during the prior year or in an amount equal to 10% of such prior
year's funds and agree to disburse those funds only on an "as-earned" basis.
The Department of Education has interpreted this surety condition to require the
posting of an irrevocable letter of credit in favor of the Department of
Education.
In addition to the financial responsibility standards, an institution is
required to make timely refunds when a student who receives Title IV Program
funds withdraws from an institution. Depending on when during the academic term
the student withdraws, the institution is required to refund all or a portion of
the Title IV Program funds paid by the withdrawing student. Beginning with the
1995-1996 award year, an institution that has failed to make all Title IV
Program refunds on a timely basis during the previous two years is required to
post a letter of credit in favor of the Department of Education equal to 25% of
the Title IV Program refunds that the institution was required to make for the
previous year. 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 Department of Education
to determine that the school lacks the requisite administrative capability and
may subject the school to provisional certification when it seeks to renew its
certification as an eligible institution, or may subject it to a fine or to a
proceeding for the limitation, suspension, or termination of its participation
in Title IV Programs. Proceedings to fine, limit, suspend, or terminate an
institution are conducted before an independent hearing officer of the
Department of Education and are subject to appeal to the Secretary of Education,
prior to any sanction taking effect. Thereafter, judicial review may be sought
in the federal courts pursuant to the federal Administrative Procedures Act.
Restrictions on Operating Additional Campuses. The HEA generally requires
that certain institutions, including proprietary schools, be in full operation
for two years before applying to participate in Title IV Programs. However,
under the HEA and the Regulations, an institution that is certified to
participate in Title IV Programs may establish an additional location within a
state or selected territory of the United States (as identified in the
Regulations) and apply to participate in Title IV Programs at that location
without reference to the two-year requirement, if such additional location
satisfies all other applicable requirements. In addition, a school which
undergoes a change in ownership resulting in a change of control must be
reviewed and recertified for participation in Title IV Programs under its new
ownership. See "--Change of Control." In the past, pending recertification,
the Department of Education has suspended Title IV Program funding to that
school's students. If a school is recertified, it will be on a provisional
basis. During the time a school is provisionally certified, it may be subject
to summary adverse
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action for violations of Title IV Program requirements, but provisional
certification does not otherwise limit an institution's access to Title IV
Program funds. With the enactment of the Higher Education Amendments of 1998,
the Department of Education may grant provisional certification to an
institution seeking approval of a change in ownership based on the preliminary
review of a materially complete application and to extend that status on a month
by month basis as necessary. Thus, funding would not be suspended under this new
provision. The institution'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 could
lose its eligibility to participate in Title IV Programs for an indeterminate
period of time during which it applies to regain eligibility. A change of
control also could have significant regulatory consequences for the Company at
the state level and could affect the accreditation of AIU's campuses.
In connection with the Company's acquisition of American European in
October 1996, AIU was required to be recertified by the Department of Education
as well as obtain the reaccreditation of SACS. In addition, AIU's campus in Los
Angeles was required to be reauthorized by the State of California. The
Department of Education has granted AIU 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 Department of Education's review of its recertification
application. On August 5, 1996 the change of control was approved by SACS and
following a Substantive Change Visit to AIU in April 1997, as required to ensure
compliance with accreditation standards following a change of control, on April
18, 1997 SACS issued a final report on AIU with no recommendations. On August
14, 1996, AIU's Los Angeles campus was reapproved by the State of California's
Council for Private Postsecondary and Vocational Education (the "California
Council").
The Department of Education's regulations provide that after a Company
becomes publicly-traded, a change of control occurs when a report on Form 8-K is
required to be filed with the Commission disclosing a change of control. Most
states and accrediting agencies have similar requirements, but they do not
provide a uniform definition of change of control. If the Company were to lose
its eligibility to participate in Title IV Programs for a significant period of
time pending an application to regain eligibility, or if it were determined not
to be eligible, its operations would be materially adversely effected. The
possible loss of Title IV eligibility resulting from a change of control may
also discourage or impede a tender offer, proxy contest, or other similar
transaction involving control of the Company.
The "85/15 Rule." With the enactment of the Higher Education Amendments of
1992, proprietary schools, such as AIU, would cease to be eligible to
participate in Title IV Programs if on a cash basis of accounting more than 85%
of its revenues from eligible programs for the prior fiscal year were derived
from Title IV funds. This was known as the 85/15 Rule. The percentages have
been changed to 90/10 with the enactment of the Higher Education Amendments of
1998 for any fiscal year containing the October 1, 1998 effective date. Any
school that violates the 90/10 Rule immediately becomes ineligible to
participate in Title IV Programs and is unable to apply to regain its
eligibility until the following fiscal year. Each year, every institution
participating in the Title IV Programs must submit consolidated financial
statements demonstrating compliance with this standard. The Company has
calculated that, since this requirement took effect in fiscal 1995, AIU has not
derived more than 29% of its revenues from Title IV Programs for any fiscal
year, and for the year ended May 31, 1998, 29% of AIU's revenues were derived
from Title IV Programs. The Company regularly monitors compliance with this
requirement in order to minimize the risk that AIU would derive more than 90% of
its revenues from Title IV Programs for any fiscal year. If AIU appears likely
to approach the 90% threshold, the Company would evaluate the appropriateness of
making changes in student funding and financing to ensure compliance.
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Branching and Classroom Locations. The Regulations contain specific
requirements governing the establishment of new main campuses, branch campuses,
and classroom locations at which any student receives not less than 50% of his
or her instruction. In addition to classrooms at campuses, locations affected
by these requirements include the business facilities of client companies used
by AIU. AIU has obtained approval for all locations required to be approved by
the Regulations. Should the Department of Education change its regulations with
respect to this approval process, or delay approvals of new locations beyond the
current approval time rate, the Company's business strategy may be impacted
negatively.
Restrictions on Payment of Bonuses, Commissions, or Other Incentives.
Schools participating in Title IV Programs are prohibited from providing any
commission, bonus, or other incentive payment based directly or indirectly on
success in securing enrollments or financial aid to persons engaged in any
student recruitment, admission, or financial aid awarding activity (the
"Incentive Compensation Rule"). If the Department of Education were to
determine that AIU's methods of compensation do not comply with the Incentive
Compensation Rule, AIU could be required to modify its compensation system,
repay certain previously disbursed Title IV Program funds, pay administrative
fines, or lose its eligibility to participate in Title IV Programs. The Company
believes AIU's compensation policies do not violate the Incentive Compensation
Rule.
STATE AUTHORIZATION
AIU's campuses in Atlanta and Los Angeles are authorized to offer education
programs and grant degrees or diplomas by the States of Georgia and California,
respectively. In addition, because AIU's campuses located in London and Dubai
are operated by a corporation whose parent corporation is organized under the
laws of the District of Columbia, the London and Dubai campuses in addition to
the District of Columbia campus are authorized to offer education programs and
grant degrees or diplomas by the Education Licensure Commission of the District
of Columbia. The level of regulatory oversight varies substantially from state
to state. In some states, campuses are subject to licensure by the state
education agency and also by a separate higher education agency. State laws
establish standards for instruction, qualifications of faculty, location and
nature of facilities, financial policies and responsibility, and other
operational matters. State laws and regulations may limit the ability of the
Company to obtain authorization to operate in certain states or to award degrees
or diplomas or offer new degree programs. As discussed below, California
prescribes standards of financial responsibility that are different from those
prescribed by the Department of Education. The Company believes that AIU's
campuses in Atlanta, Los Angeles, Miami, 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 seven months ended December
31, 1998, AIU's Los Angeles campus 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 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. In 1997, the state legislature transferred regulatory control of
out-of-state institutions from the California Council to the Bureau of Private
Postsecondary and Vocational Education, State of California Department of
Consumer Affairs as of January 1, 1998 (The New Private Postsecondary and
Vocational Education Reform Act). As the name suggests, this new state agency
has a greater consumer protection
-16-
<PAGE>
focus than the former Council, which treated out-of-state institutions in a
manner similar to an accreditation agency. The new Bureau is still in the
process of fully establishing itself and developing its regulatory relationship
with its institutions. In spite of this regulatory change, the Los Angeles
campus is in good standing with the Bureau and has received approval for its new
IT degree programs and the relocation of the campus to its new Playa Vista
location near the new Dream Works development. The University does not
anticipate any material change in its regulatory situation in this state as a
result of the shift in regulatory responsibility to the new state agency.
Georgia. Until May 1, 1997 AIU's campus in Atlanta was exempt from the
regulatory oversight of the State of Georgia. For the twelve months ended May
31, 1998 and the seven months ended December 31, 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 determined that AIU
satisfied its requirements and issued a certificate of authorization for the
period of September 19, 1997 through April 30, 1998. The Company must seek
renewal of this authorization on a yearly basis and has recently submitted its
annual report for 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 presently authorized to
advertise, admit students, and operate an institution of higher education in
Florida. At the January 1999 meeting, AIU Level I Provisional Licensure was
extended for an additional six months at which time AIU will apply for Level II
Provisional Licensure.
-17-
<PAGE>
Virginia. The Commonwealth of Virginia regulates both instate and out-of-
state institutions through the Council of Higher Education, commonly referred to
as the State Council of Higher Education of Virginia. This state agency requires
an extensive review of out-of-state institutions desiring to operate within the
Commonwealth. This review and application process follows criteria and standards
that are similar to those developed by the Commission on Colleges of SACS
relative to faculty, library resources, student services, degree program,
administration, physical plant, and credit hour requirements. In addition,
customary consumer protection requirements addressing truth in advertising,
student complaint, financial aid, tuition, academic advisement, and student
refund requirements are mandated by the state. The Council received the
application of AIU for the initial development of a northern Virginia campus in
the Dulles area in November 1998. The Council met and approved the operation of
the AIU campus on February 16, 1999. AIU is now in the process of developing and
staffing the campus and plans to open the facility later in 1999. AIU will file
mandatory annual reports that cover many of the same operational areas
identified above. Staff and peer review visitations to the campus are a part of
the ongoing review process in Virginia and will take place at a later date after
the campus becomes fully operational.
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
Daniel D. Moore 47 Chief Financial Officer
Barbara S. Butterfield 59 Senior Vice President, Human
Resources
Douglas C. Chait 35 Vice President, Corporate
Development and Secretary
</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.
Stephen G. Franklin, Sr. has served as the President of the Company since
July 1997, Chief Academic Officer since April 1997 and as a member of the Board
of Directors of the Company since June 1997. Prior to his appointment as
President, Dr. Franklin served as Executive Vice President of the Company from
April to July 1997. Since October 1996, Dr. Franklin has also served on 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.
-18-
<PAGE>
Daniel D. Moore has served as the Chief Financial Officer of the Company
since September 1998. Prior to joining the Company, Mr. Moore was Executive
Vice President and Chief Financial Officer for GeoLogistics Americas, a
logistics organization based in Atlanta specializing in global freight
forwarding. From January 1992 to January 1997, Mr. Moore was Senior Vice
President and Chief Financial Officer for GATX Logistics, Inc. of Jacksonville,
Florida. GATX Logistics is a company focused on third-party logistics and supply
chain management. Mr. Moore also worked for Harris Corporation for twelve years,
ultimately as Vice President of Accounting and Administration for Lanier
Worldwide in Atlanta. Mr. Moore is a Certified Public Accountant and a member of
the American Institute of Certified Public Accountants and the Financial
Executives Institute.
Barbara S. Butterfield has served as Senior Vice President of Human
Resources since March 1997. Prior to joining the Company, from 1991 to 1997,
Dr. Butterfield was the Vice President of Human Resources and Vice President of
Faculty and Staff Services at Stanford University, Palo Alto, California where
she provided long-range planning, analysis, and strategies in such areas as risk
management, environmental health and safety, faculty/staff housing, and human
resources. 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.
EMPLOYEES
As of December 31, 1998, the Company employed 394 persons on a full-time
basis and 224 persons on a part-time basis, including 92 full-time and 174 part-
time faculty members.
ITEM 2. PROPERTIES
AIU maintains well-equipped campuses and facilities that support the
university's focus on technology in education. Classrooms and team rooms
provide a comfortable but professional environment to facilitate collaborative
learning and better prepare students for the workplace. An advanced technical
infrastructure allows students to work on-line from thousands of data ports,
communicating with each other, instructors, and the world via the Internet. In
the undergraduate areas of study, fashion and interior design studios feature
sophisticated equipment. The visual communication facilities include
professionally equipped darkrooms and photography studios as well as classrooms
with drafting tables and other studio supplies. Video production studios house
advanced sound and video equipment. Macintosh and PC labs feature computers,
printers, and the latest software available, including programs for computer-
aided design. The Library Resource Center on each campus includes 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 December 31, 1998:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE EXPIRATION
-------- --------------------- ------------------------
<S> <C> <C>
Atlanta, GA
AIU - Buckhead 60,800 January 31, 2009
AIU - Dunwoody 50,500 December 31, 2009
Administration 25,200 December 31, 2009
Administration 11,400 December 31, 1999
Administration 2,200 March 31, 2001
Los Angeles, California 82,100 June 30, 2009
</TABLE>
-19-
<PAGE>
<TABLE>
<S> <C> <C>
Miami, Florida 13,400 September 30, 1999
Washington, DC 36,300 January 31, 2009
London, England 46,000 November 27, 2005
Dubai, United Arab Emirates 34,300 Leased by Middle East
Colleges, Ltd.
</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 up to five year renewal options. The Company also leases
facilities for student parking and housing.
The Company entered into a ten year lease commencing June 1999 for a 17,800
square foot space in northern Virginia for a new campus. The Company also
entered into a ten year lease commencing September 1999 for a 21,000 square foot
space in Miami, Florida for its permanent facility.
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 month of December 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock began trading on the Nasdaq National
Market ("Nasdaq") under the symbol "EDUT" 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 bid prices of the Company's Class A Common Stock, as reported by
The Nasdaq Stock Market:
<TABLE>
<CAPTION>
HIGH LOW
-------------- ----------------
<S> <C> <C>
YEAR ENDED MAY 31, 1998
-----------------------
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
SEVEN MONTHS ENDED DECEMBER 31, 1998
------------------------------------
First Quarter ended August 31, 1998 $27.00 $ 7.00
Second Quarter ended November 30, 1998 9.38 3.94
Month ended December 31, 1998 6.88 5.38
</TABLE>
-20-
<PAGE>
According to the records of the Company's transfer agent, the Company had
106 and 3 holders of record of Class A and Class B Common Stock, respectively,
at March 1, 1999. The Company believes that a substantially larger number of
beneficial owners hold Class A shares in depository or nominee form. The
Company has never declared nor paid cash dividends on its Common Stock and does
not anticipate paying any cash dividends on its Common Stock in the near future.
It is the current policy of the Company's Board of Directors to retain earnings
to finance the operations and expansion of the Company's business. Holders of
Class A Common Stock are entitled to receive cash dividends on at least an equal
per share basis as holders of Class B Common Stock if and when such dividends
are declared by the Board of Directors of the Company.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain consolidated financial and other
operating data for the Company and American European Corporation and
Subsidiaries (the "Predecessor"). This information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in Item 7 of this Form 10-K and the
Company's and Predecessor's Consolidated Financial Statements and Notes thereto
included in Item 8 of this Form 10-K.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE, PERCENTAGE, AND ENROLLMENT DATA)
<TABLE>
<CAPTION>
The Company (1)
------------------------------------------------------------
Fiscal Year
Seven Months Ended December 31, Ended May 31,
------------------------------- ----------------------
1998 1997 1998 1997
-------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (3):
Net revenues $ 23,848 $ 19,174 $41,914 $ 23,590
Cost of education and facilities 12,775 8,263 16,927 9,014
Selling and promotional expenses 5,770 3,280 6,321 2,428
General and administrative expenses 9,189 5,948 10,516 5,468
Acquisition costs - - 487 -
Write-off of license fees and accrual of
termination costs 3,533 - - -
Rents paid to majority shareholder - - - -
Amortization of goodwill 588 588 1,008 696
-------------- ------------ ---------- ----------
Total costs and expenses 31,855 18,079 35,259 17,606
-------------- ------------ ---------- ----------
Income (loss) from campus operations (8,007) 1,095 6,655 5,984
Income (loss) from management agreement - 23 23 479
-------------- ------------ ---------- ----------
Income (loss) from operations (8,007) 1,118 6,678 6,463
Interest expense 234 1,232 1,328 2,499
Interest income -- shareholder notes - - - -
Other income -- net 64 83 1,539 20
-------------- ------------ ---------- ----------
Income (loss) before income taxes, minority interest,
and extraordinary item (8,177) (31) 6,889 3,984
Provision for income taxes (4) 3,280 (60) (2,581) (1,981)
-------------- ------------ ---------- ----------
Income (loss) before minority interest
and extraordinary item (4,897) (91) 4,308 2,003
Minority interest in earnings of American University
in Dubai (619) (463) (1,445) -
-------------- ------------ ---------- ----------
Income (loss) before extraordinary item (5,516) (554) 2,863 2,003
Extraordinary loss less applicable income taxes - (960) (960) -
-------------- ------------ ---------- ----------
Net income (loss) $ (5,516) $(1,514) $ 1,903 $ 2,003
============== ============ ========== ==========
Basic income (loss) per share before extraordinary
item (5) $ (0.52) $ (0.06) $ 0.30 $ 0.29
Basic income (loss) per share (5) $ (0.52) $ (0.17) $ 0.20 $ 0.29
Diluted income (loss) per share before extraordinary
item (5) $ (0.52) $ (0.06) $ 0.28 $ 0.26
Diluted income (loss) per share (5) $ (0.52) $ (0.17) $ 0.19 $ 0.26
Average shares outstanding 10,639 8,742 9,527 7,000
Dilutive effect of stock options and warrants - - 681 569
-------------- ------------ ---------- ----------
Average shares outstanding assuming dilution 10,639 8,742 10,208 7,569
PRO FORMA DATA:
Income before income taxes, as reported
Pro forma provision for income taxes (6)
Pro forma net income (loss)
SELECTED OPERATING DATA:
Net cash provided by operating activities 2,694 2,726 2,686 1,356
Net cash used in investing activities (7,203) (2,164) (2,045) (31,428)
Net cash provided by (used in) financing activities 1,460 6,471 4,510 30,780
AIU fall term enrollment (7) 3,610 3,045 3,045 2,822
BALANCE SHEET DATA:
Working capital deficiency (11,309) (281) (9,772)
Total assets (64,534) 55,769 47,671
Long-term debt, including current portion 7,507 1,241 30,075
Shareholders' equity 38,761 44,294 7,877
<CAPTION>
The Predecessor (1) (2)
-------------------------------------------------------------
Period from June 1, Fiscal Year Ended May 31,
1996 through ---------------------------------------
October 8, 1996 1996 1995 1994
-------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (3):
Net revenues $ 6,189 $26,493 $23,696 $20,654
Cost of education and facilities 3,256 11,144 10,051 8,611
Selling and promotional expenses 1,335 3,614 3,083 3,165
General and administrative expenses 2,739 6,677 6,115 6,264
Acquisition costs - - - -
Write-off of license fees and accrual of
termination costs - - - -
Rents paid to majority shareholder 49 150 145 146
Amortization of goodwill - - - -
-------------------- ---------- ---------- ----------
Total costs and expenses 7,379 21,585 19,394 18,186
-------------------- ---------- ---------- ----------
Income (loss) from campus operations (1,190) 4,908 4,302 2,468
Income (loss) from management agreement (21) 127 - -
-------------------- ---------- ---------- ----------
Income (loss) from operations (1,211) 5,035 4,302 2,468
Interest expense 258 730 607 440
Interest income -- shareholder notes 98 361 153 183
Other income -- net 66 72 25 483
-------------------- ---------- ---------- ----------
Income (loss) before income taxes, minority interest,
and extraordinary item (1,305) 4,738 3,873 2,694
Provision for income taxes (4) - (107) (124) (148)
-------------------- ---------- ---------- ----------
Income (loss) before minority interest
and extraordinary item (1,305) 4,631 3,749 2,546
Minority interest in earnings of American University
in Dubai - - - -
-------------------- ---------- ---------- ----------
Income (loss) before extraordinary item (1,305) 4,631 3,749 2,546
Extraordinary loss less applicable income taxes - - - -
-------------------- ---------- ---------- ----------
Net income (loss) $ (1,305) $ 4,631 $ 3,749 $ 2,546
==================== ========== ========== ==========
Basic income per share before extraordinary item (5)
Basic income per share (5)
Diluted income per share before extraordinary item (5)
Diluted income per share (5)
Average shares outstanding
Dilutive effect of stock options and warrants
Average shares outstanding assuming dilution
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 (loss) $ (796) $ 2,890 $ 2,363 $ 1,643
==================== ========== ========== ==========
SELECTED OPERATING DATA:
Net cash provided by operating activities 1,413 5,798 5,522 4,375
Net cash used in investing activities (288) (2,662) (1,507) 725
Net cash provided by (used in) financing activities (1,197) (3,442) (3,916) (5,030)
AIU fall term enrollment (7) 2,822 2,441 2,200 2,000
BALANCE SHEET DATA:
Working capital deficiency (8,696) (8,355) (8,467)
Total assets 7,253 6,682 7,190
Long-term debt, including current portion 4,756 2,874 2,333
Shareholders' equity (7,287) (6,166) (4,877)
</TABLE>
-21-
<PAGE>
(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 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 experiences seasonality in its results of operations primarily
as a result of changes in the level of student enrollments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Seasonality."
(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.
-22-
<PAGE>
(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 should be read in conjunction with the "Selected
Consolidated Financial Data" and the Company's and Predecessor's Consolidated
Financial Statements and Notes thereto.
OVERVIEW
EduTrek acquired AIU (formerly The American College) through its
acquisition of the American European Corporation (the "Predecessor") on October
8, 1996. EduTrek's principal sources of revenue are tuition, related fees, and
payments for student housing collected from students. Other sources of revenue
include sales of textbooks, application fees, other student fees, consulting,
and other income. Net revenues are calculated by deducting AIU awarded
scholarships from gross revenues.
AIU's academic year for the traditional programs is divided into three 10-
week terms (Fall, Winter, Spring) and two eight-week summer terms (Summer I and
Summer II). Summer terms are shorter and more concentrated, and the two terms
combined equal a 10-week term in terms of their contribution to net revenues.
The average term enrollment levels for Winter, Spring and Summer terms are
approximately 95%, 90% and 85%, respectively, of the Fall term benchmark. The
following table correlates AIU's academic terms to EduTrek's fiscal quarters as
of January 1, 1999.
FISCAL QUARTERS ACADEMIC TERMS
- --------------- --------------
First (January- March) Winter; one-fifth of Spring
Second (April-June) Last four-fifths of Spring; one-half of Summer I
Third (July-September) Last half of Summer I; Summer II
Fourth (October-December) Fall
AIU's Power Campus programs (MIT, BIT, MBA, and BBA) have four enrollment
periods per year, which correspond with EduTrek's fiscal quarters: January,
April, July, and October. The full-time day programs are divided into four 10-
week terms, and the evening programs are divided into seven 10-week terms. In
addition, enrollment periods for AIU's BBA evening programs occur approximately
once per month. Net revenues from these programs vary from period to period
based on several factors that include (1) the aggregate number of students
attending classes; (2) the number of classes held during the period; and (3) the
average tuition per credit hour.
Tuition and fees are payable prior to the start of each term. A portion of
the funds is received in advance of the term's start date. The balance is
collected through financial aid and under payment schedules established on a
student by student basis. Uncollectible receivables are written off once a year
and did not exceed 2.0% of net revenues during the twelve months ended May 31,
1998 and 1997 or the seven months ended December 31, 1998 and 1997.
Each of AIU's campuses is 100% controlled by EduTrek except the campus in
Dubai, which is controlled by EduTrek under a management agreement with an
investment group based in the United Arab Emirates. Under the terms of that
agreement, the investment group provided all the start-up capital required to
open the campus in Dubai and is responsible for ongoing capital expenditures in
exchange for 65% of the net operating cash flow from that campus. In exchange
for its management services, EduTrek receives 35% of the net operating cash
flow.
As tuition is received, it is recorded as deferred tuition income, a
current liability. During the term, the applicable portion of the deferred
tuition income is recognized as revenue each month based on the aggregate number
of credit hours taken by students during the term. Deferred tuition income
historically has been at its highest level at the end of September before the
start of the academic year and
-23-
<PAGE>
the Fall term for two reasons: (1) the Fall term represents the highest
enrollment level in the year, and (2) some students, principally non-U.S.
students in London, pay a full year's tuition in advance.
EduTrek's expenses consist of cost of education and facilities, selling and
promotional expenses, general and administrative expenses, and the amortization
of goodwill.
Education costs include salaries of full-time and adjunct faculty,
instructional support, academic administrators, student development and support
costs relating to library and classroom expenses, curriculum costs, and royalty
payments to ITI. Facility costs consist of leasing, maintenance, and other
occupancy costs relating to campus facilities. Student housing costs are also
included.
Selling and promotional expenses include salaries of personnel involved in
recruitment, admissions and marketing at the campus and corporate office level,
their related costs, advertising costs, and the cost of producing marketing
materials.
General and administrative expenses include the salaries of personnel
engaged in general administration, accounting, financial aid, personnel and
compliance at the campus level, all corporate personnel, and their related
expenses. These expenses also include depreciation and amortization of related
fixed assets, deferred costs, and benefits relating to personnel at the campus
and corporate levels.
The amortization of goodwill is the result of the October 1996 acquisition
of the Predecessor. Goodwill costs are amortized over a 40-year period.
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 PREDECESSOR
-----------------------------------------
PERIOD FROM JUNE 1,
FISCAL YEAR ENDED 1996 THROUGH
May 31, 1996 October 8, 1996
------------------ ---------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues 100.0% 100.0%
Cost of education and facilities 42.1 52.6
Selling and promotional expenses 13.6 21.6
General and administrative expenses 25.2 44.3
Rents paid to majority shareholder 0.6 0.8
Income (loss) from campus operations 18.5 (19.3)
Income (loss) from management agreement 0.5 (0.3)
----- ------
Income (loss) from operations 19.0 (19.6)
Interest expense 2.8 4.2
Interest income - shareholder notes 1.4 1.6
Other income - net 0.3 1.1
----- ------
Income (loss) before income taxes,
minority interest, and extraordinary 17.9 (21.1)
item
Provision for income taxes (0.4) 0.0
----- ------
Net income (loss) 17.5% (21.1)%
===== ======
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
--------------------------------------------------------------
SEVEN MONTHS ENDED DECEMBER 31, FISCAL YEAR ENDED MAY 31,
--------------------------------- ---------------------------
<S> <C> <C>
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
1997 1998 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 43.1 53.6 38.2 40.4
Selling and promotional expenses 17.1 24.2 10.3 15.1
General and administrative expenses 31.0 38.5 23.2 25.1
Acquisition costs 0.0 0.0 0.0 1.2
Write-off of license fees and accrual of
termination costs 0.0 14.8 0.0 0.0
Amortization of goodwill 3.1 2.5 2.9 2.4
----- ------ ----- -----
Income (loss) from campus operations 5.7 (33.6) 25.3 15.8
Income (loss) from management agreement 0.1 0.0 2.0 0.1
----- ------ ----- -----
Income (loss) from operations 5.8 (33.6) 27.3 15.9
Interest expense 6.4 1.0 10.6 3.2
Other income - net 0.4 0.3 0.1 3.7
----- ------ ----- -----
Income (loss) before income taxes,
minority interest, and extraordinary
item (0.2) (34.3) 16.8 16.4
Provision for income taxes (0.3) 13.8 (8.4) (6.2)
----- ------ ----- -----
Income (loss) before minority interest and
and extraordinary item (0.5) (20.5) (8.4) 10.2
Minority interest in earnings of American
University in Dubai (2.4) (2.6) 0.0 (3.4)
----- ------ ----- -----
Income (loss) before extraordinary item (2.9) (23.1) 8.4 6.8
Extraordinary loss less applicable income
taxes (5.0) 0.0 0.0 (2.3)
----- ------ ----- -----
Net income (loss) (7.9)% (23.1)% 8.4% 4.5%
===== ====== ===== =====
</TABLE>
SEVEN MONTHS ENDED DECEMBER 31, 1998 (TRANSITION PERIOD) COMPARED TO SEVEN
MONTHS ENDED DECEMBER 31, 1997 (UNAUDITED)
The following discussion compares the Company's results for the seven months
ended December 31, 1998 ("seven month 1998 period") to the seven months ended
December 31, 1997 ("seven month 1997 period").
Net revenues. Net revenues increased approximately $4.6 million or 24.4% from
$19.2 million in the seven month 1997 period to $23.8 million in the seven month
1998 period. This increase was primarily due to an increase in student
enrollments and a tuition increase, and, to a lesser extent, the consolidation
of the American University in Dubai ("Dubai") (see note 2 of notes to
consolidated financial statements).
Cost of education and facilities. Cost of education and facilities increased
approximately $4.5 million or 54.6% from $8.3 million in the seven month 1997
period to $12.8 million in the seven month 1998 period. Education costs
increased approximately $3.9 million or 82.3% from $4.7 million in the seven
month 1997 period to $8.6 million in the seven month 1998 period due to salary
and other cost increases and, to a lesser extent, the consolidation of Dubai.
Facility costs increased approximately $626,000 or 17.7% from $3.5 million in
the seven month 1997 period to $4.2 million in the seven month 1998 period due
to the consolidation of Dubai and additional rent increases, including new
campuses in Atlanta (Dunwoody), Los Angeles, Miami, and Washington, D.C. Cost
of education and facilities increased as a percentage of net revenues from 43.1%
in the seven month 1997 period to 53.6% in the seven month 1998 period for the
reasons set forth above.
Selling and promotional expenses. Selling and promotional expenses increased
by approximately $2.5 million or 75.9% from $3.3 million in the seven month 1997
period to $5.8 million in the seven month 1998 period due to increases in salary
and other selling and promotional expenses related to new educational programs
and to new campuses in Atlanta (Dunwoody), Los Angeles, Miami, and Washington,
-25-
<PAGE>
D.C. Selling and promotional expenses increased as a percentage of net revenues
from 17.1% in the seven month 1997 period to 24.2% in the seven month 1998
period.
General and administrative expenses. General and administrative expenses
increased approximately $3.3 million or 54.5% from $5.9 million in the seven
month 1997 period to $9.2 million in the seven month 1998 period. This increase
was primarily due to additions of personnel at the home office to support the
Company's growth, particularly the opening of new campuses in Atlanta
(Dunwoody), Los Angeles, Miami, and Washington, D.C. The remaining increase was
due to the consolidation of Dubai. As a percentage of net revenues, general and
administrative expenses increased from 31.0% in the seven month 1997 period to
38.5% in the seven month 1998 period.
Write-off of license fees and accrual of termination costs. The Company has
historically capitalized and then amortized over ten years license fees paid to
ITI for IT curriculum. The Company has decided to phase out the licensed ITI
curriculum in favor of its own internally developed IT curriculum and to
negotiate the termination of the licensing agreement. As a result, the Company
has elected to write-off related license fees of $3,333,000 during the 1998
period. The Company has also accrued $200,000 to cover certain expenses in
connection with the phase out of this curriculum; however, actual expenses in
connection with this phase out may exceed $200,000. The estimated phase-out
costs range between $200,000 to $500,000 of which management believes the
ultimate cost to phase-out this curriculum agreement will be $200,000 (see note
8 of notes to consolidated financial statements).
Amortization of goodwill. Amortization of goodwill of approximately $588,000
in the seven month 1997 and 1998 periods were the result of the October 1996
acquisition of the Predecessor with goodwill costs being amortized over a 40-
year period.
Income from management agreement. Income from the Dubai campus management
agreement decreased from $23,000 in the seven month 1997 period to zero in the
seven month 1998 period due to the consolidation of Dubai effective September 1,
1997.
Interest expense. Interest expense decreased approximately $998,000 or 81.0%
in the seven month 1998 period compared to the seven month 1997 period as a
result of the application of the proceeds of the Company's September 1997
initial public offering to retire debt.
Other income - net. Other income - net remained relatively constant during
the seven month 1997 and 1998 periods.
Minority interest in earnings of American University in Dubai. Minority
interest in earnings increased approximately $156,000 or 33.7% due to the
consolidation of Dubai effective September 1, 1997 and the increase in Dubai's
operating income.
YEAR ENDED MAY 31, 1998 COMPARED TO YEAR ENDED MAY 31, 1997
Prior to the Company's acquisition of the Predecessor in October 1996, the
Company's operations were de minimis as its principal operations primarily
related to the acquisition of the Predecessor. The following discussion
compares the Company's results for the twelve months ended May 31, 1998 to the
eleven month period from July 1, 1996 through May 31, 1997 which, because the
operations of the Company were de minimis prior to October 1996, essentially
presents the operations of the Company for the eight month period ended May 31,
1997.
Net revenues. Net revenues increased approximately $18.3 million or 77.7%
from $23.6 million for the eleven months ended May 31, 1997 (the "1997 period")
to $41.9 million for the year ended May 31, 1998 (the "1998 period"). Of this
77.7% increase, 26.6% or approximately $4.9 million was due to the consolidation
of 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.
-26-
<PAGE>
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 Master's in Information Technology and the
Bachelor's in Business Administration for adult evening students. As a
percentage of net revenues, selling and promotional expenses increased from
10.3% in the 1997 period to 15.1% in the 1998 period.
General and administrative expenses. General and administrative expenses
increased approximately $5.0 million or 92.3% from $5.5 million in the 1997
period to $10.5 million in the 1998 period. Of the 92.3% increase, 20.4% or
approximately $1.1 million was due to the consolidation of Dubai. The remaining
increase was primarily due to additions of personnel at the home office to
support the Company's growth. As a percentage of net revenues, general and
administrative expenses increased from 23.2% in the 1997 period to 25.1% in the
1998 period.
Acquisition costs. Acquisition costs include $487,000 of accounting, legal,
and other costs in the 1998 period associated with the planned combination with
ITI Education Corporation ("ITI"). In March 1998, the Company and ITI announced
that their planned combination was terminated in favor of amended and expanded
licensing arrangements under which the Company acquired rights to ITI's
information technology system.
Amortization of goodwill. Amortization expenses, principally goodwill
expenses, of approximately $1.0 million in the 1998 period and approximately
$696,000 in the 1997 period were the result of the October 1996 acquisition of
the Predecessor with goodwill costs being amortized over a 40-year period.
Income from management agreement. Income from the Dubai campus management
agreement decreased approximately $456,000 or 95.2% from approximately $479,000
in the 1997 period to approximately $23,000 in the 1998 period due to the
consolidation of Dubai effective September 1, 1997. The portion of income from
operations related to Dubai was approximately $789,000 for the 1998 period,
which represents an increase of 64.7% primarily due to an increase in
enrollment.
Interest expense. Interest expense decreased approximately $1.2 million or
46.9% in the 1998 period compared to the 1997 period as a result of the
application of the proceeds of the Company's September 1997 initial public
offering to retire debt.
Other income - net. Other income - net increased from $20,000 in the 1997
period to approximately $1.5 million in the 1998 period primarily due to a
$991,000 gain on the sale of aircraft, which offset $481,000 of related net
operating costs during the 1998 period. The remaining increase is related to
interest income after the initial public offering and a one-time sales tax
recovery.
Minority interest in earnings of American University in Dubai. Effective
September 1, 1997, the Company modified its joint venture agreement relating to
Dubai, which resulted in the change in presentation of income from management
agreement and minority interest in earnings (see note 2 of notes to consolidated
financial statements).
-27-
<PAGE>
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 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 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.
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.
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<PAGE>
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 two fiscal quarters and month ended December 31, 1998 and 1997,
respectively, and 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 and Notes thereto. 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
--------------------------------------------------
1st Qtr (1) 2nd Qtr (1) 3rd Qtr 4th Qtr
--------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 4,842 $ 6,718 $ 8,803 $ 9,416
Income (loss) from operations (284) 371 2,699 2,466
Income (loss) before extraordinary item (383) (714) 935 810
Net income (loss) $ (333) $ (714) $ 935 $ 810
Basic income (loss) per share before
extraordinary item (2) $ 0.13 $ 0.12
Basic income (loss) per share (2) $ 0.13 $ 0.12
Diluted income (loss) per share before
extraordinary item (2) $ 0.12 $ 0.10
Diluted income (loss) per share (2) $ 0.12 $ 0.10
<CAPTION>
Fiscal Year Ended May 31, 1998
----------------------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
----------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $ 6,228 $ 9,312 $12,701 $13,673
Income (loss) from operations (526) 768 3,115 3,321
Income (loss) before extraordinary item (962) 214 1,778 1,833
Net income (loss) $ (962) $ (746) $ 1,778 $ 1,833
Basic income (loss) per share before
extraordinary item (2) $ (0.13) $ 0.02 $ 0.17 $ 0.17
Basic income (loss) per share (2) $ (0.13) $ (0.08) $ 0.17 $ 0.17
Diluted income (loss) per share before
extraordinary item (2) $ (0.13) $ 0.02 $ 0.16 $ 0.17
Diluted income (loss) per share (2) $ (0.13) $ (0.07) $ 0.16 $ 0.17
</TABLE>
<TABLE>
<CAPTION>
Seven Months Ended December 31, 1997 Seven Months Ended December 31, 1998
----------------------------------------- ----------------------------------------
1st Qtr 2nd Qtr December 1st Qtr 2nd Qtr December
----------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $ 6,228 $ 9,312 $ 3,634 $ 7,825 $ 11,642 $ 4,381
Income (loss) from operations (526) 768 876 (1,462) (3,701) (2,844)
Income (loss) before extraordinary item (962) 214 194 (985) (2,596) (1,935)
Net income (loss) $ (962) $ (746) $ 194 $ (985) $ (2,596) $ (1,935)
Basic income (loss) per share before
extraordinary item $ (0.13) $ 0.02 $ 0.05 $ (0.09) $ (0.24) $ (0.19)
Basic income (loss) per share $ (0.13) $ (0.08) $ 0.04 $ (0.09) $ (0.24) $ (0.19)
Diluted income (loss) per share before
extraordinary item $ (0.13) $ 0.02 $ 0.05 $ (0.09) $ (0.24) $ (0.19)
Diluted income (loss) per share $ (0.13) $ (0.07) $ 0.03 $ (0.09) $ (0.24) $ (0.19)
</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.
SEASONALITY IN RESULTS OF OPERATIONS
The Company experiences seasonality in its results of operations primarily
as a result of changes in the level of student enrollments. While the Company
enrolls students throughout the year, with a fiscal year that historically ended
on May 31, the Company's first and second fiscal quarter enrollments and related
revenues generally were lower than the third and fourth quarter fiscal quarters
due to traditionally lower student enrollment levels in the summer terms. In
addition, first and second fiscal quarter costs and expenses historically were
higher as a percentage of net revenues as a result of certain fixed costs which
are not significantly affected by the seasonal first and second fiscal quarter
declines in net revenues. Under the new fiscal year ending December 31, the
second and third fiscal quarter revenues will be lower than the first and fourth
fiscal quarters, and the second and third fiscal quarter costs and expenses will
be higher as a percentage of net revenues than the first and fourth fiscal
quarters. This seasonality will be mitigated by new educational programs which
are offered throughout the year in new campuses in California, Georgia, Florida,
northern Virginia, and the District of Columbia.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operating activities and capital requirements,
including debt repayments, principally from cash provided by operating
activities and borrowings under bank credit facilities. The Company executed a
new $10 million revolving line of credit with a bank (the "Credit Agreement") on
March 25, 1999. The Credit Agreement matures on April 30, 2001 but can be
extended beyond that date. Amounts outstanding bear interest at LIBOR plus
2.75%. The Credit Agreement replaced an existing $4.0 million bank credit
facility. As a result of the addition of four new campuses in the seven months
ended December 31, 1998, the Company experienced a decrease in cash and cash
equivalents of approximately $3.1 million as compared to May 31, 1998.
The increase in investing activities for the seven months ended December
31, 1998 compared to the seven months ended December 31, 1997 was principally
due to the increase in the number of locations and curriculum licensing costs
associated with the Company's expansion. Purchases of property, plant, and
equipment for the seven months ended December 31, 1998 were approximately $3.7
million. Total purchases of property, plant, and equipment for the year ended
December 31, 1999 are expected to range from $4.5 to $5.5 million. The increase
from the seven months ended December 31, 1997 is due to: (1) the opening of four
new campuses; (2) hardware and software costs related to the installation of a
new management information system; (3) improvements to the Company's computer
facilities and
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<PAGE>
telecommunications equipment at the corporate level; (4) investments in computer
technology to support information technology curriculum; and (5) increases in
normal recurring capital expenditures due to the overall increases in student
and employment levels resulting from the Company's growth. For the seven months
ended December 31, 1998, curriculum development costs totaled approximately
$600,000. Curriculum development costs for the year ended December 31, 1999 are
expected to be in the range of $500,000 to $1.0 million. The Company expects to
fund capital expenditures for existing and new campuses through cash from
operations and proceeds from the Credit Agreement, which has increased the
Company's borrowing capacity.
The Company's ability to fund its working capital and capital expenditure
requirements, implement new programs, make interest payments, fund future
acquisitions, and meet its other cash requirements, depends on, among other
things, current cash and cash equivalents, internally generated funds, and the
Company's Credit Agreement. Management believes that such sources will be
sufficient to meet the Company's capital requirements and operating needs for
the next fiscal year. However, if there is a significant reduction of
internally generated funds, the Company may require additional funds from
outside sources. In such event, there can be no assurance that the Company will
be able to obtain such funding as and when required or on acceptable terms.
The Department of Education requires that Title IV program funds collected
by an institution for unbilled tuition be kept in a separate cash or cash
equivalent account until the students are billed for the portion of their
program related to these funds. In addition, all funds transferred to the
Company through electronic funds transfer programs are held in a separate cash
account until certain conditions are satisfied. As of December 31, 1998, the
Company had approximately $474,000 in these separate accounts to comply with
these requirements. These 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 the Company's ability to fund daily operations.
YEAR 2000 READINESS
The year 2000 problem arises from the fact that many existing information
technology hardware and software systems and non-information technology products
containing embedded microchip processors may not recognize the year 2000.
Accordingly, problems may arise for such products and systems when processing
information containing dates that fall after December 31, 1999.
Some of the Company's computer information systems are not currently
configured to recognize the year 2000. The Company has developed an assessment
team, which has established testing procedures, has begun the testing of its
computer information systems, and expects completion of this project by June of
1999.
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 before the year 2000 and that it will require a total of $2 million
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
that 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 on the
year 2000 problem including, in a worst case scenario, relying on manual record
keeping, until full compliance is achieved.
The Company has reviewed its material relationships with third parties such
as vendors and evaluated the consequences of third party year 2000 problems on
the Company. The Company is requiring contract letters of compliance from all
vendors. The Company does not believe year 2000 problems of these third parties
pose a material risk to the Company. However, because the Company is in a
regulated
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<PAGE>
industry and indirectly relies on only a few sources for a substantial portion
of its revenues, the Company is dependent upon those entities' efforts to
address their own year 2000 issues. Should any such third parties experience
year 2000 related disruptions, it could have a material adverse impact on the
Company's business, results of operations, liquidity, or financial condition.
For example, as with all postsecondary education-oriented businesses whose
students receive governmental financial aid, the Company's operations and
liquidity depend upon the student funding provided by Title IV Programs for its
students. Processing of applications for this funding is handled by the
Department of Education's computer systems. The Department of Education has
stated that its systems will be year 2000 compliant in early calendar year 1999
and has set forth a calendar of when schools can test their systems for year
2000 compliance.
EFFECT OF INFLATION
The Company does not believe its operations have been materially affected
by inflation.
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," is effective for the Company for the seven months ended
December 31, 1998. SFAS No. 130 establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general purpose financial statements. The Company
has adopted SFAS No. 130 in the current year as required.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," is also effective for the Company for the seven months ended
December 31, 1998. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments and related
information in financial statements. This statement did not affect the
disclosures the Company provides.
The Company adopted SFAS No. 128, "Earnings per Share," during the year
ended May 31, 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 No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998 and establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133 will
be effective for the Company's fiscal year ending December 31, 2000. The Company
does not currently have any derivative instruments nor is it involved in hedging
activities.
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities,"
(SOP 98-5) which requires costs of start-up activities and organization costs to
be expensed as incurred. The Company wrote-off all pre-opening costs in December
1998.
ITEM 7-A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
No response is required to this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements are filed with this Report:
PAGE
----
Independent Auditors' Report 33
Consolidated Balance Sheets 34
Consolidated Statements of Operations 35
Consolidated Statements of Changes in Shareholders' Equity 37
-31-
<PAGE>
Consolidated Statements of Cash Flows 38
Notes to Consolidated Financial Statements 40
-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 December 31, 1998
and May 31, 1998, and the related consolidated statements of operations, changes
in shareholders' equity, and cash flows for the seven months ended December 31,
1998, the year ended May 31, 1998, and the period from July 1, 1996 (date of
formation) to May 31, 1997. We also audited the accompanying consolidated
statements of operations, changes in shareholders' equity, and cash flows of
American European Corporation and subsidiaries (the Predecessor) for the period
from June 1, 1996 to October 8, 1996 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 December 31, 1998 and May 31, 1998 and the results of its operations and its
cash flows for the seven months ended December 31, 1998, the year ended May 31,
1998, and the period from July 1, 1996 (date of formation) to May 31, 1997, and
the results of 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
March 25, 1999
-33-
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, MAY 31,
1998 1998
------------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,779 $ 5,843
Accounts receivable -- net of allowance of $277 and $190,
respectively 3,054 2,886
Deferred income taxes 308 130
Income taxes receivable 166
Other 1,288 759
------------- ----------
Total current assets 7,595 9,618
Property, plant, and equipment -- net of accumulated depreciation 14,971 5,729
Goodwill -- net of accumulated amortization of $2,292
and $1,704, respectively 38,369 38,957
Deferred income taxes 2,496 497
Other 1,103 968
------------- ----------
$64,534 $55,769
============ ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,816 $ 2,508
Accrued expenses 1,632 721
Value-added tax payable 473 157
Unearned revenues 8,477 4,323
Income taxes payable 0 1,616
Line of credit 1,820 -
Current maturities -- long-term debt 1,686 574
------------ ----------
Total current liabilities 18,904 9,899
Capital leases and other -- less current maturities 5,821 667
Deferred rent 966 849
Other liabilities 82 60
------------ ----------
Total liabilities 25,773 11,475
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, Class A voting, one vote per share, without par
value, 40,000,000 shares authorized, 4,362,605 and 4,335,401,
issued and outstanding, respectively 36,611 36,564
Common stock, Class B voting, ten votes per share, without par value,
10,000,000 shares authorized, 6,293,000 issued and outstanding 3,973 3,973
Accumulated other comprehensive income 24 88
Retained earnings (accumulated deficit) (1,847) 3,669
--------- ----------
Total shareholders' equity 38,761 44,294
--------- ----------
$64,534 $55,769
========= ==========
</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
------------------------------------------------------------------------
SEVEN MONTHS ENDED YEAR ENDED PERIOD FROM JULY 1, 1996
DECEMBER 31, MAY 31, (DATE OF FORMATION) TO
1998 1997 1998 MAY 31, 1997
------- ------- ---------- ------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues $ 23,848 $19,174 $41,914 $ 23,590
Costs and expenses:
Cost of education and facilities 12,775 8,263 16,927 9,014
Selling and promotional expenses 5,770 3,280 6,321 2,428
General and administrative expenses 9,189 5,948 10,516 5,468
Acquisition costs - - 487 -
Write-off of license fees and 3,533 - - -
accrual of termination costs (Note 8)
Amortization of goodwill 588 588 1,008 696
------- ------- ---------- ------------------------
Total costs and expenses 31,855 18,079 35,259 17,606
------- ------- ---------- ------------------------
Income (loss) from campus operations (8,007) 1,095 6,655 5,984
Income from management agreement - 23 23 479
------- ------- ---------- ------------------------
Income (loss) from operations (8,007) 1,118 6,678 6,463
Interest expense 234 1,232 1,328 2,499
Other income -- net 64 83 1,539 20
------- ------- ---------- ------------------------
Income (loss) before income taxes, minority
interest, and extraordinary item (8,177) (31) 6,889 3,984
Benefit (provision) for income taxes 3,280 (60) (2,581) (1,981)
------- ------- ---------- ------------------------
Income (loss) before minority interest and
extraordinary item (4,897) (91) 4,308 2,003
Minority interest in earnings of
American University in Dubai (619) (463) (1,445) -
------- ------- ---------- ------------------------
Income (loss) before extraordinary item (5,516) (554) 2,863 2,003
Extraordinary loss less applicable income taxes - (960) (960) -
------- ------- ---------- ------------------------
Net income (loss) $(5,516) $(1,514) $ 1,903 $ 2,003
======= ======= ========== ========================
Earnings Per Share:
Basic income (loss) per share before extraordinary item $ (0.52) $ (0.06) $0.30 $ 0.29
Basic net income (loss) per share $ (0.52) $ (0.17) $0.20 $ 0.29
Diluted income (loss) per share before extraordinary item $ (0.52) $ (0.06) $0.28 $ 0.26
Diluted net income (loss) per share $ (0.52) $ (0.17) $0.19 $ 0.26
Average shares outstanding 10,639 8,742 9,527 7,000
Dilutive effect:
Warrants - - 240 569
Options - - 441 -
------- ------- ---------- ------------------------
681 569
------- ------- ---------- ------------------------
Average shares outstanding assuming dilution 10,639 8,742 10,208 7,569
</TABLE>
See notes to consolidated financial statements.
-35-
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THE PREDECESSOR
-----------------------------------------
PERIOD FROM JUNE 1, YEAR ENDED
1996 THROUGH MAY 31,
OCTOBER 8, 1996 1996
------------------- ----------
<S> <C> <C>
Net revenues $ 6,189 $26,493
Costs and expenses:
Cost of education and facilities 3,256 11,144
Selling and promotional expenses 1,335 3,614
General and administrative expenses 2,739 6,677
Rents paid to majority stockholders 49 150
------------------- ----------
Total costs and expenses 7,379 21,585
------------------- ----------
Income (loss) from campus operations (1,190) 4,908
Income (loss) from management agreement (21) 127
------------------- ----------
Income (loss) from operations (1,211) 5,035
Interest expense 258 730
Other income -- net 164 433
------------------- ----------
Income (loss) before income taxes, minority interest, and
extraordinary item (1,305) 4,738
Provision for income taxes - (107)
------------------- ----------
Net income (loss) $ (1,305) $ 4,631
=================== ==========
</TABLE>
See notes to consolidated financial statements.
-36-
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
STOCKHOLDERS' COMPREHENSIVE ACCUMULATED
PREDECESSOR COMMON STOCK PAID-IN CAPITAL NOTES INCOME DEFICIT TOTAL
- ----------- ------------ --------------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance -- May 31, 1995 $ 1 $ 434 $ (3,229) $ 67 $ (3,440) $ (6,167)
Distribution to shareholders (4,500) (4,500)
Capital contributed
by stockholder 43 43
Net income 4,631 4,631
Foreign currency translation 35 35
Notes receivable and
advances from shareholders (1,330) (1,330)
------------ --------------- ------------- ------------- ----------- ---------
Balance -- May 31, 1996 1 477 (4,559) 102 (3,309) (7,288)
Distribution to shareholders (1,890) (1,890)
Capital contributed
by stockholder 1,239 1,239
Comprehensive income:
Net loss (1,305) (1,305)
Foreign currency translation (18) (18)
---------
(1,323)
Notes receivable and advances
from shareholders (1,016) (1,016)
------------ --------------- ------------- ------------- ----------- ---------
Balance -- October 8, 1996 $ 1 $ 477 $ (5,575) $ 84 $ (5,265) $(10,278)
============ =============== ============= ============= =========== =========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED RETAINED
COMMON STOCK -- COMMON OTHER EARNINGS
NUMBER OF SHARES COMMON STOCK STOCK COMPREHENSIVE (ACCUMULATED
------------------- -----------------
COMPANY CLASS A Class B CLASS A Class B WARRANTS INCOME DEFICIT) TOTAL
- ------- ------- ------- ------- ------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
-- July 1, 1996 2,240 $1,000 $ 1,000
Issuance of common stock in
connection with the acquisition
of EduTrek Systems, Inc. 105 1,995 $ (237) (237)
Sale of common stock in
connection with
acquisition of Predecessor 2,100 3,000 3,000
Issuance of common stock in
exchange for certain fees 350 $ 500 500
Issuance of warrants in
connection with acquisition
of Predecessor $ 677 677
Issuance of common stock in
exchange for stock of
Predecessor 210 787 787
Comprehensive income:
Foreign currency translation $ 147 147
Net income 2,003 2,003
--------
2,150
------- ------- ------- ------- -------- ------------- ------------ --------
Balance -- May 31, 1997 665 6,335 1,287 4,000 677 147 1,766 7,877
Issuance of common stock net of
initial public offering costs
-- September 29, 1997 2,733 34,560 34,560
Conversion of warrants to
common stock 879 677 (677) -
Conversion of Class B Common
Stock to Class A Common Stock 42 (42) 27 (27) -
Issuance of common stock
under stock option plan 16 13 13
Comprehensive income:
Foreign currency translation (59) (59)
Net income 1,903 1,903
--------
1,844
------- ------- ------- ------- -------- ------------- ------------ --------
Balance -- May 31, 1998 4,335 6,293 36,564 3,973 - 88 3,669 44,294
Issuance of common stock
under stock option plan 28 47 47
Comprehensive income:
Foreign currency translation (64) (64)
Net loss (5,516) (5,516)
--------
(5,580)
------- ------- ------- ------- -------- ------------- ------------ --------
Balance -- December 31, 1998 4,363 6,293 $36,611 $3,973 $ - $ 24 $(1,847) $ 38,761
======= ======= ======= ======= ======== ============= ============ ========
</TABLE>
See notes to consolidated financial statements.
-37-
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THE COMPANY
-----------------------------------------------------------------
SEVEN MONTHS ENDED
DECEMBER 31, YEAR ENDED PERIOD FROM JULY 1, 1996
----------------------- MAY 31, (DATE OF FORMATION) TO
1998 1997 1998 MAY 31, 1997
--------- --------- --------- -------------------------
(Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $ (5,516) $ (1,514) $ 1,903 $ 2,003
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Write-off of license fees (Note 8) 3,533 - - -
Write-off of pre-opening costs (Note 2) 141 - - -
Depreciation and amortization 1,801 1,653 2,718 1,626
Bad debt expense 310 234 307 126
Extraordinary loss - 1,600 1,600 -
Gain on sale of aircraft - - (991) -
Amortization of loan discount - 22 22 146
Decrease (increase) in accounts receivable (477) (1,450) (2,920) 1,334
(Increase) decrease in deferred taxes (2,177) - (137) 225
Increase (decrease) in accounts payable and accrued
liabilities 3,216 (153) 561 796
Increase (decrease) in unearned revenues 4,154 4,386 325 (6,508)
Increase (decrease) in value-added taxes payable 316 (202) (449) (323)
Increase (decrease) in income taxes payable (1,616) (1,591) (140) 1,537
Other (991) (259) (113) 394
--------- --------- --------- -------------------------
Net cash provided by operating activities 2,694 2,726 2,686 1,356
--------- --------- --------- -------------------------
INVESTING ACTIVITIES
Additions to licenses, pre-opening, and curriculum
development costs (3,552) (836) (1,440) -
Purchases of property, plant, and equipment (3,651) (1,328) (2,681) (681)
Sale of property, plant, and equipment - - 2,076 -
Acquisition of Predecessor - - - (30,747)
Net increase in note receivable from related parties and
former stockholders - - - -
--------- --------- --------- -------------------------
Net cash used in investing activities (7,203) (2,164) (2,045) (31,428)
--------- --------- --------- -------------------------
FINANCING ACTIVITIES
Net receipts (payments) -- line-of-credit 1,820 (3,000) - (938)
Principal payments under capital lease (460) (98) (346) (52)
obligations
Principal repayments on long-term debt 54 (25,012) (33,347) (26)
Proceeds from issuance of common stock - 34,560 34,560 4,000
Proceeds from long-term borrowings - - 4,043 29,117
Increase in deferred loan costs - - - (1,321)
Other 46 21 (400) -
--------- --------- --------- -------------------------
Net cash provided by financing activities 1,460 6,471 4,510 30,780
--------- --------- --------- -------------------------
Effect of exchange rate changes on cash (15) 32 14 (30)
--------- --------- --------- -------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,064) 7,065 5,165 678
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,843 678 678 -
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,779 $ 7,743 $ 5,843 $ 678
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 150 $ 1,439 $ 1,567 $ 1,690
Income taxes 679 989 2,047 45
</TABLE>
See notes to consolidated financial statements.
-38-
<PAGE>
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THE PREDECESSOR
-----------------------------------------
PERIOD FROM JUNE 1, YEAR ENDED
1996 THROUGH MAY 31,
OCTOBER 8, 1996 1996
------------------- ---------------
<S> <C> <C>
Net income (loss) $ (1,305) $ 4,631
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 392 1,087
Bad debt expense 69 168
Increase in accounts receivable (192) (199)
Decrease (increase) in accounts payable and accrued liabilities (461) 391
Increase in unearned revenues 3,135 30
Increase in value-added taxes payable 190 13
Decrease in income taxes payable - (58)
Other (415) (265)
------------------- ---------------
Net cash provided by operating activities 1,413 5,798
------------------- ---------------
INVESTING ACTIVITIES
Purchases of property, plant, and equipment (118) (1,434)
Net increase in note receivable from related parties and former stockholders (170) (1,228)
------------------- ---------------
Net cash used in investing activities (288) (2,662)
------------------- ---------------
FINANCING ACTIVITIES
Proceeds from long-term borrowings 750 2,058
Principal repayments on long-term debt (234) (893)
Principal payments under capital lease obligations (94) (148)
Net receipts (payments) -- line-of-credit 151 (2)
Distributions to stockholders (1,890) (4,500)
Capital contribution from stockholder - 43
Other 120 -
------------------- ---------------
Net cash used in financing activities (1,197) (3,442)
------------------- ---------------
Effect of exchange rate changes on cash (12) 8
------------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (84) (298)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 453 751
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 369 $ 453
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 295 $ 730
Income taxes 107
</TABLE>
See notes to consolidated financial statements.
-39-
<PAGE>
EDUTREK INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPANY - AS OF DECEMBER 31, 1998 AND MAY 31, 1998 AND FOR THE SEVEN MONTHS
DECEMBER 31, 1998 AND 1997 (UNAUDITED), THE YEAR ENDED MAY 31, 1998, AND THE
PERIOD
FROM JULY 1, 1996 (DATE OF FORMATION) TO MAY 31, 1997, PREDECESSOR - FOR THE
PERIOD
FROM JUNE 1, 1996 TO OCTOBER 8, 1996, AND THE YEAR ENDED MAY 31, 1996
NOTE 1 - ORGANIZATION AND BUSINESS
Organization - EduTrek International, Inc. (the "Company"), through its
subsidiary American InterContinental University, Inc. ("AIU"), is a leading
provider of career-oriented, internationally focused higher education programs.
The Company operates campuses in Atlanta, the District of Columbia, Los Angeles,
Miami, London, and Dubai, United Arab Emirates, with curricula focusing on
international business, multimedia communications, design, and information
technology. AIU is accredited by the Commission on Colleges of the Southern
Association of Colleges and Schools.
Acquisition - The Company, formerly known as E Holdings, Inc., was
organized by Mr. Steve Bostic, the Company's current Chairman and Chief
Executive Officer, on July 1, 1996 for the purpose of acquiring all of the
capital stock of EduTrek Systems, Inc. ("EduTrek Systems") (a company also
controlled by Mr. Bostic), AIU, formerly known as American European Corporation,
and American College in London, Ltd. U.S., as well as 85% of the membership
interests of American European Middle East Corporation, L.L.C ("AEMEC" which,
together with AIU, 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>
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and the results of the
acquisition of the Predecessor for the period from July 1, 1996 to May 31, 1997
as if the acquisition had occurred as of July 1, 1996:
Net revenue $27,926,000
-40-
<PAGE>
Net income $ 276,000
Basic income per share $ 0.04
Diluted income per share $ 0.03
Public Offering - On September 29, 1997, the Company completed an initial
public offering of 2,990,000 shares of its Class A Common Stock, of which
2,732,890 shares were sold by the Company, including 390,000 shares sold as the
result of the Underwriter's exercise of an over-allotment option, at $14 per
share, which after underwriting discounts and commissions and payment of
offering expenses raised $34,560,000 for the Company. The Company used
$28,571,000 of the proceeds to retire long-term debt and related accrued and
unpaid interest incurred in connection with the acquisition, $620,000 to repay
short-term indebtedness outstanding under the Revolving Loan, and the remaining
net proceeds of $5,369,000 were used for general corporate purposes, including
increased working capital requirements of the Company resulting from its growth.
Government Regulation - The Company and AIU are subject to extensive
regulation by federal, state, and foreign governmental agencies, and accrediting
agencies. In particular, the Higher Education Act of 1965, as amended (the
"HEA"), and the regulations promulgated thereunder by the U.S. Department of
Education (the "Regulations") set forth numerous standards that schools must
satisfy in order to participate in the various federal student financial
assistance programs under Title IV of the HEA ("Title IV Programs"). For
example, the HEA and Regulations: (i) establish certain financial
responsibility and administrative capability, (ii) establish maximum acceptable
rates of default by students on federally guaranteed or funded student loans,
(iii) restrict the ability of a school or its parent corporation to engage in
certain types of transactions that would result in a change in ownership and
control of that school or corporation, (iv) limit the proportion of school
revenues that may be derived from Title IV Programs, and (v) prohibit the
payment of certain types of incentives to personnel engaged in student
recruiting and admissions activities.
With the enactment of the Higher Education Amendments of 1992, proprietary
schools, such as AIU, would cease to be eligible to participate in Title IV
Programs if on a cash basis of accounting, more than 85% of its revenues from
eligible programs for the prior fiscal year were derived from Title IV Programs.
This was known as the 85/15 Rule. The percentages have been changed to 90/10
with the enactment of the Higher Education Amendments of 1998 for any fiscal
year containing the October 1, 1998 effective date. Any school that violates
the 90/10 Rule immediately becomes ineligible to participate in Title IV
Programs and is unable to apply to regain its eligibility until the following
fiscal year. Each year, every institution participating in Title IV Programs
must submit consolidated financial statements demonstrating compliance with this
standard. For the year ended May 31, 1998, 29% of AIU's revenues were derived
from Title IV Programs. The Company regularly monitors compliance with this
requirement in order to minimize the risk that AIU would derive more than 90% of
its revenues from Title IV Programs for any fiscal year. If AIU appears likely
to approach the 90% threshold, the Company would evaluate the appropriateness of
making changes in student funding and financing to ensure compliance.
Other - The Company effected a 7 for 1 stock split in June 1997. All share
and per share data information in the accompanying 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.
Also in June 1997, one warrant holder exercised its option to purchase
257,110 shares of Class A Common Stock at an exercise price of $.0014 per share.
In September 1997, another warrant holder exercised its option to purchase
444,318 shares of Class A Common Stock at the same exercise price.
In December 1997, one warrant holder exercised its option to purchase
177,723 shares of Class A Common Stock at an exercise price of $.0014 per share.
There are no remaining warrants outstanding.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Change in Fiscal Year - During the seven months ended December 31, 1998,
the Board of Directors adopted a change in the fiscal year end of the Company
from May 31 to December 31. The
-41-
<PAGE>
Company historically experienced seasonality in its results of operations as a
result of lower student enrollments in the summer terms. This seasonality will
be mitigated by new educational programs which are offered throughout the year,
thereby decreasing seasonality and the need for a May 31 year end.
Principles of Consolidation - Effective September 1, 1997, AEMEC entered
into an agreement with Middle East Colleges, Ltd. ("MEC") to modify certain
aspects of their joint venture agreement relating to the operation of the
American University in Dubai ("Dubai"). These modifications give effective
control of the joint venture to AEMEC as defined in Statement of Financial
Accounting Standards ("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, Dubai, and the
American College in London, Ltd., a registered British corporation that is
wholly owned by The American College in London, Ltd. U.S. Significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers cash equivalents to be
all demand deposits and highly liquid unrestricted investments with an original
maturity of three months or less which can be readily converted to cash on
demand without penalty.
Cash at December 31, 1998 and May 31, 1998 includes approximately $474,000
and $218,000, respectively, which is restricted to expenditures for scholarships
and other awards to students. A corresponding liability has been recorded for
these funds until they are disbursed.
Property and Equipment - Property and equipment is stated at cost less
accumulated depreciation. 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 was to capitalize all pre-opening
costs, except those costs related to advertising, prior to the commencement of a
new educational program. Pre-opening costs were amortized over twelve months
upon commencement of a new program. American Institute of Certified Public
Accountants Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities," (SOP 98-5) requires the Company to expense all pre-opening costs as
incurred and to write off any pre-opening costs included on the balance sheet
beginning in January 1999 or earlier. The Company wrote-off the remaining
deferred pre-opening costs of $141,000 in December 1998.
Licenses - The Company capitalizes license fees and amortizes the fees over
the life of the agreement. During the year ended May 31, 1998, the Company
capitalized and began amortizing a
-42-
<PAGE>
$450,000 license fee paid to ITI Education Corporation ("ITI") for the use of an
information technology curriculum in the Masters of Information Technology
program in Atlanta, GA. Also during the year ended May 31, 1998, the Company
entered into a ten year license agreement with ITI Learning Systems, Inc. (a
wholly-owned subsidiary of ITI) for the use of an information technology
curriculum at subsequent locations. The cost of this license was $750,000 which
was paid in July 1998. The license fee for subsequent locations in the District
of Columbia, Los Angeles, and Miami was $900,000 per location and was paid
during the seven months ended December 31, 1998.
The Company has decided to phase out the licensed ITI curriculum in favor
of its own internally developed information technology curriculum and to
negotiate the termination of the licensing agreement. As a result, the Company
has elected to write-off related license fees during the seven months ended
December 31, 1998 (see note 8).
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 - Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" is effective for the Company
for the seven months ended December 31, 1998. SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general purpose
financial statements. The Company has adopted SFAS No. 130 in the current year
as required.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is also effective for the Company for the seven months ended
December 31, 1998. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments and related
information in financial statements. This statement did not significantly alter
the disclosures the Company provides.
The Company adopted SFAS No. 128, "Earnings per Share," during the year
ended May 31, 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
-43-
<PAGE>
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.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was issued in June 1998 and establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133 will
be effective for the Company's fiscal year ending December 31, 2000. The
Company does not currently have any derivative instruments nor is it involved in
hedging activities.
Foreign Currency Translation - Assets and liabilities of the Company's
United Kingdom operations are translated from Pounds Sterling into U.S. dollars
at the rate of currency exchange at the end of the fiscal period. Revenues and
expenses are translated at average monthly exchange rates prevailing during the
period. Resulting translation differences are recognized as a component of
shareholders' equity and comprehensive income (see note 13).
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 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 December 31, 1998 and May 31, 1998 consist of the
following (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 May 31, 1998
--------------------- ----------------
<S> <C> <C>
Prepaid expenses $1,248 $511
Pre-opening costs - 212
Other 40 36
------ ----
$1,288 $759
====== ====
</TABLE>
NOTE 4 - PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment at December 31, 1998 and May 31, 1998 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 May 31, 1998
--------------------- ----------------
<S> <C> <C>
Furniture, fixtures, and equipment $11,754 $4,396
Leasehold improvements 4,683 1,896
Library books 653 551
Other - 256
------- ------
17,090 7,099
Less accumulated depreciation and amortization 2,119 1,370
------- ------
$14,971 $5,729
======= ======
</TABLE>
Depreciation expense for property, plant, and equipment was $887,000,
$580,000 (unaudited), $1,275,000, $766,000, $1,225,000, and $391,000 for the
seven months ended December 31, 1998 and 1997, 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.
NOTE 5 - CAPITAL LEASES AND OTHER
-44-
<PAGE>
Capital leases and other at December 31, 1998 and May 31, 1998 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 May 31, 1998
------------------- ----------------
<S> <C> <C>
Capital lease obligations $7,167 $ 955
Directors and officers insurance and other (matures
in 1999) 340 286
------------------- ----------------
7,507 1,241
Less current portion 1,686 574
------------------- ----------------
$5,821 $ 667
=================== ================
</TABLE>
At December 31, 1998, the Company had $1.8 million borrowed against its
$4.0 million line of credit. At May 31, 1998, the Company had no amount
borrowed against its $3.0 million line of credit. Amounts outstanding bear
interest at 9.5%.
The extraordinary loss of $960,000, during the year ended May 31, 1998, net
of taxes ($1,600,000 less the related income tax effect of $640,000) 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 $50,000, $44,000
(unaudited), $77,000, $51,000, and $44,000 for the seven months ended December
31, 1998 and 1997, 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
December 2009. Many of the lease agreements contain renewal clauses with
various terms; however, none of the leases contain any significant restrictions.
Several of the lease agreements contain provisions for rent escalations which
are either tied to the Consumer Price Index or require a specific percentage
increase annually. These leases are classified as operating leases.
The Company also leases various other assets under agreements which are
classified as capital leases. The net book value of these assets at December
31, 1998 and May 31, 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 May 31, 1998
------------------- ----------------
<S> <C> <C>
Furniture, fixtures, and equipment $8,129 $1,454
Less accumulated amortization 605 291
------------------- ----------------
$7,524 $1,163
=================== ================
</TABLE>
For the years ending December 31, future minimum lease payments and present
value of net minimum lease payments under capital leases and future minimum
lease payments under noncancellable operating leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year ending December 31: Leases Leases
---------------- ---------------
<S> <C> <C>
1999 $1,984,290 $ 8,551,935
2000 1,798,972 8,678,284
</TABLE>
-45-
<PAGE>
<TABLE>
<S> <C> <C>
2001 1,643,891 8,312,805
2002 1,371,438 8,024,421
2003 1,347,486 7,273,863
Thereafter 947,744 39,188,434
--------- -----------
Total minimum lease payments 9,093,821 $80,029,742
===========
Less amount representing interest 1,926,804
---------
Present value of net minimum lease payments 7,167,017
=========
</TABLE>
Rent expense incurred for the seven months ended December 31, 1998 and
1997, 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 $3,472,500, $2,883,800 (unaudited),
$5,444,000, $3,101,000, $1,337,000, and $3,997,800, respectively.
NOTE 8 - WRITE-OFF OF LICENSE FEES AND ACCRUAL OF TERMINATION COSTS
During the year ended May 31, 1998, the Company and ITI entered into an
agreement whereby the Company licensed information technology curriculum from
ITI. The Company's practice was to capitalize and then amortize over ten years
license fees paid to ITI. The Company has decided to phase out the licensed ITI
curriculum in favor of its own internally developed information technology
curriculum and to negotiate the termination of the licensing agreement. As a
result, the Company has elected to write-off related license fees of $3,333,000
during the seven months ended December 31, 1998. The estimated phase-out costs
range from $200,000 to $500,000; management believes the ultimate cost to phase-
out this curriculum agreement will be $200,000, which has been accrued during
the seven months ended December 31, 1998.
NOTE 9 - CONSULTING AND EMPLOYMENT AGREEMENTS
In connection with the acquisition of the Predecessor, the Company entered
into consulting and employment agreements with the selling shareholders and
other officers of American European. The Company also entered into an
employment agreement with an officer of the Company. For the seven months ended
December 31, 1998 and 1997 and the years ended May 31, 1998 and 1997, such
payments, which were charged to operations, totaled $464,000, $459,000
(unaudited), $716,000, and $705,000, respectively. Future payments under these
agreements for the years ending December 31 are as follows (in thousands):
<TABLE>
<S> <C>
1999 $525
2000 525
2001 435
2002 41
</TABLE>
Of the above amounts, approximately $536,000 of future payments relate to a
continuing officer of the Company. Amounts paid to such officer totaled
approximately $96,250, $96,250 (unaudited), $165,000, and $27,500 for the seven
months ended December 31, 1998 and 1997 and for the years ended May 31, 1998 and
1997, respectively.
NOTE 10 - INCOME TAXES
Income tax expense for the seven months ended December 31, 1998, the year
ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997 consists of
(in thousands):
<TABLE>
<CAPTION>
Seven Months Ended Year Ended May 31,
--------------------------------------
December 31, 1998 1998 1997
-------------------------- ------------------ ------------------
<S> <C> <C> <C>
Current:
Federal $(1,103) $2,238 $1,423
State 0 480 333
------- ------ ------
Total current (benefit) provision (1,103) 2,718 1,756
</TABLE>
-46-
<PAGE>
<TABLE>
<S> <C> <C> <C>
Deferred:
Federal (1,600) (117) 194
State (577) (20) 31
------- ------ ------
Total deferred (benefit) provision (2,177) (137) 225
------- ------ ------
Total (benefit) provision $(3,280) $2,581 1,981
======= ====== ======
</TABLE>
The following is a reconciliation of the statutory tax rate to the
Company's effective tax rate for the seven months ended December 31, 1998, the
year ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997:
<TABLE>
<CAPTION>
Seven Months Ended Year Ended May 31,
-------------------------------------
December 31, 1998 1998 1997
--------------------------------- ------------------ -----------------
<S> <C> <C> <C>
Statutory rate 34.00% 34.00% 34.00%
State income taxes (net of
Federal benefit) 4.30% 4.40% 6.03%
Permanent differences:
Nondeductible goodwill (2.28%) 4.97% 9.69%
Nontaxable foreign earnings
of minority interest 2.82% (5.90%)
Other (2.35%)
----- ----- -----
Effective rate 40.11% 37.47% 49.72%
===== ===== =====
</TABLE>
The deferred income tax provision of $60,000 (unaudited) for the seven
months ended December 31, 1997 is primarily a result of nondeductible goodwill
of $588,000 and nontaxable foreign earnings of minority interest of $463,000.
The effects of temporary differences which gave rise to the deferred tax
asset and liability at December 31, 1998 and May 31, 1998, respectively, are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1998 May 31, 1998
------------------------------ --------------------------------
Current Long-term Current Long-term
-------------- ------------- --------------- ----------------
<S> <C> <C> <C> <C>
Deferred tax assets arising from:
Net operating loss carryforward $2,112
Unearned revenue $217 $ 94
Deferred rent 384 $376
Other 91 73 121
Deferred tax liabilities (37)
---- ------ ---- ----
$308 $2,496 $130 $497
==== ====== ==== ====
</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, 1996 Year Ended
to October 8, 1996 May 31, 1996
----------------------------- --------------------
<S> <C> <C>
Domestic $ - $ 23
</TABLE>
-47-
<PAGE>
<TABLE>
<S> <C> <C>
Foreign - 84
--------------------------- -------------------
$ - $107
=========================== ===================
</TABLE>
NOTE 11 - U.S. AND FOREIGN OPERATIONS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" is effective for the Company for the seven months ended December
31, 1998. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments and related information
in financial statements. SFAS No. 131 uses the management approach for
determining what operating segment information to report. The management
approach is based on the way that management organizes the operating segments
within the Company for making decisions and assessing performance. The Company
operates solely in the education industry, and management makes decisions and
assesses performance based on the geographic locations of its campuses.
Therefore, the Company has elected to report segment information based on
geographic areas.
The Company's operations are located in the United States, the United
Kingdom, and Dubai, United Arab Emirates. The Company's operations in Dubai
represented management fees from a management agreement through August 1997 and
consolidated operations since September 1, 1997 (see note 2). Net revenues and
income (loss) from operations by geographic area for the seven months ended
December 31, 1998 and 1997, the year ended May 31, 1998, and the period from
October 8, 1996 (date of acquisition of the Predecessor) to May 31, 1997 and
identifiable assets by geographic area at December 31, 1998 and 1997 and May 31,
1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Seven Months Ended December 31, Year Ended May 31,
--------------------------------- -------------------
1998 1997 1998 1997
-------------- ----------------- --------- --------
(Unaudited)
<S> <C> <C> <C> <C>
Net revenues:
United States $ 13,981 $10,172 $22,453 $13,437
United Kingdom 6,990 7,272 14,595 10,153
Dubai, UAE 2,877 1,730 4,866 -
Home Office - - - -
-------- ------- ------- -------
Total $ 23,848 $19,174 $41,914 $23,590
======== ======= ======= =======
Income (loss) from operations:
United States $ 6 $ 3,219 $ 8,089 $10,533
United Kingdom 1,826 2,606 5,873 4,385
Dubai, UAE 959 739 2,257 479
Home Office (10,798) (5,446) (9,541) (8,934)
-------- ------- ------- -------
Total $ (8,007) $ 1,118 $ 6,678 $ 6,463
======== ======= ======= =======
Identifiable assets:
United States $ 60,938 $52,054 $52,725 $46,141
United Kingdom 2,753 2,242 2,216 1,530
Dubai, UAE 1,780 1,607 828 -
Home Office - - - -
-------- ------- ------- -------
Total $ 65,471 $55,903 $55,769 $47,671
======== ======= ======= =======
</TABLE>
NOTE 12 - STOCK OPTION PLAN
The Company has a stock incentive plan (the "Plan") for key employees and
directors under which it may grant incentive stock options, nonqualified stock
options, stock appreciation rights, restricted stock, or performance awards of
Class A Common Stock or cash. The maximum number of shares of Class A Common
Stock which can be issued through awards granted under the Plan is 1,200,000.
Incentive stock options granted under the Plan expire on the tenth
anniversary of the date the option is granted or the fifth anniversary of the
date the option is granted in the event that the individual grantee owns more
than 10% of the total voting power of all classes of stock of the Company.
-48-
<PAGE>
On December 14, 1998, the Company repriced all stock options, with the
exception of the March 1997 stock options, to an exercise price of $6.50 per
share, which was above the fair market value of the stock on that date. In the
seven months ended December 31, 1998, fixed stock options to purchase an
aggregate of 69,000 shares of Class A Common Stock were granted to certain
officers and employees of the Company, exercisable at a weighted average
exercise price of $6.50 per share which was above the fair market value at the
repricing date. Generally, these options vest over a five-year period beginning
on the first anniversary of the date of grant.
In the seven months ended December 31, 1998, the Company issued 18,000
fixed stock options at an exercise price of $6.50 per share, which was above the
fair market value of the stock, to selected members of the Board of Directors.
In the seven months ended December 31, 1997, fixed stock options to
purchase an aggregate of 99,644 shares of Class A Common Stock were granted to
certain officers and employees of the Company, exercisable at a weighted average
exercise price of $6.50 per share which was above the fair market value at the
repricing date. Generally, these options vest over a five-year period beginning
on the first anniversary of the date of grant.
In the year ended May 31, 1998, fixed stock options to purchase an
aggregate of 299,644 shares of Class A Common Stock were granted to certain
officers and employees of the Company, exercisable at a weighted average
exercise price of $6.50 per share which was above the fair market value at the
repricing date. Generally, these options vest over a five-year period beginning
on the first anniversary of the date of grant.
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 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 likelihood of these 35,000 performance options vesting was
estimated to be 100% and these were not considered variable options.
The estimated weighted average fair value of options granted during the
seven months ended December 31, 1998 and 1997, the year ended May 31, 1998, and
the period from July 1, 1996 to May 31, 1997 was $5.32, $6.51 (unaudited),
$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 $306,000, $79,000 (unaudited), $425,000, and $13,200
would have been recorded for the seven months ended December 31, 1998 and 1997,
the year ended May 31, 1998, and the period from July 1, 1996 to May 31, 1997,
respectively. Accordingly, the Company's net income and earnings per share for
the seven months ended December 31, 1998 and 1997, the year ended May 31, 1998,
and the period from July 1, 1996 to May 31, 1997 would have been reduced to the
pro forma amounts indicated below:
<TABLE>
<CAPTION>
Seven Months Ended December 31, Year Ended May 31,
---------------------------------------------- -----------------------------------
1998 1997 1998 1997
---------------------- ---------------------- ----------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Net income (loss):
As reported $(5,516,000) $(1,514,000) $1,903,000 $2,002,690
Pro forma $(5,822,000) $(1,593,000) $1,478,000 $1,989,490
Basic net income (loss) per
share:
As reported $ (0.52) $ (0.17) $ 0.20 $ 0.29
Pro forma $ (0.55) $ (0.18) $ 0.16 $ 0.28
Diluted net income (loss) per
share:
</TABLE>
-49-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
As reported $ (0.52) $ (0.17) $ 0.19 $ 0.26
Pro forma $ (0.55) $ (0.18) $ 0.14 $ 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
the seven months ended December 31, 1998 and 1997, the year ended May 31, 1998,
and the period from July 1, 1996 to May 31, 1997:
<TABLE>
<CAPTION>
Seven Months Ended December 31, Year Ended May 31,
------------------------------------------------ ------------------------------------
1998 1997 1998 1997
----------------------- ----------------------- ----------------- -----------------
(Unaudited)
<S> <C> <C> <C> <C>
Expected volatility 48.6% 52.9% 52.6% 0%
Risk-free interest rate 4.9% 5.9% 5.8% 6.2%
Dividend yield 0% 0% 0% 0%
Expected life 3.74 2.80 3.97 3.91
Annual forfeiture rate 3% 3% 3% 3%
</TABLE>
The following tables set forth activity in the Company's Plan:
<TABLE>
<CAPTION>
All Subsequent Options Initial (March 31, 1997) Options
------------------------------------- ------------------------------------
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
Granted 87,000 $12.460
Exercised (2,000) $14.000 (22,204) $0.7714
Canceled (59,000) $14.711 (16,380) $0.7714
------- -------
Outstanding December 31, 1998 325,644 $ 6.500 359,533 $0.7714
======= =======
Exercisable December 31, 1998 11,929 $ 6.500 71,907 $0.7714
</TABLE>
Exercise price for options outstanding as of December 31, 1998 ranged from
$.7714 to $6.50. The weighted average remaining contractual life of those
options is 8.72 years.
NOTE 13 - COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" is effective for the Company
for the seven months ended December 31, 1998. SFAS No. 130 establishes standards
for reporting and displaying comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. The Company has adopted SFAS No. 130 in the current year as
required. The components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
Seven Months Ended December 31, Year Ended May 31,
----------------------------------------------- -----------------------------------
1998 1997 1998 1997
---------------------- ----------------------- ----------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $(5,516) $(1,514) $1,903 $2,003
Change in equity due to foreign
</TABLE>
-50-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
currency translation adjustments (64) (26) (59) 147
------- ------- ------ ------
Comprehensive income (loss) $(5,580) $(1,540) $1,844 $2,150
======= ======= ====== ======
</TABLE>
NOTE 14 - SUBSEQUENT EVENTS
In March 1999, the Company entered into a ten year lease for a 17,800
square foot space in northern Virginia for a new campus. The Company begins its
occupancy in June 1999 and will incur rent payments of approximately $250,000
for the year ended December 31, 1999 and approximately $500,000 each year
thereafter.
Also in March 1999, the Company entered into a ten year lease for a 21,000
square foot space in Miami, Florida for its permanent facility. The Company
begins its occupancy in September 1999 and will incur rent payments of
approximately $100,000 for the year ended December 31, 1999 and approximately
$350,000 each year thereafter.
On March 25, 1999, the Company executed a new $10 million bank credit
agreement (the "Credit Agreement"). The Credit Agreement matures on April 30,
2001 but can be extended beyond this date. Amounts outstanding bear interest at
LIBOR plus 2.75%. This new Credit Agreement replaced an existing $4.0 million
bank credit facility.
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<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 1999 Annual
Meeting of Shareholders (the "Proxy Statement"). The Company will, within 120
days of December 31, 1998, file with the Securities and Exchange Commission a
definitive proxy statement pursuant to Regulation 14A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors and executive officers of the
Registrant is set forth in the Proxy Statement under the headings "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance," which
information is incorporated herein by reference. The name, age, and position of
each executive officer of the Company is set forth under the heading "Executive
Officers" in Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the
Proxy Statement under the heading "Executive Compensation," which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners and Management," which information is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related
transactions is set forth in the Proxy Statement under the headings "Certain
Transactions" and "Compensation Committee Interlocks and Insider Participation,"
which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. The following financial statements and auditors'
report have been filed with Item 8 in Part II of this Report.
PAGE
----
Independent Auditors' Report 33
Consolidated Balance Sheets 34
Consolidated Statements of Operations 35
Consolidated Statements of Changes in Shareholders' Equity 37
Consolidated Statements of Cash Flows 38
Notes to Consolidated Financial Statements 40
(a)(2) Financial Statement Schedules. All financial statement schedules are
omitted as the required information is inapplicable.
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<PAGE>
(a)(3) Exhibits. The exhibits listed below are filed with or incorporated by
reference into this Report. The exhibits which are denominated with an
asterisk (*) were previously filed as part of, and are hereby
incorporated by reference from, either (i) the Company's registration
statement on Form S-1, Registration Number 333-29603, as amended,
declared effective by the Securities and Exchange Commission on September
23, 1997 (the "S-1"); (ii) the Company's Quarterly Report on Form 10-Q
for the quarter ended February 28, 1998 (the "2/28/98 10-Q"); or (iii)
the Company's Annual Report on Form 10-K for the fiscal year ended May
31, 1998 ("May 1998 10-K"). Unless otherwise indicated, the exhibit
number corresponds to the exhibit number in the referenced document.
<TABLE>
<CAPTION>
Exhibit Number Description
- ---------------------------- -----------------------------------------------------------------------
<C> <S>
* 2.1 Stock Purchase Agreement dated July 25, 1996 by and between EduTrek
International, Ltd., Thomas J. Barnette and Phillip J. Markert
relating to the acquisition of the Predecessor (S-1)
* 3(i) Articles of Incorporation (S-1)
* 3(i).1 Articles of Amendment to Articles of Incorporation, dated September 6,
1996 (S-1)
* 3(i).2 Articles of Amendment to Articles of Incorporation, dated June 17,
1996 (S-1)
* 3(ii) Bylaws (S-1)
* 4.1 Specimen Certificate of Class A Common Stock (S-1)
10.1 Amended and Restated 1997 Incentive Plan
* 10.3 Form of Incentive Stock Option Agreement (S-1)
* 10.4 Form of Non-qualified Stock Option Agreement (S-1)
10.5 Credit Agreement dated as of March 25, 1999 by and between the Company
and First Union National Bank
10.6 Office Lease dated June 19, 1998 between the Company and W9/WLA Real
Estate Limited Partnership
10.6.1 First Amendment dated September 4, 1998 to Office Lease dated June 19,
1998 between the Company and W9/WLA Real Estate Limited Partnership
* 10.7 Employment Agreement, dated March 21, 1997, by and between E Holdings,
Inc. and Stephen G. Franklin, Sr. (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 (May 1998
10-K)
* 10.11 Financial Operations Agreement, dated October 1, 1995, by and between
American European Middle East Corporation, LLC and Middle East
Colleges, Ltd., relating to the operation of the University's campus
in Dubai (S-1)
* 10.12 Memorandum of Understanding, dated January 24, 1996, by and between
American European Middle East Corporation, LLC and Middle East
Colleges, Ltd. (S-1)
* 10.14 Anti-Dilution Rights Agreement, dated October 8, 1996, by and between
E Holdings, Inc. and Phillip J. Markert (S-1)
* 10.15 Agent Agreement, dated March 13, 1996, by and between Target Marketing
Systems, Inc. and EduTrek Systems, Inc. (S-1)
* 10.16 License Agreement, dated July 26, 1997, by and between ITI Learning
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Systems, Inc., American European Corporation and the Company (S-1)
* 10.17 Lease: Embassy Row 500 Between EduTrek International, Inc., a Georgia
Corporation (Tenant) and a Maryland Corporation (Landlord) (2/28/98
10-Q)
* 10.18 Lease Agreement dated June 30, 1998 between 1770 G Street Limited
Partnership and American Intercontinental University, Inc. (May 1998
10-K)
* 21.1 Subsidiaries of the Registrant (S-1)
23.1 Independent Auditors' Consent
24.1 Power of Attorney of 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
24.7 Power of Attorney of J. Robert Fitzgerald
27.1 Financial Data Schedule (SEC only)
</TABLE>
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the month
ended December 31, 1998.
-54-
<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.
EDUTREK INTERNATIONAL, INC.
Date: March 30, 1999 By: /s/ Steve Bostic
----------------------------------------
Steve Bostic, Chairman and
Chief Executive Officer
(principal executive officer)
Date: March 30, 1999 By: /s/ Daniel D. Moore
----------------------------------------
Daniel D. Moore, Chief Financial
Officer (principal financial and
accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Chairman and Chief Executive March 30, 1999
/s/ Steve Bostic Officer
- ----------------------------
Steve Bostic
/s/ Daniel D. Moore Chief Financial Officer March 30, 1999
- ----------------------------
Daniel D. Moore
President, Chief Academic Officer March 30, 1999
* and Director
- ----------------------------
Stephen G. Franklin, Sr.
* Director March 30, 1999
- ----------------------------
Paul D. Beckham
* Director March 30, 1999
- ----------------------------
Fred C. Davison
* Director March 30, 1999
- ----------------------------
Ronald P. Hogan
* Director March 30, 1999
- ----------------------------
Gaylen D. Kemp
* Director March 30, 1999
- ----------------------------
Gerald Tellefsen
* Director March 30, 1999
- ----------------------------
J. Robert Fitzgerald
</TABLE>
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<PAGE>
* By: /s/ Daniel D. Moore
----------------------
Daniel D. Moore,
as Attorney in fact pursuant to Powers
of Attorney filed as exhibits to this Report
-56-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- --------------
<C> <S>
10.1 Amended and Restated 1997 Incentive Plan
10.5 Credit Agreement dated as of March 25, 1999 by and
between the Company and First Union National Bank
10.6 Office Lease dated June 19, 1998 between the Company
and W9/WLA Real Estate Limited Partnership
10.6.1 First Amendment dated September 4, 1998 to Office
Lease dated June 19, 1998 between the Company and
W9/WLA Real Estate Limited Partnership
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
24.7 Power of Attorney of J. Robert Fitzgerald
27.1 Financial Data Schedule (SEC only)
</TABLE>
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<PAGE>
EXHIBIT 10.1
EDUTREK INTERNATIONAL, INC.
AMENDED AND RESTATED 1997 INCENTIVE PLAN
The following plan has been amended to reflect the changes effected by
Amendment No. 1 adopted by the Board of Directors on September 25, 1998 and
approved by the shareholders on October 29, 1998 and Amendment No. 2 adopted by
the Board of Directors on October 16, 1998.
SECTION 1. GENERAL PURPOSE OF PLAN; DEFINITIONS.
The name of this plan is the EduTrek International, Inc. 1997 Incentive
Plan (the "Plan"). The purpose of the Plan is to enable EduTrek International,
Inc. (the "Company") and its Subsidiaries and Affiliates to attract and retain
employees and directors who contribute to the Company's success by their
ability, ingenuity and industry, and to enable such employees and directors to
participate in the long-term success and growth of the Company through an equity
interest in the Company.
For purposes of the Plan, the following terms shall be defined as set forth
below:
a. "Affiliate" means any corporation (other than a Subsidiary),
partnership, joint venture or any other entity in which the Company owns,
directly or indirectly, at least a 10 percent beneficial ownership interest.
b. "Board" means the Board of Directors of the Company.
c. "Cause" means a felony conviction of a participant or the failure of a
participant to contest prosecution for a felony, or a participant's willful
misconduct or dishonesty, any of which is harmful to the business or reputation
of the Company or any Subsidiary or Affiliate.
d. "Code" means the Internal Revenue Code of 1986, as amended, or any
successor thereto and the Treasury Regulations and rulings promulgated
thereunder.
e. "Committee" means a committee of the Board appointed for the purpose of
administering the Plan, which committee shall at all times consist of two or
more Non-Employee Directors.
f. "Commission" means the U.S. Securities and Exchange Commission.
g. "Company" means EduTrek International, Inc., a corporation organized
under the laws of the State of Georgia (or any successor corporation).
h. "Disability" means total and permanent disability as determined under
the Company's long term disability program.
i. "Early Retirement" means retirement from active employment with the
Company, any Subsidiary and any Affiliate pursuant to the early retirement
provisions of the applicable company pension plan.
<PAGE>
j. "Eligible Employee" means a person regularly employed by the Company or
a Subsidiary and who is responsible for or contributes to the management, growth
and/or profitability of the business of the Company or a Subsidiary.
k. "Eligible Participant" means an Eligible Employee or a Non-Employee
Director.
l. "Exchange Act" means the Securities Exchange Act of 1934, as amended,
and any successor thereto.
m. "Fair Market Value" means, as of any given date, the mean between the
high "bid" and low "ask" prices as of the close of business for the Company's
Stock in the over-the-counter market, as reported by the Nasdaq Stock Market (or
other national quotation service), or, if the Stock is registered on a national
securities exchange, the closing price of the Stock on such national securities
exchange or, if neither traded in the over-the-counter market nor listed on a
national securities exchange, then the fair market value as determined by the
Board or the Committee, but in no case less than the par value of such Stock.
n. "Incentive Stock Option" means any Stock Option intended to be and
designated as an "incentive stock option" within the meaning of Section 422 of
the Code.
o. "Non-Employee Director" means a member of the Board who is not a
regular salaried employee of the Company or one of its Subsidiaries. As it
relates to the members of the Committee and for the purpose of Sections 2 and 10
of the Plan, "Non-Employee Director" shall have the meaning set forth in Rule
16b-3(b) (3) as promulgated by the Commission under the Securities Exchange Act
of 1934, as amended, or any successor definition adopted by the Commission.
p. "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
q. "Normal Retirement" means retirement from active employment with the
Company, any Subsidiary, and any Affiliate on or after the normal retirement
date specified in the applicable company pension plan.
r. "Performance "ward" means an award of shares of Stock or cash pursuant
to Section 9 contingent upon achieving certain performance goals.
s. "Plan" means this 1997 Incentive Plan.
t. "Restricted Stock" means an award of shares of Stock that are subject
to restrictions under Section 8.
u. "Retirement" means Normal or Early Retirement.
v. "Stock" means the Class A Common Stock of the Company.
-3-
<PAGE>
w. "Stock Appreciation Right" means a right granted under Section 7 which
entitles the holder to receive a cash payment or an award of Stock in an amount
equal to the difference between (i) the Fair Market Value of the Stock covered
by such right at the date the right is granted, unless otherwise determined by
the Board or the Committee pursuant to Section 7 and (ii) the Fair Market Value
of the Stock covered by such right at the date the right is exercised multiplied
by the number of shares covered by the right.
x. "Stock Option" means any option to purchase shares of Stock granted to
Eligible Employees or Eligible Participants under the Plan.
y. "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
SECTION 2. ADMINISTRATION.
The Plan shall be administered by the Board or the Committee. Subject to
the provisions of Section 10 of the Plan, the Board or the Committee shall have
the power and authority to grant to Eligible Employees or Eligible Participants,
pursuant to the terms of the Plan: (i) Incentive Stock Options; (ii) Non-
Qualified Stock Options; (iii) Stock Appreciation Rights; (iv) Restricted Stock;
or (v) Performance Awards.
In particular, the Board or the Committee shall have the authority:
(i) to select the Eligible Employees or Eligible Participants to whom
Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights,
Restricted Stock, or Performance Awards or a combination of the foregoing from
time to time will be granted hereunder;
(ii) to determine whether and to what extent Incentive Stock Options,
Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, or
Performance Awards or a combination of the foregoing, are to be granted
hereunder;
(iii) to determine the number of shares of Stock to be covered by each
such award granted hereunder;
(iv) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder including, but not limited to,
the option price per share, any restriction on any Stock Option or other award
and/or the shares of Stock relating thereto based on performance and/or such
other factors as the Board or the Committee may determine, in its sole
discretion, and any vesting acceleration features based on performance and/or
such other factors as the Board or the Committee may determine, in its sole
discretion;
(v) to determine whether, to what extent and under what circumstances
Stock and other amounts payable with respect to an award under this Plan shall
be deferred either automatically or at
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<PAGE>
the election of a participant, including providing for and determining the
amount (if any) of deemed earnings on any deferred amount during any deferral
period.
Subject to Section 12, the Board or the Committee shall have the authority
to adopt, alter and repeal such administrative rules, guidelines and practices
governing the Plan as it shall, from time to time, deem advisable; to interpret
the terms and provisions of the Plan and any award issued under the Plan (and
any agreements relating thereto); and to otherwise supervise the administration
of the Plan.
All decisions made by the Board or the Committee pursuant to the provisions
of the Plan shall be final and binding on all persons, including the Company and
Plan participants.
SECTION 3. STOCK SUBJECT TO PLAN.
The total number of shares of Stock reserved and available for distribution
under the Plan shall be 1,200,000. Such shares may consist, in whole or in
part, of authorized and unissued shares or treasury shares.
If any shares of Stock that have been subject to option cease to be subject
to option, or if any shares subject to any Restricted Stock award granted
hereunder are forfeited or such award is otherwise terminated, such shares shall
again be available for distribution in connection with future awards under the
Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, a substitution or adjustment shall be made in the aggregate
number of shares reserved for issuance under the Plan, in the number and option
price of shares subject to outstanding Stock Options granted under the Plan and
in the number of shares subject to Restricted Stock awards granted under the
Plan as may be determined to be appropriate by the Board or the Committee, in
its sole discretion, provided that the number of shares subject to any award
shall always be a whole number. Such adjusted option price shall also be used
to determine the amount payable by the Company upon the exercise of any Stock
Appreciation Right associated with any Stock Option.
SECTION 4. ELIGIBILITY.
Awards granted pursuant to Section 5 hereunder shall be granted only to
Eligible Employees. Awards granted pursuant to Sections 6, 7, 8 and 9 shall be
granted only to Eligible Participants. Awards granted pursuant to Section 10
shall be granted only to Non-Employee Directors who are serving as members of
the Committee. The optionees and participants under the Plan shall be selected
from time to time by the Board or the Committee, in its sole discretion, from
among those eligible, and the Board or the Committee shall determine, in its
sole discretion, the number of shares covered by each award or grant.
-5-
<PAGE>
SECTION 5. INCENTIVE STOCK OPTIONS.
Incentive Stock Options may be granted either alone or in addition to other
awards granted under the Plan. Any Incentive Stock Option granted under the
Plan shall be in such form as the Board or the Committee may from time to time
approve, and the provisions of Incentive Stock Option awards need not be the
same with respect to each optionee.
The Board or the Committee shall have the authority to grant any Eligible
Employee Incentive Stock Options (with or without Stock Appreciation Rights)
except that Incentive Stock Options shall not be granted to employees of an
Affiliate. To the extent that any Stock Option does not qualify as an Incentive
Stock Option, it shall constitute a separate Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of this Plan
relating to Incentive Stock Options shall be interpreted, amended or altered,
nor shall any discretion or authority granted under the Plan be so exercised, so
as to disqualify either the Plan or any Incentive Stock Option under Section 422
of the Code. Notwithstanding the foregoing, in the event an optionee
voluntarily disqualifies an option as an Incentive Stock Option within the
meaning of Section 422 of the Code, the Board or the Committee may, but shall
not be obligated to, make such additional grants, awards or bonuses as the Board
or the Committee shall deem appropriate, to reflect the tax savings to the
Company which results from such disqualification.
Incentive Stock Options granted under the Plan shall be evidenced by
agreements to be consistent with and subject to the following terms and
conditions and shall contain such additional terms and conditions, consistent
with the terms of the Plan, as the Board or the Committee shall deem desirable:
(a) Option Price. The option price per share of Stock purchasable
under an Incentive Stock Option shall be not less than the Fair Market
Value of the Stock on the date of the grant of the Incentive Stock Option;
provided, however, that the option price per share of an Incentive Stock
Option granted to an individual who, at the time the option is granted,
owns directly or indirectly more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company (a "Ten
Percent Owner"), shall be not less than one hundred ten percent (110%) of
the Fair Market Value on the date the option is granted.
(b) Option Term. The term of each Incentive Stock Option shall be
fixed by the Board or the Committee, but no Incentive Stock Option shall be
exercisable more than ten years after the date such option is granted.
Notwithstanding the foregoing, no Incentive Stock Option granted to a Ten
Percent Owner shall be exercisable more than five (5) years from the date
of grant of the option.
(c) Exercisability. Subject to paragraph (j) of this Section 5,
Incentive Stock Options shall be exercisable at such time or times and
subject to such terms and conditions as shall be determined by the Board or
the Committee at grant. If the Board or the Committee provides, in its
discretion, that any Incentive Stock Option is exercisable only in
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<PAGE>
installments, the Board or the Committee may waive such installment
exercise provision at any time in whole or in part based on performance
and/or such other factors as the Board or the Committee may determine in
its sole discretion.
(c) Method of Exercise. Incentive Stock Options may be exercised in
whole or in part at any time during the option period, by giving written
notice of exercise to the Company specifying the number of shares to be
purchased, accompanied by payment in full of the purchase price, in cash,
by check or such other instrument as may be acceptable to the Board or the
Committee. As determined by the Board or the Committee, in its sole
discretion, at or after grant, payment in full or in part may also be made
in the form of unrestricted Stock owned by the optionee (based on the Fair
Market Value of the Stock on the date the option is exercised). An
optionee shall have the right to dividends or other rights of a stockholder
with respect to shares subject to the option only when the optionee has
given written notice of exercise and has paid in full for such shares.
(d) Non-transferability of Options. No Incentive Stock Option shall
be transferable by the Optionee otherwise than by will or by the laws of
descent and distribution. All Incentive Stock Options shall be
exercisable, during the optionee's lifetime, only by the optionee.
(e) Termination by Death. Unless otherwise determined by the Board or
the Committee at grant, if any optionee's employment with the Company, any
Subsidiary, and any Affiliate terminates by reason of death, the Incentive
Stock Option may thereafter be immediately exercised, to the extent then
exercisable (or on such accelerated basis as the Board or the Committee
shall determine at or after grant), by the legal representative of the
estate or by the legatee of the optionee under the will of the optionee,
for a period of three years from the date of such death or until the
expiration of the stated term of such Incentive Stock Option, whichever
period is the shorter.
(f) Termination by Reason of Disability. Unless otherwise determined
by the Board or the Committee at grant, if any optionee's employment with
the Company, any Subsidiary and any Affiliate terminates by reason of
Disability, any Incentive Stock Option held by such optionee may thereafter
be exercised, to the extent it was exercisable at the time of termination
due to Disability (or on such accelerated basis as the Board or Committee
shall determine at or after grant), but may not be exercised after three
years from the date of such termination of employment or the expiration of
the stated term of such Incentive Stock Option, whichever period is the
shorter; provided, however, that, if the optionee dies within such three-
year period, any unexercised Incentive Stock Option held by such optionee
shall thereafter be exercisable to the extent to which it was exercisable
at the time of death for a period of twelve months from the date of such
death or for the stated term of such Incentive Stock Option, whichever
period is the shorter. In the event of termination of employment by reason
of Disability, if an Incentive Stock Option is exercised after the
expiration of the exercise periods that apply for purposes of Section 422
of the Code, such Stock Option will thereafter be treated as a Non-
Qualified Stock Option.
-7-
<PAGE>
(g) Termination by Reason of Retirement. Unless otherwise determined
by the Board or the Committee at grant, if any optionee's employment with
the Company, any Subsidiary and any Affiliate terminates by reason of
Normal or Early Retirement, any Incentive Stock Option held by such
optionee may thereafter be exercised to the extent it was exercisable at
the time of such Retirement (or on such accelerated basis as the Board or
the Committee shall determine at or after grant), but may not be exercised
after three years from the date of such termination of employment or the
expiration of the stated term of such Incentive Stock Option, whichever
period is the shorter; provided, however, that, if the optionee dies within
such three-year period any unexercised Incentive Stock Option held by such
optionee shall thereafter be exercisable, to the extent to which it was
exercisable at the time of death, for a period of twelve months from the
date of such death or for the stated term of the Incentive Stock Option,
whichever period is the shorter. In the event of termination of employment
by reason of Retirement, if an Incentive Stock Option is exercised after
the exercise periods that apply for purposes of Section 422 of the Code,
such Stock Option will thereafter be treated as a Non-Qualified Stock
Option.
(h) Other Termination. Unless otherwise determined by the Board or
the Committee at grant, if an optionee's employment with the Company, any
Subsidiary and any Affiliate terminates for any reason other than death,
Disability or Normal or Early Retirement, the Incentive Stock Option shall
thereupon terminate, except that such option may be exercised for the
lesser of three months from the date of termination or the balance of such
option's term if the optionee's employment with the Company, any Subsidiary
and any Affiliate is involuntarily terminated by the optionee's employer
without Cause.
(i) Limit on Value of Incentive Stock Option First Exercisable
Annually. To the extent that the aggregate Fair Market Value (determined at
the time the option is granted) of shares of Stock with respect to which
Incentive Stock Options are exercisable for the first time by an individual
during any calendar year (under all of the Company's option plans) exceeds
$100,000, such options shall be treated as Non-Qualified Stock Options.
SECTION 6. NON-QUALIFIED STOCK OPTIONS.
The Board or the Committee may grant to Eligible Participants options under
the Plan which are not Incentive Stock Options under the provisions of Section
422 of the Code. Such Non-Qualified Stock Options shall be evidenced by
agreements in such form and consistent with this Plan as the Board or the
Committee shall approve from time to time, which agreements shall contain in
substance the same terms and conditions as set forth in Section 5 hereof with
respect to Incentive Stock Options (except that references to employment with
the Company shall be deemed to mean service on the Board); provided, however,
that the limitations set forth in Sections 5(a), 5(b) or 5(i) shall not be
applicable to Non-Qualified Stock Options. Payment of the option exercise price
for a Non-Qualified Stock Option may be made in the form of Restricted Stock
owned by the optionee, in which case the shares received upon the exercise of
such Non-Qualified Stock Option shall be restricted or deferred, as the case may
be, in accordance with the original term of the Restricted Stock award in
question, except that the Board or the Committee may direct that such
restrictions or deferral provisions shall apply only to the number of such
shares equal to the number of shares of Restricted Stock surrendered
-8-
<PAGE>
upon the exercise of such option. No shares of unrestricted Stock shall be
issued until full payment therefor has been made.
SECTION 7. STOCK APPRECIATION RIGHTS.
(a) Grant and Exercise When Granted in Conjunction With Stock Options.
Stock Appreciation Rights may be granted in conjunction with all or part of any
Stock Option granted under the Plan and may contain terms and conditions
different from those of the related Stock Option, except as otherwise provided
below. In the case of a Non-Qualified Stock Option, such rights may be granted
either at or after the time of the grant of such Non-Qualified Stock Option. In
the case of an Incentive Stock Option, such rights may be granted only at the
time of the grant of such Incentive Stock Option.
A Stock Appreciation Right or applicable portion thereof granted with
respect to a given Stock Option shall terminate and no longer be exercisable
upon the termination or exercise of the related Stock Option, except that,
unless otherwise provided by the Board or the Committee at the time of grant, a
Stock Appreciation Right granted with respect to less than the full number of
shares covered by a related Stock Option shall only be reduced if and to the
extent that the number of shares covered by the exercise or termination of the
related Stock Option exceeds the number of shares not covered by the Stock
Appreciation Right.
A Stock Appreciation Right may be exercised by an optionee, in accordance
with paragraph (d) of this Section 7, by surrendering the applicable portion of
the related Stock Option. Upon such exercise and surrender, the optionee shall
be entitled to receive an amount determined in the manner prescribed in
paragraph (d) of this Section 7. Stock Options which have been so surrendered,
in whole or in part, shall no longer be exercisable to the extent the related
Stock Appreciation Rights have been exercised.
(b) Grant and Exercise When Granted in Tandem With Stock Option. Stock
Appreciation Rights may be granted in tandem either at the time of grant of a
Non-Qualified Stock Option or at any time during the term of such Stock Option.
Stock Appreciation Rights are not permitted to be granted in tandem with an
Incentive Stock Option under this Plan.
A Stock Appreciation Right may be exercised at any time to the extent that
the Stock Option to which it relates is then exercisable, and shall be subject
to the conditions applicable to such Stock Option. When a Stock Appreciation
Right is exercised in accordance with Section 7(d), the Stock Option to which it
relates shall cease to be exercisable to the extent of the number of shares with
respect to which the Stock Appreciation Right is exercised. Similarly, when an
option is exercised, the Stock Appreciation Right relating to the shares covered
by such Stock Option exercise shall terminate. Any Stock Appreciation Right
which is outstanding on the last day of the term of the Stock Option to which it
is related shall be automatically exercised on such date for cash or Stock, as
determined by the Board or the Committee, without any action by the optionee.
(c) Grant and Exercise When Granted Alone. Stock Appreciation Rights may
be granted at the discretion of the Board or the Committee in a manner not
related to an award of a Stock Option. A Stock Appreciation Right granted under
this Section 7(c) is not exercisable for a period of six
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months from the date of grant, unless a longer period is otherwise determined by
the Board or the Committee. The Stock Appreciation Right, granted under Section
7(c), shall be exercisable in accordance with Section 7(d) over a period not to
exceed ten years. Any Stock Appreciation Right which is outstanding on the last
day of the exercisable period shall be automatically exercised on such date for
cash or Stock, as determined by the Board or the Committee, without any action
by the holder.
(d) Terms and Conditions. Stock Appreciation Rights shall be subject to
such terms and conditions, not inconsistent with the provisions of the Plan, as
shall be determined from time to time by the Board or the Committee, including
the following:
(i) Stock Appreciation Rights granted pursuant to Section 7(a) and
7(b) shall be exercisable only at such time or times and to the extent that
the Stock Options to which the Stock Appreciation Rights relate shall be
exercisable in accordance with the provisions of Sections 5 and 6 and this
Section 7 of the Plan; provided, however, that any Stock Appreciation Right
granted subsequent to the grant of the related Stock Option shall not be
exercisable during the first six months of the term of the Stock
Appreciation Right, except that this additional limitation shall not apply
in the event of death or Disability of the optionee prior to the expiration
of the six-month period.
(ii) Upon the exercise of a Stock Appreciation Right granted pursuant
to Section 7(a) or 7(b), an optionee shall be entitled to receive an amount
in cash or shares of Stock equal in value to the excess of the Fair Market
Value of one share of Stock over the option price per share specified in
the related Stock Option multiplied by the number of shares in respect of
which the Stock Appreciation Right shall have been exercised, with the
Board or the Committee having the right to determine the form of payment.
Upon the exercise of a Stock Appreciation Right granted pursuant to Section
7(c), the holder shall be entitled to receive an amount in cash or shares
of Stock equal in value to the excess of the Fair Market Value of one share
of Stock over the Fair Market Value of one share of Stock at the date the
Stock Appreciation Right was granted multiplied by the number of shares in
respect of which the Stock Appreciation Right shall have been exercised,
with the Board or the Committee having the right to determine the form of
payment.
(iii) No Stock Appreciation Right shall be transferable by the holder
otherwise than by will or the laws of descent and distribution. All Stock
Appreciation Rights shall be exercisable, during the holder's lifetime,
only by the holder.
(iv) Upon the exercise of a Stock Appreciation Right granted pursuant
to Section 7(a) or Section 7(b), the Stock Option or part thereof to which
such Stock Appreciation Right is related shall be deemed to have been
exercised for the purpose of the limitation set forth in Section 3 of the
Plan on the number of shares of Stock to be issued under the Plan.
(v) A Stock Appreciation Right granted in connection with an
Incentive Stock Option pursuant to Section 7(a), may be exercised only if
and when the market price of the Stock subject to the Incentive Stock
Option exceeds the exercised price of such Stock Option.
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(vi) In its sole discretion, the Board or the Committee may provide,
at the time of grant of a Stock Appreciation Right under this Section 7,
that such Stock Appreciation Right can be exercised only in the event of a
"Change of Control" and/or a "Potential Change of Control" (as defined in
Section 14 below).
(vii) The Board or the Committee, in its sole discretion, may also
provide that in the event of a "Change of Control" and/or a "Potential
Change of Control" (as defined in Section 14 below) the amount to be paid
upon the exercise of a Stock Appreciation Right shall be based on the
"Change of Control Price" (as defined in Section 14 below).
(viii) Any exercise by a participant of all or a portion of a Stock
Appreciation Right for cash, may only be made during the period beginning
on the third business day following the date of the Company's release of
its quarterly or annual summary statements of sales and earnings to the
public and ending on the twelfth business day following such date;
provided, however, that the foregoing shall not apply to any exercise by a
participant of a Stock Appreciation Right for cash where the date of
exercise is automatic or fixed in advance under the Plan and is outside the
control of the participant.
SECTION 8. RESTRICTED STOCK.
(a) Administration. Shares of Restricted Stock may be issued either alone
or in addition to other awards granted under the Plan. The Board or the
Committee shall determine the Eligible Participants to whom, and the time or
times at which, grants of Restricted Stock will be made, the number of shares to
be awarded, the price, if any, to be paid by the recipient of Restricted Stock
(subject to Section 8(b) hereof), the time or times within which such awards may
be subject to forfeiture, and all other conditions of the awards. However, in
no event shall any restriction, including risk of forfeiture, attach to the
Restricted Stock for a term to exceed ten years from the date such Stock was
granted. The Board or the Committee may also condition the grant of Restricted
Stock upon the attainment of specified performance goals, or such other criteria
as the Board or the Committee may determine, in its sole discretion. The
provisions of Restricted Stock awards need not be the same with respect to each
recipient.
(b) Awards and Certificates. The prospective recipient of an award of
shares of Restricted Stock shall not have any rights with respect to such award,
unless and until such recipient has executed an agreement evidencing the award
(a "Restricted Stock Award Agreement") and has delivered a fully executed copy
thereof to the Company, and has otherwise complied with the then applicable
terms and conditions.
(i) Awards of Restricted Stock must be accepted within a period of 60
days (or such shorter period as the Board or the Committee may specify)
after the award date by executing a Restricted Stock Award Agreement and
paying whatever price, if any, is required.
(ii) Each participant who is awarded Restricted Stock shall be issued
a stock certificate in respect of such shares of Restricted Stock. Such
certificate shall be registered in the name
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of the participant, and shall bear an appropriate legend referring to the
terms, conditions, and restrictions applicable to such award, substantially
in the following form:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including
forfeiture) of the E Holdings, Inc. 1997 Incentive Plan and a
Restricted Stock Agreement entered into between the registered owner
and EduTrek International, Inc. Copies of such Plan and Agreement are
on file in the offices of EduTrek International, Inc., 3340 Peachtree
Road, Suite 2000, Atlanta, Georgia 30326."
(iii) The Board or the Committee shall require that the stock
certificates evidencing such shares be held in custody by the Company until
the restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock award, the participant shall have delivered a stock power,
endorsed in blank, relating to the Stock covered by such award.
(c) Restrictions and Conditions. The shares of Restricted Stock awarded
pursuant to this Section 8 shall be subject to the following restrictions and
conditions:
(i) Subject to the provisions of this Plan and Restricted Stock
Award Agreements, during the period of six months after the award or such
longer period as may be set by the Board or the Committee commencing on the
grant date (the "Restriction Period"), the participant shall not be
permitted to sell, transfer, pledge or assign shares of Restricted Stock
awarded under the Plan. Within these limits, the Board or the Committee
may, in its sole discretion, provide for the lapse of such restrictions in
installments and may accelerate or waive such restrictions in whole or in
part based on performance and/or such other factors as the Board or the
Committee may determine, in its sole discretion.
(ii) Except as provided in paragraph (c)(i) of this Section 8, the
participant shall have, with respect to the shares of Restricted Stock, all
of the rights of a stockholder of the Company, including the right to
receive any dividends.
Dividends paid in cash with respect to shares of Restricted Stock
shall not be subject to any restrictions or subject to forfeiture.
Dividends paid in stock of the Company or stock received in connection with
a stock split with respect to Restricted Stock shall be subject to the same
restrictions as on such Restricted Stock. Certificates for shares of
unrestricted Stock shall be delivered to the participant promptly after,
and only after, the period of forfeiture shall expire without forfeiture in
respect of such shares of Restricted Stock.
(iii) Subject to the provisions of the Restricted Stock Award
Agreement and this Section 8, upon termination of employment for any reason
during the Restriction Period, all shares still subject to restriction
shall be forfeited by the participant, and the participant shall only
receive the amount, if any, paid by the participant for such forfeited
Restricted Stock.
(iv) In the event of special hardship circumstances of a participant
whose employment is involuntarily terminated (other than for Cause), the
Board or the Committee may, in it sole
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discretion, waive in whole or in part any or all remaining restrictions
with respect to such participant's shares of Restricted Stock.
SECTION 9. PERFORMANCE AWARDS.
(a) Administration. Shares of Stock or a payment in cash may be
distributed under the Plan upon the attainment of achievement objectives to a
participant as a Performance Award. The Board or the Committee shall determine
the Eligible Participants to whom the Performance Award is granted, the terms
and conditions of the achievement objectives, the term of the performance
period, and the level and form of the payment of the Performance Award.
(b) Achievement Objectives. The Board or the Committee, at its sole
discretion may establish, under this Section 9, achievement objectives either in
terms of Company-wide objectives or in terms of objectives that are related to
the specific performance of the participant or the division, subsidiary,
department or function within the Company in which the participant is engaged.
A minimum level of acceptance, at the discretion of the Board or the Committee,
may be established.
If at the end of the performance period the specified objectives have been
attained, the participant is deemed to have fully earned the Performance Award.
If such achievement objectives have not been attained, the participant is deemed
to have partly earned the Performance Award and becomes eligible to receive a
portion of the total award, as determined by the Board or the Committee. If a
required minimum level of achievement has not been met, the participant is
entitled to no portion of the Performance Award. The Company may adjust the
payment of awards or the achievement objectives if events occur or circumstances
arise which would cause a particular payment or set of achievement objectives to
be inappropriate as a measure of performance.
(c) Terms and Conditions. A participant to whom a Performance Award has
been granted is given achievement objectives to be reached over a specified
period, the "performance period." Generally this period shall be not less than
one year but in no case shall the period exceed five years.
Any participant granted a Performance Award pursuant to this Section 9 who
by reason of death, disability or retirement terminates his position with the
Company before the end of the performance period is entitled to receive a
portion of any earned Performance Award.
A participant who terminates his position with the Company for any other
reason forfeits all rights under the Performance Award.
SECTION 10. PARTICIPATION OF NON-EMPLOYEE DIRECTOR COMMITTEE MEMBERS.
Each Non-Employee Director serving on the Committee shall be eligible to
receive awards granted pursuant to Sections 6, 7, 8 and 9 of the Plan only upon
authorization and approval of the Board or the stockholders of the Company.
SECTION 11. LOAN PROVISIONS.
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With the consent of the Board or the Committee, the Company may make, or
arrange for, a loan or loans to an Eligible Employee or Eligible Participant
with respect to the exercise of any Stock Option granted under the Plan and/or
with respect to the payment of the purchase price, if any, of any Restricted
Stock awarded hereunder. The Board or the Committee shall have full authority
to decide whether to make a loan or loans hereunder and to determine the amount,
term and provisions of any such loan or loans, including the interest rate to be
charged in respect of any such loan or loans, whether the loan or loans are to
be with or without recourse against the borrower, the terms on which the loan is
to be repaid and the conditions, if any, under which the loan or loans may be
forgiven.
SECTION 12. AMENDMENTS AND TERMINATION.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the right of an
optionee or participant under a Stock Option, Stock Appreciation Right,
Restricted Stock, or Performance Award theretofore granted, without the
optionee's or participant's consent, or which without the approval of the
shareholders would (i) except as expressly provided in this Plan, increase the
total number of shares reserved for the purpose of the Plan or (ii) change the
catergory or class of employees eligible to receive Incentive Stock Options
under the Plan.
The Plan may at any time or from time to time be terminated, modified or
amended by the affirmative vote of not less than a majority of the votes
entitled to be cast thereon by the Company's stockholders. The Board or the
Committee may amend the terms of any award or option theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of
any holder without his consent. The Board or the Committee may also substitute
new Stock Options for previously granted Stock Options including options granted
under other plans applicable to the participant and previously granted Stock
Options having higher option prices.
SECTION 13. UNFUNDED STATUS OF PLAN.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant or optionee by the Company, nothing set forth herein shall give any
such participant or optionee any rights that are greater than those of a general
creditor of the Company. In its sole discretion, the Board or the Committee may
authorize the creation of trusts or other arrangements to meet the obligations
created under the Plan to deliver Stock or a payment in lieu of or with respect
to awards hereunder, provided, however, that the existence of such trusts or
other arrangements is consistent with the unfunded status of the Plan.
SECTION 14. CHANGE OF CONTROL.
The following acceleration and valuation provisions shall apply in the
event of a "Change of Control" or "Potential Change of Control," as defined in
this Section 14:
(a) In the event of a "Change of Control" as defined in paragraph (b) of
this Section 14, unless otherwise determined by the Board or the Committee in
writing at or after grant, but prior to the occurrence of such Change of
Control, or, if and to the extent so determined by the Board or the
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Committee in writing at or after grant (subject to any right of approval
expressly reserved by the Board or the Committee at the time of such
determination) in the event of a "Potential Change of Control," as defined in
paragraph (c) of this Section 14:
(i) any Stock Appreciation Rights and any Stock Options awarded
under the Plan which have been outstanding for at least six months, if not
previously exercisable and vested shall become fully exercisable and
vested;
(ii) with the exception of the six month restriction in Section
8(c)(i), the restrictions and deferral limitations applicable to any
Restricted Stock award under the Plan shall lapse and such shares and
awards shall be deemed fully vested; and
(iii) the value of all outstanding Stock Options, Stock Appreciation
Rights, Restricted Stock or Performance Awards shall, to the extent
determined by the Board or the Committee at or after grant, be cashed out
on the basis of the "Change of Control Price" (as defined in paragraph (d)
of this Section 14) as of the date the Change of Control occurs or
Potential Change of Control is determined to have occurred, or such other
date as the Board or the Committee may determine prior to the Change of
Control or Potential Change of Control.
(b) For purpose of paragraph (a) of this Section 14, a "Change of Control"
means the happening of any of the following:
(i) when any "person," as such term used in Section 13(d) and 14(d)
of the Exchange Act (other than Steven Bostic or any affiliate of Steven
Bostic, the Company or a Subsidiary or any Company employee benefit plan
(including its trustee)), is or becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly of securities
of the Company representing 20 percent or more of the combined voting power
of the Company's then outstanding securities;
(ii) when, during any period of two consecutive years during the
existence of the Plan, the individuals who, at the beginning of such
period, constitute the Board cease, for any reason other than death, to
constitute at least a majority thereof, unless each director who was not a
director at the beginning of such period was elected by, or on the
recommendation of, at least two-thirds of the directors at the beginning of
such period; or
(iii) the occurrence of a transaction requiring stockholder approval
for the acquisition of the Company by an entity other than the Company or a
Subsidiary through purchase of assets, or by merger, or otherwise.
(c) For purposes of paragraph (a) of this Section 14, a "Potential Change
of Control" means the happening of any of the following:
(i) the entering into an agreement by the Company, the consummation
of which would result in a Change of Control of the Company as defined in
paragraph (b) of this Section 14; or
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(ii) the acquisition of beneficial ownership, directly or indirectly,
by any entity, person or group (other than Steven Bostic or any affiliate
of Steven Bostic, the Company or a Subsidiary or any Company employee
benefit plan (including its trustee)) of securities of the Company
representing five percent or more of the combined voting power of the
Company's outstanding securities and the adoption by the Board of Directors
of a resolution to the effect that a Potential Change of Control of the
Company has occurred for purposes of this Plan.
(d) For purposes of this Section 14, "Change of Control Price" means the
highest price per share paid in any transaction reported on the Nasdaq Stock
Market or the New York Stock Exchange Composite Tape, whichever then applies to
the Stock, or paid or offered in any transaction related to a potential or
actual Change of Control of the Company at any time during the preceding 60 day
period as determined by the Board or the Committee, except that in the case of
Incentive Stock Options and Stock Appreciation Rights relating to Incentive
Stock Options, such price shall be based only on transactions reported for the
date on which the Board or the Committee decides to cash out such options.
SECTION 15. GENERAL PROVISIONS.
(a) All certificates for shares of Stock delivered under the Plan shall be
subject to such stock transfer orders and other restrictions as the Board or the
Committee may deem advisable under the rules, regulations, and other
requirements of the Commission, any stock exchange upon which the Stock is then
listed, and any applicable federal or state securities law, and the Board or the
Committee may cause a legend or legends to be placed on any such certificates to
make appropriate reference to such restrictions.
(b) Nothing set forth in this Plan shall prevent the Board from adopting
other or additional compensation arrangements, subject to stockholder approval
if such approval is required; and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption of the Plan shall
not confer upon any employee or director of the Company, any Subsidiary or any
Affiliate, any right to continued employment (or, in the case of a director,
continued retention as a director) with the Company, a Subsidiary or an
Affiliate, as the case may be, nor shall it interfere in any way with the right
of the Company, a Subsidiary or an Affiliate to terminate the employment of any
of its employees at any time.
(c) Each participant shall, no later than the date as of which the value
of an award first becomes includable in the gross income of the participant for
federal income tax purposes, pay to the Company, or make arrangements
satisfactory to the Board or the Committee regarding payment of, any federal,
state, or local taxes of any kind required by law to be withheld with respect to
the award. The obligations of the Company under the Plan shall be conditional on
such payment or arrangements and the Company (and, where applicable, its
Subsidiaries and Affiliates), shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind otherwise due to the
participant. A participant may irrevocably elect to have the withholding tax
obligations or, in the case of all awards hereunder except Stock Options which
have related Stock Appreciation Rights, if the Board or the Committee so
determines, any additional tax obligation with respect to any awards
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hereunder satisfied by (a) having the Company withhold shares of Stock otherwise
deliverable to the participant with respect to the award or (b) delivering to
the Company shares of unrestricted Stock.
(d) At the time of grant or purchase, the Board or the Committee may
provide in connection with any grant or purchase made under this Plan that the
shares of Stock received as a result of such grant or purchase shall be subject
to a right of first refusal, pursuant to which the participant shall be required
to offer the Company any shares that the participant wishes to sell, with the
price being the then Fair Market Value of the Stock, subject to provisions of
Section 15 hereof and to such other terms and conditions as the Board or the
Committee may specify at the time of grant.
(e) No member of the Board or the Committee, nor any officer or employee
of the Company acting on behalf of the Board or the Committee, shall be
personally liable for any action, determination, or interpretation taken or made
in good faith with respect to the Plan, and all members of the Board or the
Committee and each and any officer or employee of the Company acting on their
behalf shall, to the extent permitted by law, be fully indemnified and protected
by the Company in respect of any such action, determination or interpretation.
SECTION 16. EFFECTIVE DATE OF PLAN.
The Plan shall be effective on the date it is approved by a majority vote
of the Company's stockholders.
SECTION 17. TERM OF PLAN.
No Stock Option, Stock Appreciation Right, Restricted Stock or Performance
Award shall be granted pursuant to the Plan on or after the tenth anniversary of
the date of stockholder approval, but awards theretofore granted may extend
beyond that date.
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EXHIBIT 10.5
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CREDIT AGREEMENT
dated as of March 25, 1999
by and among
EDUTREK INTERNATIONAL, INC.,
as Borrower,
and
FIRST UNION NATIONAL BANK
as Lender
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TABLE OF CONTENTS
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ARTICLE 1 DEFINITION............................................................................................ 1
SECTION 1.1 Definitions................................................................................ 1
SECTION 1.2 General.................................................................................... 12
SECTION 1.3 Other Definitions and Provisions........................................................... 13
ARTICLE 2 REVOLVING CREDIT FACILITY............................................................................. 13
SECTION 2.1 Revolving Credit Loans..................................................................... 13
SECTION 2.2 Procedure for Advances of Loans............................................................ 13
SECTION 2.3 Repayment of Loans......................................................................... 14
SECTION 2.4 Note....................................................................................... 14
SECTION 2.5 Permanent Reduction of the Commitment..................................................... 14
SECTION 2.6 Use of Proceeds............................................................................ 14
ARTICLE 3 LETTER OF CREDIT FACILITY............................................................................. 15
SECTION 3.1 L/C Commitment............................................................................. 15
SECTION 3.2 Procedure for Issuance of Letters of Credit................................................ 15
SECTION 3.3 Commissions and Other Charges.............................................................. 15
SECTION 3.4 Reimbursement Obligation of the Borrower................................................... 16
SECTION 3.5 Obligations Absolute....................................................................... 16
SECTION 3.6 Effect of Application...................................................................... 17
ARTICLE 4 GENERAL LOAN PROVISIONS............................................................................... 17
SECTION 4.1 Interest................................................................................... 17
SECTION 4.2 Fees....................................................................................... 18
SECTION 4.3 Manner of Payment.......................................................................... 18
SECTION 4.4 Crediting of Payments and Proceeds......................................................... 18
SECTION 4.5 Changed Circumstances...................................................................... 19
SECTION 4.6 Capital Requirements....................................................................... 19
SECTION 4.7 Taxes...................................................................................... 20
ARTICLE 5 CLOSING; CONDITIONS OF CLOSING AND BORROWING.......................................................... 21
SECTION 5.1 Closing.................................................................................... 21
SECTION 5.2 Conditions to Closing and Initial Extensions of Credit..................................... 21
SECTION 5.3 Conditions to All Loans and Letters of Credit.............................................. 23
ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF THE BORROWER........................................................ 24
SECTION 6.1 Representations and Warranties............................................................. 24
SECTION 6.2 Survival of Representations and Warranties Etc............................................. 30
ARTICLE 7 FINANCIAL INFORMATION AND NOTICES..................................................................... 31
SECTION 7.1 Financial Statements and Projections........................................................31
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SECTION 7.2 Officer's Compliance Certificate........................................................... 32
SECTION 7.3 Accountants' Certificate................................................................... 32
SECTION 7.4 Other Reports.............................................................................. 32
SECTION 7.5 Notice of Litigation and Other Matters..................................................... 32
SECTION 7.6 Accuracy of Information.................................................................... 33
ARTICLE 8 AFFIRMATIVE COVENANTS................................................................................. 34
SECTION 8.1 Preservation of Corporate Existence and Related Matters.................................... 34
SECTION 8.2 Maintenance of Property.................................................................... 34
SECTION 8.3 Insurance.................................................................................. 34
SECTION 8.4 Accounting Methods and Financial Records................................................... 34
SECTION 8.5 Payment and Performance of Obligations..................................................... 34
SECTION 8.6 Compliance With Laws and Approvals......................................................... 35
SECTION 8.7 Environmental Laws......................................................................... 35
SECTION 8.8 Compliance with ERISA...................................................................... 35
SECTION 8.9 Compliance With Agreements................................................................. 35
SECTION 8.10 Conduct of Business....................................................................... 35
SECTION 8.11 Visits and Inspections.................................................................... 35
SECTION 8.12 Additional Guarantors..................................................................... 36
SECTION 8.13 Year 2000 Compliance...................................................................... 36
SECTION 8.14 Further Assurances........................................................................ 36
ARTICLE 9 FINANCIAL COVENANTS................................................................................... 36
SECTION 9.1. Net Worth................................................................................. 36
SECTION 9.2. Fixed Charge Coverage Ratio............................................................... 37
SECTION 9.3. Leverage Ratio............................................................................ 37
SECTION 9.4. Rent Expense Ratio........................................................................ 37
SECTION 9.5. Ratio of Actual to Budgeted Revenues...................................................... 37
--------
SECTION 9.6. Quarterly Rent Expense Ratio.............................................................. 37
ARTICLE 10 NEGATIVE COVENANTS................................................................................... 37
SECTION 10.1 Limitations on Debt....................................................................... 37
SECTION 10.2 Limitations on Liens...................................................................... 38
SECTION 10.3 Limitations on Loans. Advances. Investments and Acquisitions.............................. 39
SECTION 10.4 Limitations on Mergers and Liquidation.................................................... 39
SECTION 10.5 Limitations on Sale of Assets............................................................. 40
SECTION 10.6 Limitations on Dividends and Distributions................................................ 40
SECTION 10.7 Limitations on Exchange and Issuance of Capital Stock..................................... 40
SECTION 10.8 Transactions with Affiliates.............................................................. 41
SECTION 10.9 Certain Accounting Changes................................................................ 41
SECTION 10.10 Restrictive Agreements................................................................... 41
SECTION 10.11 Flight Enterprises....................................................................... 41
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ARTICLE 11 DEFAULT AND REMEDIES................................................................................ 41
SECTION 11.1 Events of Default........................................................................ 41
SECTION 11.2 Remedies................................................................................. 43
SECTION 11.3 Rights and Remedies Cumulative; Non-Waiver; etc.......................................... 44
ARTICLE 12 MISCELLANEOUS....................................................................................... 45
SECTION 12.1 Notices.................................................................................. 45
SECTION 12.2 Expenses; Indemnity...................................................................... 46
SECTION 12.3 Set-off.................................................................................. 46
SECTION 12.4 Governing Law............................................................................ 47
SECTION 12.5 Consent to Jurisdiction.................................................................. 47
SECTION 12.6 Binding Arbitration: Waiver of Jury Trial................................................ 47
SECTION 12.7 Reversal of Payments..................................................................... 48
SECTION 12.8 Injunctive Relief; Punitive Damages...................................................... 48
SECTION 12.9 Accounting Matters....................................................................... 49
SECTION 12.10 Successors and Assigns: Confidentiality................................................. 49
---------------
SECTION 12.11 Amendments, Waivers and Consents........................................................ 49
SECTION 12.12 Performance of Duties................................................................... 50
SECTION 12.13 All Powers Coupled with Interest........................................................ 50
SECTION 12.14 Survival of Indemnities................................................................. 50
SECTION 12.15 Titles and Captions..................................................................... 50
SECTION 12.16 Severability of Provisions.............................................................. 50
SECTION 12.17 Counterparts............................................................................ 50
SECTION 12.18 Term of Agreement....................................................................... 50
</TABLE>
EXHIBITS
Exhibit A - Form of Note
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Notice of Account Designation
Exhibit D - Form of Notice of Prepayment
Exhibit E - Form of Officer's Certificate
SCHEDULES
Schedule 6.1(a) - Jurisdictions of Organization and Qualification
Schedule 6.1(b) - Subsidiaries and Capitalization
Schedule 6.1(f) - Taxes
Schedule 6.1(g) - Intellectual Property
Schedule 6.1(i) - ERISA Plans
Schedule 6.1(l) - Material Contracts
Schedule 6.1(m) - Labor and Collective Bargaining Agreements
Schedule 6.1(u) - Debt and Contingent Obligations
Schedule 6.1(v) - Litigation
Schedule 9.5 - Budget
Schedule 10.2 - Existing Liens
Schedule 10.3 - Existing Loans, Advances and Investments
iii
<PAGE>
CREDIT AGREEMENT
CREDIT AGREEMENT, dated as of the 25/th/ day of March, 1999, by and among
EDUTREK INTERNATIONAL, INC., a corporation organized under the laws of Georgia
(the "Borrower") and FIRST UNION NATIONAL BANK, as the lender (the "Lender").
STATEMENT OF PURPOSE
--------------------
The Borrower has requested, and the Lender has agreed, to extend a
revolving credit facility to the Borrower on the terms and conditions of this
Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, such parties
hereby agree as follows:
ARTICLE 1.
DEFINITIONS
-----------
SECTION 1.1 Definitions. The following terms when used in this
-----------
Agreement shall have the meanings assigned to them below:
"Adjusted Funded Debt" means the sum of (a) principal amount of Funded Debt
--------------------
outstanding on such date plus (b) the product of (i) Scheduled Real Property
----
Rental Expense payable during the twelve (12) month period commencing with the
first day of the month in which calculation date falls multiplied by (ii) six
(6).
"Affiliate" means, with respect to any Person, any other Person (other than
---------
a Subsidiary) which directly or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, such first
Person or any of its Subsidiaries. The term "control" means (a) the power to
vote five percent (5%) or more of the securities or other equity interests of a
Person having ordinary voting power, or (b) the possession, directly or
indirectly, of any other power to direct or cause the direction of the
management and policies of a Person, whether through ownership of voting
securities, by contract or otherwise.
"Agreement" means this Credit Agreement, as amended or modified from time
---------
to time.
"Applicable Law" means all applicable provisions of constitutions,
--------------
statutes, laws, rules, treaties, regulations and orders of all Governmental
Authorities and all orders and decrees of all courts and arbitrators.
"Application" means an application, in the form specified by the Lender
-----------
from time to time, requesting the Lender to issue a Letter of Credit.
<PAGE>
"Available Commitment" means at any time, an amount equal to the excess, if
--------------------
any, of (a) the Commitment over (b) the sum of (i) the outstanding principal
amount of the Loans plus (ii) the outstanding principal or face amount of the
----
L/C Obligations.
"Base Rate" means, at any time, the higher of (a) the Prime Rate or (b) the
---------
Federal Funds Rate plus 1/2 of 1%; each change in the Base Rate shall take
----
effect simultaneously with the corresponding change or changes in the Prime Rate
or the Federal Funds Rate.
"Base Rate Loan" means any Loan bearing interest at a rate based upon the
--------------
Base Rate as provided in Section 4.1(a).
"Business Day" means (a) for all purposes other than as set forth in clause
------------
(b) below, any day other than a Saturday, Sunday or legal holiday on which banks
in Atlanta, Georgia and New York, New York, are open for the conduct of their
commercial banking business, and (b) with respect to all notices and
determinations in connection with, and payments of principal and interest on,
any LIBOR Rate Loan, any day that is a Business Day described in clause (a) and
that is also a day for trading by and between banks in Dollar deposits in the
London interbank market.
"Capital Asset" means, with respect to the Borrower and its Subsidiaries,
-------------
any asset that should, in accordance with GAAP, be classified and accounted for
as a capital asset on a consolidated balance sheet of the Borrower and its
Subsidiaries.
"Capital Lease" means, with respect to the Borrower and its Subsidiaries,
-------------
any lease of any property that should, in accordance with GAAP, be classified
and accounted for as a capital lease on a consolidated balance sheet of the
Borrower and its Subsidiaries.
"Capital Stock" means (a) in the case of a corporation, corporate stock;
-------------
(b) in the case of an association or business entity, any and all shares,
interest, participations, rights or other equivalents (however designated) of
equity interests; (c) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); (d) any other
interest or participation that confers on a Person the right to receive a share
of the profits and losses of, or distributions of assets of, the issuing Person;
and (e) any securities convertible into or exchangeable for any of the foregoing
or any warrants, rights or options to acquire any of the foregoing.
"Closing Date" means the date of this Agreement or such later Business Day
------------
upon which each condition described in Article 5 shall be satisfied or waived in
all respects in a manner acceptable to the Lender, in its sole discretion.
"Code" means the Internal Revenue Code of 1986, and the rules and
----
regulations thereunder, each as amended or supplemented from time to time.
2
<PAGE>
"Commitment" means the obligation of the Lender to make Loans to, or to
----------
issue Letters of Credit for the account of, the Borrower hereunder in an
aggregate principal at any time outstanding not to exceed $10,000,000, as the
same may be reduced or modified at any time or from time to time pursuant to the
terms hereof.
"Contingent Obligation" means, with respect to the Borrower and its
---------------------
Subsidiaries, without duplication, any obligation, contingent or otherwise, of
any such Person pursuant to which such Person has directly or indirectly
guaranteed any Debt or other obligation of any other Person and, without
limiting the generality of the foregoing, any obligation, direct or indirect,
contingent or otherwise, of any such Person (a) to purchase or pay (or advance
or supply funds for the purchase or payment of) such Debt or other obligation
(whether arising by virtue of partnership arrangements, by agreement to keep
well, to purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement condition or otherwise) or (b) entered into for the
purpose of assuring in any other manner the obligee of such Debt or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided, that the term Contingent
--------
Obligation shall not include endorsements for collection or deposit in the
ordinary course of business.
"Credit Facility" means the revolving credit facility established pursuant
---------------
to Article 2 hereof and the and the letter of credit facility established
pursuant to Article 3 hereof.
"Debt" means, with respect to the Borrower and its Subsidiaries at any date
----
and without duplication, the sum of the following calculated in accordance with
GAAP: (a) all liabilities, obligations and indebtedness for borrowed money
including but not limited to obligations evidenced by bonds, debentures, notes
or other similar instruments of any such Person, (b) all obligations to pay the
deferred purchase price of property or services of any such Person, except trade
payables or operating leases arising in the ordinary course of business , (c)
all obligations of any such Person as lessee under Capital Leases, (d) all Debt
of any other Person secured by a Lien on any asset of any such Person, (e) all
Contingent Obligations of any such Person, (f) all obligations, contingent or
otherwise, of any such Person relative to the face amount of letters of credit,
whether or not drawn, and banker's acceptances issued for the account of any
such Person and (g) all obligations incurred by any such Person pursuant to
Hedging Agreements.
"Default" means any of the events specified in Section 11.1 which with the
-------
passage of time, the giving of notice or any other condition, would constitute
an Event of Default.
"Dollars" or "$" means, unless otherwise qualified, dollars in lawful
--------------
currency of the United States.
"EBITDA" means, with respect to Borrower and its consolidated Subsidiaries,
------
for any period of calculation and without duplication, the sum of (i) Net Income
of Borrower and its consolidated Subsidiaries for such period, plus (ii)
----
Interest Expense paid or accrued during such period, plus (iii) depreciation and
----
amortization expense deducted during such period in calculating Net Income of
Borrower and its consolidated Subsidiaries, plus (iv) the income taxes
----
3
<PAGE>
paid or payable in cash by Borrower and its consolidated Subsidiaries in respect
of such period, calculated in each case on a consolidated basis for Borrower and
its Subsidiaries in accordance with GAAP.
"EBITDAR" means, with respect to Borrower and its consolidated
-------
Subsidiaries, for any period of calculation, the sum of EBITDA of Borrower and
its consolidated Subsidiaries plus all Total Real Property Rental Expense paid
----
or accrued during such period, calculated in each case on a consolidated basis
for Borrower and its Subsidiaries in accordance with GAAP.
"Employee Benefit Plan" means any employee benefit plan within the meaning
---------------------
of Section 3(3) of ERISA which (a) is maintained for employees of the Borrower
or any ERISA Affiliate or (b) has at any time within the preceding six years
been maintained for the employees of the Borrower or any current or former ERISA
Affiliate.
"Environmental Laws" means any and all federal, state and local laws,
------------------
statutes, ordinances, rules, regulations, permits, licenses, approvals,
interpretations and orders of courts or Governmental Authorities, relating to
the protection of human health or the environment, including, but not limited
to, requirements pertaining to the manufacture, processing, distribution, use,
treatment, storage, disposal, transportation, handling, reporting, licensing,
permitting, investigation or remediation of Hazardous Materials.
"ERISA" means the Employee Retirement Income Security Act of 1974, and the
-----
rules and regulations thereunder, each as amended or modified from time to time.
"ERISA Affiliate" means any Person who together with the Borrower is
---------------
treated as a single employer within the meaning of Section 414(b), (c), (m) or
(o) of the Code or Section 4001(b) of ERISA.
"Event of Default" means any of the events specified in Section 11.1,
----------------
provided that any requirement for passage of time, giving of notice, or any
other condition, has been satisfied.
"FDIC" means the Federal Deposit Insurance Corporation, or any successor
----
thereto.
"Federal Funds Rate" means, the rate per annum (rounded upwards, if
------------------
necessary, to the next higher 1/100th of 1%) representing the daily effective
federal funds rate as quoted by the Lender and confirmed in Federal Reserve
Board Statistical Release H.15 (519) or any successor or substitute publication
selected by the Lender. If, for any reason, such rate is not available, then
"Federal Funds Rate" shall mean a daily rate which is determined, in the opinion
of the Lender, to be the rate at which federal funds are being offered for sale
in the national federal funds market at 9:00 a.m. (Atlanta time). Rates for
weekends or holidays shall be the same as the rate for the most immediate
preceding Business Day.
"Fiscal Year" means the fiscal year of the Borrower and its Subsidiaries
-----------
ending on December 31 of each year.
4
<PAGE>
"Fixed Charges" means, with respect to Borrower and its consolidated
-------------
Subsidiaries, as of any calculation date and without duplication, the sum of (a)
consolidated Interest Expense of Borrower and its consolidated Subsidiaries paid
or payable during the twelve (12) month period ending on or most recently ended
prior to such date plus (b) consolidated Scheduled Real Property Rental Expense
----
payable during the twelve (12) month period commencing with the first day of the
month in which calculation date falls plus (c) principal payments on Funded Debt
----
of Borrower or of its Subsidiaries scheduled to be made during the twelve (12)
month period commencing with the first day of the month in which calculation
date falls, plus (d) an amount equal to twenty percent (20%) of the outstanding
----
balance of the Loans, in each case calculated on a consolidated basis for
Borrower and its Subsidiaries in accordance with GAAP.
"Fixed Charge Coverage Ratio" means, at any date of determination thereof,
---------------------------
the ratio of (a) an amount equal to (i) consolidated EBITDAR of Borrower and its
consolidated Subsidiaries for the twelve (12) month period ending on or most
recently ended prior to such date, less (ii) dividend and other distributions
----
made to shareholders made during the twelve (12) month period ending on or most
recently ended prior to such date, less (iii) the income tax expense of Borrower
----
and its consolidated Subsidiaries for the twelve (12) month period ending on or
most recently ended prior to such date less (iv) all cost and expense to
----
repurchase, redeem or otherwise acquire or retire Capital Stock of Borrower
incurred by Borrower or any of its consolidated Subsidiaries during the twelve
(12) month period ending on or most recently ended prior to such date
(including, but not limited to, any such repurchases, redemptions or
acquisitions made pursuant to Section 10.6(c)hereof) to (b) Fixed Charges as of
such date.
"Flight Enterprises" means Flight Enterprises, LLC, a North Carolina
------------------
limited liability company and Subsidiary of Borrower.
"Funded Debt" shall mean, for any Person, collectively, (a) the aggregate
-----------
principal amount of Debt for borrowed money which would, in accordance with
GAAP, be classified as long-term debt, together with the current maturities
thereof; (b) all Debt outstanding under any revolving credit, line of credit or
similar agreement providing for borrowings (and any extensions or renewals
thereof), notwithstanding that any such Debt is created within one year of the
expiration of such agreement; (c) all obligations of such Person as lessee under
Capital Leases; (d) all debt, obligations or other liabilities of such Person
with respect to letters of credit issued for such Person's account; (e) Debt
that is such by virtue of clause (e) of the definition thereof, but only to the
extent that the obligations Guaranteed are obligations that would constitute
Debt for Money Borrowed; and (f) Debt that is such by virtue of clause (g) of
the definition thereof, and (g) any other Debt bearing interest or carrying a
similar payment requirement (including any Debt issued at a discount to its face
amount), calculated in all cases for such Person and its Subsidiaries on a
consolidated basis in accordance with GAAP.
"GAAP" means generally accepted accounting principles, as recognized by the
----
American Institute of Certified Public Accountants and the Financial Accounting
Standards Board, consistently applied and maintained on a consistent basis for
the Borrower and its Subsidiaries
5
<PAGE>
throughout the period indicated and consistent with the prior financial practice
of the Borrower and its Subsidiaries.
"Governmental Approvals" means all authorizations, consents, approvals,
----------------------
licenses and exemptions of, registrations and filings with, and reports to, all
Governmental Authorities.
"Governmental Authority" means any nation, province, state or political
----------------------
subdivision thereof, and any government or any Person exercising executive,
legislative, regulatory or administrative functions of or pertaining to
government, and any corporation or other entity owned or controlled, through
stock or capital ownership or otherwise, by any of the foregoing.
"Guarantors" means each of Borrower's Subsidiaries which is organized or
----------
formed under the laws of the United States or of any political subdivision
thereof or any territory thereof.
"Guaranty" means that certain Guaranty executed and delivered by each of
--------
the Guarantors in favor of Lender guaranteeing the payment and performance of
the Obligations.
"Hazardous Materials" means any substances or materials (a) which are or
-------------------
become defined as hazardous wastes, hazardous substances, pollutants,
contaminants, chemical substances or mixtures or toxic substances under any
Environmental Law, (b) which are toxic, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic, mutagenic or otherwise harmful to human
health or the environment and are or become regulated by any Governmental
Authority, (c) the presence of which require investigation or remediation under
any Environmental Law or common law, (d) the discharge or emission or release of
which requires a permit or license under any Environmental Law or other
Governmental Approval, (e) which are deemed to constitute a nuisance, a trespass
or pose a health or safety hazard to persons or neighboring properties, (f)
which are materials consisting of underground or aboveground storage tanks,
whether empty, filled or partially filled with any substance, or (g) which
contain, without limitation, asbestos, polychlorinated biphenyls, urea
formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived
substances or waste, crude oil, nuclear fuel, natural gas or synthetic gas.
"Hedging Agreement" means any agreement with respect to an interest rate
-----------------
swap, collar, cap, floor or a forward rate agreement or other agreement
regarding the hedging of interest rate risk exposure executed in connection with
hedging the interest rate exposure of the Borrower under this Agreement, and any
confirming letter executed pursuant to such hedging agreement, all as amended,
restated or otherwise modified.
"Interest Expense" means, for any period and without duplication, the
----------------
aggregate of all interest expense deducted in computing Net Income of Borrower
and its consolidated Subsidiaries for such period.
"L/C Commitment" means Four Million Dollars ($4,000,000).
--------------
6
<PAGE>
"L/C Obligations" means at any time, an amount equal to the sum of (a) the
---------------
aggregate undrawn and unexpired amount of the then outstanding Letters of Credit
and (b) the aggregate amount of drawings under Letters of Credit which have not
then been reimbursed pursuant to Section 3.4.
"Lender" means First Union National Bank, a national banking association,
------
and its successors and assigns.
"Lender's Office" means the office of the Lender specified in or determined
---------------
in accordance with the provisions of Section 12.1.
"Letters of Credit" shall have the meaning assigned thereto in Section
-----------------
3.1(a).
"Leverage Ratio" means, for Borrower and its consolidated Subsidiaries at
--------------
any date of determination thereof, the ratio of (a) Adjusted Funded Debt of
Borrower and its consolidated Subsidiaries as of such date of determination, to
(b) EBITDAR of Borrower and its consolidated Subsidiaries for the twelve (12)
month period ending on or most recently ended prior to such date, determined in
each case on a consolidated basis for Borrower and its Subsidiaries in
accordance with GAAP.
"LIBOR Market Index Rate" means, for any day, the rate for 1-month U.S.
-----------------------
dollar deposits as reported on Telerate page 3750 of the Telerate Service as of
11:00 a.m., London time, on such day, or if such day is not a Business Day, then
the immediately preceding Business Day (or if not so reported, then as
determined by Lender from another recognized source or interbank quotation).
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
----
charge, security interest or encumbrance of any kind in respect of such asset.
For the purposes of this Agreement, a Person shall be deemed to own subject to a
Lien any asset which it has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, Capital Lease or other
title retention agreement relating to such asset.
"Loan" means any revolving loan made to the Borrower pursuant to Section
----
2.1, and all such Loans collectively as the context requires.
"Loan Documents" means, collectively, this Agreement, the Note, any Hedging
--------------
Agreement executed by Lender or any of its Affiliates, the Applications, the
Security Documents and each other document, instrument and agreement executed
and delivered by the Borrower, its Subsidiaries or their counsel in connection
with this Agreement or otherwise referred to herein or contemplated hereby, all
as may be amended, restated or otherwise modified.
"Material Adverse Effect" means, with respect to the Borrower or any of its
-----------------------
Subsidiaries, a material adverse effect on the properties, business, prospects,
operations or condition (financial or otherwise) of any such Person or the
ability of any such Person to perform its obligations under the Loan Documents
or Material Contracts, in each case to which it is a party.
7
<PAGE>
"Material Contract" means (a) any contract or other agreement, written or
-----------------
oral, of the Borrower or any of its Subsidiaries involving monetary liability of
or to any such Person in an amount in excess of $1,000,000 per annum, or (b) any
other contract or agreement, written or oral, of the Borrower or any of its
Subsidiaries the failure to comply with which could reasonably be expected to
have a Material Adverse Effect.
"Multiemployer Plan" means a "multiemployer plan" as defined in Section
------------------
4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is making, or
is accruing an obligation to make, contributions within the preceding six years.
"Net Income" means, for Borrower and its consolidated Subsidiaries, the net
----------
income (or loss) of Borrower and its Subsidiaries for the period in question
after giving effect to deduction of or provision for all operating expenses, all
taxes and reserves and all other proper deductions, in each case calculated on a
consolidated basis for Borrower and its Subsidiaries in accordance with GAAP,
provided that there shall be excluded:
(a) the net income (or net loss) of any Person accrued prior to the
date it becomes a Subsidiary of, or is merged into or consolidated with,
the Borrower or any Subsidiary of the Borrower;
(b) the net income (or net loss) of any Person not a Subsidiary of
Borrower in which the Borrower or any of its Subsidiaries has an ownership
interest, except to the extent that any such net income has actually been
received by Borrower or such Subsidiary in the form of cash dividends or
similar distributions;
(c) any restoration of any contingency reserve, except to the extent
that provision for such reserve was made out of income during such period;
(d) any net gains or losses on the sale or other disposition, not in
the ordinary course of business, of any Capital Assets, provided that there
shall also be excluded any related charges for taxes thereon;
(e) any net gain arising from the collection of the proceeds of any
insurance policy;
(f) any write-up of any asset or non-recurring write-down of any
asset; and
(g) any other extraordinary item.
"Net Worth" shall mean total stockholders' equity for the Borrower and its
---------
Subsidiaries, calculated on a consolidated basis for Borrower and its
Subsidiaries in accordance with GAAP.
8
<PAGE>
"Note" means the Revolving Credit Note made by the Borrower payable to the
----
order of the Lender, substantially in the form of Exhibit A hereto, evidencing
---------
the Revolving Credit Facility, and any amendments and modifications thereto, any
substitutes therefor, and any replacements, restatements, renewals or extension
thereof, in whole or in part.
"Notice of Account Designation" shall have the meaning assigned thereto in
-----------------------------
Section 2.2(b).
"Notice of Borrowing" shall have the meaning assigned thereto in Section
-------------------
2.2(a).
"Notice of Prepayment" shall have the meaning assigned thereto in Section
--------------------
2.3(b).
"Obligations" means, in each case, whether now in existence or hereafter
-----------
arising: (a) the principal of and interest on (including interest accruing
after the filing of any bankruptcy or similar petition) the Loans, (b) the L/C
Obligations, (c) all payment and other obligations owing by the Borrower to the
Lender or any Affiliate of the Lender under any Hedging Agreement and (d) all
other fees and commissions (including attorney's fees), charges, indebtedness,
loans, liabilities, financial accommodations, obligations, covenants and duties
owing by the Borrower to the Lender, of every kind, nature and description,
direct or indirect, absolute or contingent, due or to become due, contractual or
tortious, liquidated or unliquidated, and whether or not evidenced by any note,
and whether or not for the payment of money under or in respect of this
Agreement, the Note, any Letter of Credit or any of the other Loan Documents.
"Officer's Compliance Certificate" shall have the meaning assigned thereto
--------------------------------
in Section 7.2.
"Other Taxes" shall have the meaning assigned thereto in Section 4.7(b).
-----------
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
----
agency.
"Pension Plan" means any Employee Benefit Plan, other than a Multiemployer
------------
Plan, which is subject to the provisions of Title IV of ERISA or Section 412 of
the Code and which (a) is maintained for employees of the Borrower or any ERISA
Affiliates or (b) has at any time within the preceding six years been maintained
for the employees of the Borrower or any of their current or former ERISA
Affiliates.
"Person" means an individual, corporation, partnership, association, trust,
------
business trust, joint venture, joint stock company, pool, syndicate, sole
proprietorship, limited liability company, unincorporated organization,
Governmental Authority or any other form of entity or group thereof.
"Pledge Agreement" means that certain Stock Pledge Agreement executed and
----------------
delivered by Borrower and certain of the Guarantors in favor of Lender as
security for the Obligations and granting to Lender a first priority Lien on
100% of the shares of Capital Stock of each domestic
9
<PAGE>
Subsidiary of Borrower and in 66% of the shares of Capital Stock of each foreign
Subsidiary of Borrower.
"Prime Rate" means, at any time, the rate of interest per annum publicly
----------
announced from time to time by First Union, as its prime rate. Each change in
the Prime Rate shall be effective as of the opening of business on the day such
change in the Prime Rate occurs. The parties hereto acknowledge that the rate
announced publicly by First Union as its Prime Rate is an index or base rate and
shall not necessarily be its lowest or best rate charged to its customers or
other banks.
"Projections" shall have the meaning given such term is Section 6.1(p)
-----------
hereof.
"Reimbursement Obligation" means the obligation of the Borrower to
------------------------
reimburse the Lender pursuant to Section 3.4 for amounts drawn under Letters of
Credit.
"Revenues" shall mean, for any period, the net revenues of Borrower and its
--------
Subsidiaries for such period, prior to the deduction of costs and expenses for
such period, calculated for Borrower and its Subsidiaries on a consolidated
basis in accordance with GAAP.
"Scheduled Real Property Rental Expense" means, with respect to Borrower
--------------------------------------
and its consolidated Subsidiaries, as of any calculation date therefor and for
any period of calculation, all amounts, whether or not denominated as "rent,"
scheduled to be payable by Borrower or any of its consolidated Subsidiaries
during such period to the lessor under a lease for offices, classrooms, real
property or other premises, including, without limitation, base rent, percentage
rent and operating cost escalation.
"Security Agreement" means that certain Security Agreement executed and
------------------
delivered by Borrower and each Guarantor in favor of Lender as security for the
Obligations and granting to Lender a first priority Lien on substantially all of
the assets of the Borrower and the Guarantors.
"Security Documents" means the collective reference to the Guaranty, the
------------------
Security Agreement, the Pledge Agreement, and each other agreement or writing
pursuant to which the Borrower or any Subsidiary thereof pledges or grants a
security interest in any property or assets securing the Obligations or any such
Person guaranties the payment and/or performance of the Obligations.
"Solvent" means, as to the Borrower and its Subsidiaries on a particular
-------
date, that any such Person (a) has capital sufficient to carry on its business
and transactions and all business and transactions in which it is about to
engage and is able to pay its debts as they mature, (b) owns property having a
value, both at fair valuation and at present fair saleable value, greater than
the amount required to pay its probable liabilities (including contingencies),
and (c) does not believe that it will incur debts or liabilities beyond its
ability to pay such debts or liabilities as they mature.
10
<PAGE>
"Subsidiary" means as to any Person, any corporation, partnership or other
----------
entity of which more than fifty percent (50%) of the outstanding Capital Stock
having ordinary voting power to elect a majority of the board of directors or
other managers of such corporation, partnership or other entity is at the time,
directly or indirectly, owned by or the management is otherwise controlled by
such Person (irrespective of whether, at the time, Capital Stock of any other
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency); provided, however, that Middle East
-------- -------
Colleges, Ltd. shall be deemed a Subsidiary for purposes of this Agreement.
Unless otherwise qualified references to "Subsidiary" or "Subsidiaries" herein
shall refer to those of the Borrower.
"Taxes" shall have the meaning assigned thereto in Section 4.7(a).
-----
"Termination Date" means the earliest of (a) April 30, 2001, (b) the date
----------------
of termination by the Borrower pursuant to Section 2.5(a), and (c) the date of
termination by the Lender pursuant to Section 11.2(a).
"Termination Event" means: (a) a "Reportable Event" described in Section
-----------------
4043 of ERISA, or (b) the withdrawal of the Borrower or any ERISA Affiliate from
a Pension Plan during a plan year in which it was a "substantial employer" as
defined in Section 4001(a)(2) of ERISA, or (c) the termination of a Pension
Plan, the filing of a notice of intent to terminate a Pension Plan or the
treatment of a Pension Plan amendment as a termination under Section 4041 of
ERISA, or (d) the institution of proceedings to terminate, or the appointment of
a trustee with respect to, any Pension Plan by the PBGC, or (e) any other event
or condition which would constitute grounds under Section 4042(a) of ERISA for
the termination of, or the appointment of a trustee to administer, any Pension
Plan, or (f) the partial or complete withdrawal of the Borrower or any ERISA
Affiliate from a Multiemployer Plan, or (g) the imposition of a Lien pursuant to
Section 412 of the Code or Section 302 of ERISA, or (h) any event or condition
which results in the reorganization or insolvency of a Multiemployer Plan under
Sections 4241 or 4245 of ERISA, or (i) any event or condition which results in
the termination of a Multiemployer Plan under Section 4041A of ERISA or the
institution by PBGC of proceedings to terminate a Multiemployer Plan under
Section 4042 of ERISA.
"Total Real Property Rental Expense" means, with respect to Borrower and
----------------------------------
its Consolidated Subsidiaries, for any period of calculation, all amounts,
whether or not denominated as "rent," payable by Borrower or any of its
consolidated Subsidiaries to the lessor under a lease for offices, classrooms,
real property or other premises, including, without limitation, base rent,
percentage rent and operating cost escalation, during such period.
"Uniform Customs" the Uniform Customs and Practice for Documentary Credits
---------------
(1994 Revision), International Chamber of Commerce Publication No. 500.
"UCC" means the Uniform Commercial Code as in effect in the State of
---
Georgia.
"United States" means the United States of America.
-------------
11
<PAGE>
"Wholly-Owned" means, with respect to a Subsidiary, a Subsidiary all of the
------------
shares of Capital Stock of which are, directly or indirectly, owned or
controlled by the Borrower and/or one or more of its Wholly-Owned Subsidiaries.
"Year 2000 Compliant" shall mean, as to any computer software or other
-------------------
processing device, that such software or devices:
(a) are able, without delay, error, invalid or incorrect results,
premature endings or interruption, to consistently and correctly recognize,
handle, accept, sort, manipulate, calculate, display, store, retrieve, access,
compare and process date, year and time data and information before, between,
during and after January 1, 1999, September 9, 1999, December 31, 1999, January
1, 2000, February 29, 2000, March 1, 2000 and any other date after December 31,
1999 (all of the foregoing being collectively defined as the "Relevant Dates"),
including, but not limited to, accepting any date, year or time data, and
performing calculations or other operations or functions on dates, years or
times or portions of dates, years or times and without delay, error, invalid or
incorrect results, premature endings or interruption;
(b) before, between, during and after any of the Relevant Dates,
function accurately in accordance with any applicable documentation or other
materials and without delay, interruption, premature endings, error, incorrect
or invalid results or changes in operations associated with the occurrence of
any of the Relevant Dates or the advent of any new century, year, leap year or
any other date, year or time related matter;
(c) consistently and accurately responds to, stores and provides
output of two-digit year data or six-digit date data, and properly resolves any
ambiguity as to century or year in a disclosed, defined and predetermined
manner;
(d) will not be adversely affected in any manner by the advent of the
year 2000 A.D. or the passing or transition of any year, century or other
Relevant Date; and,
(e) consistently, correctly, accurately, unambiguously and without
delay, error, invalid or incorrect results, premature endings or interruption,
receives, provides, processes and interfaces date, year and time data between
software, applications, hardware, firmware, equipment, embedded chips or other
applicable items, in a disclosed, defined and predetermined manner.
SECTION 1.2 General. Unless otherwise specified, a reference in this
-------
Agreement to a particular section, subsection, Schedule or Exhibit is a
reference to that section, subsection, Schedule or Exhibit of this Agreement.
Wherever from the context it appears appropriate, each term stated in either the
singular or plural shall include the singular and plural, and pronouns stated in
the masculine, feminine or neuter gender shall include the masculine, the
feminine and the neuter. Any reference herein to "Atlanta time" shall refer to
the applicable time of day in Atlanta, Georgia.
12
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SECTION 1.3 Other Definitions and Provisions.
--------------------------------
(f) Use of Capitalized Terms. Unless otherwise defined therein, all
------------------------
capitalized terms defined in this Agreement shall have the defined meanings when
used in this Agreement, the Note and the other Loan Documents or any
certificate, report or other document made or delivered pursuant to this
Agreement.
(g) Miscellaneous. The words "hereof", "herein" and "hereunder" and words
-------------
of similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement.
ARTICLE 2.
REVOLVING CREDIT FACILITY
-------------------------
SECTION 2.1 Revolving Credit Loans. Subject to the terms and conditions
----------------------
of this Agreement, Lender agrees to make Loans to the Borrower from time to time
from the Closing Date through the Termination Date as requested by the Borrower
in accordance with the terms of Section 2.2 provided, that the aggregate
--------
principal amount of all outstanding Loans (after giving effect to any amount
requested), when aggregated with the outstanding principal amount of the L/C
Obligations, shall not exceed the Commitment. Subject to the terms and
conditions hereof, the Borrower may borrow, repay and reborrow Loans hereunder
until the Termination Date.
SECTION 2.2 Procedure for Advances of Loans.
-------------------------------
(a) Requests for Borrowing. The Borrower shall give the Lender irrevocable
----------------------
prior written notice in the form attached hereto as Exhibit B (a "Notice of
---------
Borrowing") not later than 11:00 a.m. (Atlanta time) on the same Business Day as
each Loan, of its intention to borrow, specifying (i) the date of such
borrowing, which shall be a Business Day, (ii) the amount of such borrowing,
which shall be in an aggregate principal amount of at least $100,000 or a whole
multiple of $10,000 in excess thereof. Notices received after 11:00 a.m.
(Atlanta time) shall be deemed received on the next Business Day.
(b) Disbursement of Loans. Not later than 2:00 p.m. (Atlanta time) on the
---------------------
proposed borrowing date, Lender will make available to the Borrower the proceeds
of the Loan. The Borrower hereby irrevocably authorizes the Lender to disburse
the proceeds of each borrowing requested pursuant to this Section 2.2 in
immediately available funds by crediting or wiring such proceeds to the deposit
account of the Borrower identified in the most recent Notice of Account
Designation substantially in the form of Exhibit C hereto (a "Notice of Account
---------
Designation") delivered by the Borrower to the Lender or may be otherwise agreed
upon by the Borrower and the Lender from time to time.
13
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SECTION 2.3 Repayment of Loans.
------------------
(a) Repayment on Termination Date. The Borrower shall repay the
-----------------------------
outstanding principal amount of all Loans in full, together with all accrued but
unpaid interest thereon, on the Termination Date.
(b) Optional Repayments. The Borrower may at any time and from time to
-------------------
time repay the Loans, in whole or in part, upon delivery of notice, in the form
attached hereto as Exhibit D (a "Notice of Prepayment") specifying the date and
---------
amount of repayment. If any such notice is given, the amount specified in such
notice shall be due and payable on the date set forth in such notice. Partial
repayments shall be in an aggregate amount of at least $100,000 or a whole
multiple of $10,000 in excess thereof.
SECTION 2.4 Note. The Loans and the obligation of the Borrower to repay
----
the Loans shall be evidenced by a Note executed by the Borrower payable to the
order of the Lender representing the Borrower's obligation to pay the Commitment
or, if less, the aggregate unpaid principal amount of all Loans made and to be
made to the Borrower hereunder, plus interest and all other fees, charges and
----
other amounts due thereon. The Note shall be dated the date hereof and shall
bear interest on the unpaid principal amount thereof at the applicable interest
rate per annum specified in Section 4.1.
SECTION 2.5 Permanent Reduction of the Commitment.
-------------------------------------
(a) The Borrower shall have the right at any time and from time to time,
upon at least five (5) Business Days prior written notice to the Lender, to
permanently reduce, in whole at any tune or in part from time to time, without
premium or penalty, the Commitment in an aggregate principal amount not less
than $100,000 or any whole multiple of $10,000 in excess thereof.
(b) Each permanent reduction permitted or required pursuant to this
Section 2.5 shall be accompanied by a payment of principal sufficient to reduce
the sum of the aggregate outstanding Loans plus the outstanding L/C Obligations
after such reduction to the Commitment as so reduced. Any reduction of the
Commitment to zero shall be accompanied by payment of all outstanding
Obligations (and furnishing of cash collateral satisfactory to the Lender for
all L/C Obligations).
SECTION 2.6 Use of Proceeds. The Borrower shall use the proceeds of the
---------------
Loans (a) to finance the acquisition of Capital Assets, (b) repayment of the
existing Debt of Borrower owed to NationsBank, N.A., and (c) for working capital
and general corporate requirements of the Borrower and its Subsidiaries,
including the payment of certain fees and expenses incurred in connection with
the transactions.
14
<PAGE>
ARTICLE 3.
LETTER OF CREDIT FACILITY
-------------------------
SECTION 3.1 L/C Commitment. Subject to the terms and conditions
--------------
hereof, the Lender agrees to issue standby letters of credit ("Letters of
Credit") for the account of the Borrower on any Business Day from the Closing
Date through but not including the Termination Date in such form as may be
approved from time to time by the Lender; provided, that the Lender shall have
--------
no obligation to issue any Letter of Credit if, after giving effect to such
issuance, (a) the L/C Obligations would exceed the L/C Commitment or (b) the
Available Commitment would be less than zero. Each Letter of Credit shall (i)
be denominated in Dollars in a minimum amount of $10,000, (ii) be a standby
letter of credit issued to support obligations of the Borrower or any of its
Subsidiaries, contingent or otherwise, incurred in the ordinary course of
business, (iii) expire on a date satisfactory to the Lender, which date shall be
no later than the Termination Date and (iv) be subject to the Uniform Customs
and, to the extent not inconsistent therewith, the laws of the State of Georgia.
The Lender shall not at any time be obligated to issue any Letter of Credit
hereunder if such issuance would conflict with, or cause the Lender to exceed
any limits imposed by, any Applicable Law. References herein to "issue" and
derivations thereof with respect to Letters of Credit shall also include
extensions or modifications of any existing Letters of Credit, unless the
context otherwise requires.
SECTION 3.2 Procedure for Issuance of Letters of Credit. The Borrower
-------------------------------------------
may from time to time request that the Lender issue a Letter of Credit by
delivering to the Lender at the Lender's Office an Application therefor,
completed to the satisfaction of the Lender, and such other certificates,
documents and other papers and information as the Lender may request. Upon
receipt of any Application, the Lender shall process such Application and the
certificates, documents and other papers and information delivered to it in
connection therewith in accordance with its customary procedures and shall,
subject to Section 3.1 and Article 5 hereof, promptly issue the Letter of Credit
requested thereby (but in no event shall the Lender be required to issue any
Letter of Credit earlier than three Business Days after its receipt of the
Application therefor and all such other certificates, documents and other papers
and information relating thereto) by issuing the original of such Letter of
Credit to the beneficiary thereof or as otherwise may be agreed by the Lender
and the Borrower. The Lender shall furnish to the Borrower a copy such Letter of
Credit promptly following the issuance of such Letter of Credit.
SECTION 3.3 Commissions and Other Charges.
-----------------------------
(a) The Borrower shall pay to the Lender a letter of credit commission
with respect to each Letter of Credit in an amount equal to two and three-
fourths percent (2.75%) per annum on the face amount of such Letter of Credit.
Such commission shall be payable quarterly in arrears on the last Business Day
of each fiscal quarter of the Borrower and on the Termination Date.
(b) In addition to the foregoing commission, the Borrower shall pay the
Lender any and all processing, administrative and similar fees charged generally
by the Lender in connection with the issuance of Letters of Credit.
15
<PAGE>
SECTION 3.4 Reimbursement Obligation of the Borrower. The Borrower
----------------------------------------
agrees to reimburse the Lender within 24 hours each date on which the Lender
notifies the Borrower of the date and amount of a draft paid under any Letter of
Credit for the amount of (a) such draft so paid and (b) any taxes, fees, charges
or other costs or expenses incurred by the Lender in connection with such
payment. Each such payment shall be made to the Lender at its address for
notices specified herein in lawful money of the United States and in immediately
available funds. Interest shall be payable on any and all amounts remaining
unpaid by the Borrower under this Article 3 from the date such amounts accrue or
are drawn at the rate payable on the Loans pursuant to Section 4.1 hereof and on
all such amounts which are not paid when due (whether at stated maturity, by
acceleration or otherwise) at the rate which would be payable on any outstanding
Loans which were then overdue. If the Borrower fails to timely reimburse the
Lender on the date the Borrower receives the notice referred to in this Section
3.4, the Borrower shall be deemed to have timely given a Notice of Borrowing
hereunder to the Lender requesting a Loan on such date in an amount equal to the
amount of such drawing and, subject to the satisfaction or waiver of the
conditions precedent specified in Article 5, the Lender shall make a Loan in
such amount, the proceeds of which shall be applied to reimburse the Lender for
the amount of the related drawing and costs and expenses.
SECTION 3.5 Obligations Absolute. The Borrower's obligations under
--------------------
this Article 3 (including without limitation the Reimbursement Obligation) shall
be absolute and unconditional under any and all circumstances and irrespective
of any set-off, counterclaim or defense to payment which the Borrower may have
or have had against the Lender or any beneficiary of a Letter of Credit. The
Borrower also agrees with the Lender that the Lender shall not be responsible
for, and the Borrower's Reimbursement Obligation under Section 3.4 shall not be
affected by, among other things, the validity or genuineness of documents or of
any endorsements thereon, even though such documents shall in fact prove to be
invalid, fraudulent or forged, or any dispute between or among the Borrower and
any beneficiary of any Letter of Credit or any other party to which such Letter
of Credit may be transferred or any claims whatsoever of a Borrower against any
beneficiary of such Letter of Credit or any such transferee. The Lender shall
not be liable for any error, omission, interruption or delay in transmission,
dispatch or delivery of any message or advice, however transmitted, in
connection with any Letter of Credit, except for errors or omissions caused by
the Lender's gross negligence or willful misconduct. The Borrower agrees that
any action taken or omitted by the Lender under or in connection with any Letter
of Credit or the related drafts or documents, if done in the absence of gross
negligence or willful misconduct and in accordance with the standards of care
specified in the Uniform Customs and, to the extent not inconsistent therewith,
the UCC shall be binding on the Borrower and shall not result in any liability
of the Lender to the Borrower. The responsibility of the Lender to the Borrower
in connection with any draft presented for payment under any Letter of Credit
shall, in addition to any payment obligation expressly provided for in such
Letter of Credit, be limited to determining that the documents (including each
draft) delivered under such Letter of Credit in connection with such presentment
are in conformity with such Letter of Credit.
16
<PAGE>
SECTION 3.6 Effect of Application. To the extent that any provision
---------------------
of any Application related to any Letter of Credit is inconsistent with the
provisions of this Article 3, the provisions of this Article 3 shall apply.
ARTICLE 4.
GENERAL LOAN PROVISIONS
-----------------------
SECTION 4.1 Interest.
--------
(a) Interest Rate. Subject to the provisions of this Section 4.1, the
-------------
aggregate principal amount of the Loans or any portion thereof shall bear
interest at the LIBOR Market Index Rate plus 2.75%, as that rate may change from
----
day to day in accordance with changes in the LIBOR Market Index Rate.
(b) Circumstances Affecting LIBOR Market Index Rate Availability. If the
------------------------------------------------------------
Lender shall determine that, by reason of circumstances affecting the foreign
exchange and interbank markets generally, deposits in eurodollars, in the
applicable amounts are not being quoted via Telerate Page 3750 or offered to the
Lender, then the Lender shall forthwith give notice thereof to the Borrower.
Thereafter, until the Lender notifies the Borrower that such circumstances no
longer exist, the aggregate principal amounts of the Loan or any portion
thereof, shall bear interest at the Base Rate.
(c) Laws Affecting LIBOR Market Index Rate Availability. If, after the
---------------------------------------------------
date hereof, the introduction of, or any change in, any Applicable Law or any
change in the interpretation or administration thereof by any Governmental
Authority, central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Lender with any request or
directive (whether or not having the force of law) of any such Authority,
central bank or comparable agency, shall make it unlawful or impossible for the
Lender to quote or maintain Loans based on the LIBOR Market Index Rate, the
Lender shall promptly give notice thereof to the Borrower. Thereafter, until the
Lender notifies the Borrower that such circumstances no longer exist, the
aggregate principal amounts of the Loan or any portion thereof, shall bear
interest at the Base Rate.
(d) Default Rate. Upon the occurrence and during the continuance of an
------------
Event of Default, all outstanding Loans shall bear interest at a rate per annum
two percent (2%) in excess of the rate then applicable. Interest shall continue
to accrue on the Note after the filing by or against the Borrower of any
petition seeking any relief in bankruptcy or under any act or law pertaining to
insolvency or debtor relief, whether state, federal or foreign.
(e) Interest Payment and Computation. Interest shall be payable in arrears
--------------------------------
on the last Business Day of each month commencing March 31, 1999. All interest
rates, fees and commissions provided hereunder shall be computed on the basis of
a 360-day year and assessed for the actual number of days elapsed.
17
<PAGE>
(f) Maximum Rate. In no contingency or event whatsoever shall the aggregate
------------
of all amounts deemed interest hereunder or under the Note charged or collected
pursuant to the terms of this Agreement or pursuant to the Note exceed the
highest rate permissible under any Applicable Law which a court of competent
jurisdiction shall, in a final determination, deem applicable hereto. In the
event that such a court determines that the Lender has charged or received
interest hereunder in excess of the highest applicable rate, the rate in effect
hereunder shall automatically be reduced to the maximum rate permitted by
Applicable Law and the Lender shall, at the Lender's option, promptly refund to
the Borrower any interest received by Lender in excess of the maximum lawful
rate or shall apply such excess to the principal balance of the Obligations. It
is the intent hereof that the Borrower not pay or contract to pay, and that the
Lender not receive or contract to receive, directly or indirectly in any manner
whatsoever, interest in excess of that which may be paid by the Borrower under
Applicable Law.
SECTION 4.2 Fees.
----
(a) Unused Fee. Commencing on the Closing Date, the Borrower shall pay to
----------
the Lender a non-refundable unused fee at a rate per annum equal to one-half of
one percent ( 1/2 of 1%) on the average daily Available Commitment. The unused
fee shall be payable in arrears on the last Business Day of each calendar
quarter during the term of this Agreement commencing March 31, 1999, and on the
Termination Date.
(b) Closing Fee. The Borrower shall pay to the Lender a non-refundable
-----------
closing fee equal to $100,000, payable at closing. Such fee is to compensate
Lender for the costs associated with the organization, structuring, processing,
approving and closing of the transactions contemplated by this Agreement. Such
fee shall be fully earned upon payment and shall not be subject to proration or
rebate for any reason whatsoever.
SECTION 4.3 Manner of Payment. Each payment by the Borrower on account
-----------------
of the principal of or interest on the Loans or of any fee, commission or other
amounts payable to the Lender under this Agreement or any Note shall be made not
later than 1:00 p.m. (Atlanta time) on the date specified for payment under this
Agreement to the Lender at the Lender's Office, in Dollars, in immediately
available funds and shall be made without any set-off, counterclaim or deduction
whatsoever. Any payment received after such time but before 2:00 p.m. (Atlanta
time) on such day shall be deemed a payment on such date for the purposes of
Section 11.1, but for all other purposes shall be deemed to have been made on
the next succeeding Business Day. Any payment received after 2:00 p.m. (Atlanta
time) shall be deemed to have been made on the next succeeding Business Day for
all purposes.
SECTION 4.4 Crediting of Payments and Proceeds. In the event that the
----------------------------------
Borrower shall fail to pay any of the Obligations when due and the Obligations
have been accelerated pursuant to Section 11.2, all payments received by the
Lender upon the Note and the other Obligations and all net proceeds from the
enforcement of the Obligations shall be applied first to all expenses then due
and payable by the Borrower hereunder, then to all indemnity obligations then
due and payable by the Borrower hereunder, then to all fees then due and
18
<PAGE>
payable, then to all commitment and other fees and commissions then due and
payable, then to accrued and unpaid interest on the Note and any termination
payments due in respect of a Hedging Agreement with Lender or any of its
Affiliates, then to the principal amount of the Note and Reimbursement
Obligations and then to the cash collateral account described in Section 11.2(b)
hereof to the extent of any L/C Obligations then outstanding, in that order.
SECTION 4.5 Increased Costs. If, after the date hereof, the
---------------
introduction of, or any change in, any Applicable Law, or in the interpretation
or administration thereof by any Governmental Authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by the Lender with any request or directive (whether or not having
the force of law) of such Authority, central bank or comparable agency:
(a) shall subject the Lender to any tax, duty or other charge with
respect to the Note, Letter of Credit or Application or shall change the basis
of taxation of payments to the Lender of the principal of or interest on the
Note, Letter of Credit or Application, any Loan or any other amounts due under
this Agreement in respect thereof (except for changes in the rate of tax on the
overall net income of the Lender or of Lender's Office imposed by the
jurisdiction in which the Lender is organized or is or should be qualified to do
business or where Lender's Office is located); or
(b) shall impose, modify or deem applicable any reserve (including,
without limitation, any imposed by the Board of Governors of the Federal Reserve
System), special deposit, insurance or capital or similar requirement against
assets of, deposits with or for the account of, or credit extended by the Lender
or shall impose on the Lender or the foreign exchange and interbank markets any
other condition affecting the Note, any Loan, Letter of Credit or Application;
and the result of any of the foregoing is to increase the costs to the Lender of
maintaining any Loan or issuing any Letter of Credit or to reduce the yield or
amount of any sum received or receivable by the Lender under this Agreement or
under the Note in respect of a Loan or Letter of Credit or Application, then the
Lender shall promptly notify the Borrower of such fact and demand compensation
therefor and, within fifteen (15) days after such notice by the Lender, the
Borrower shall pay to the Lender such additional amount or amounts as will
compensate the Lender for such increased cost or reduction. The Lender will
promptly notify the Borrower of any event of which it has knowledge which will
entitle the Lender to compensation pursuant to this Section 4.5; provided, that
--------
the Lender shall incur no liability whatsoever to the Borrower in the event it
fails to do so. The amount of such compensation shall be determined, in the
Lender's sole discretion, based upon the LIBOR Market Index Rate, and using any
reasonable attribution or averaging methods which the Lender deems appropriate
and practical. A certificate of the Lender setting forth the basis for
determining such amount or amounts necessary to compensate the Lender shall be
forwarded to the Borrower and shall be conclusively presumed to be correct save
for manifest error.
SECTION 4.6 Capital Requirements. If either (a) the introduction of,
--------------------
or any change in, or in the interpretation of, any Applicable Law or (b)
compliance with any guideline or request from
19
<PAGE>
any central bank or comparable agency or other Governmental Authority (whether
or not having the force of law), has or would have the effect of reducing the
rate of return on the capital of, or has affected or would affect the amount of
capital required to be maintained by, Lender or any corporation controlling the
Lender as a consequence of, or with reference to the Commitments and other
commitments of this type, below the rate which the Lender or such other
corporation could have achieved but for such introduction, change or compliance,
then within five (5) Business Days after written demand by the Lender, the
Borrower shall pay to the Lender from time to time as specified by the Lender
additional amounts sufficient to compensate the Lender or other corporation for
such reduction. A certificate as to such amounts submitted to the Borrower by
the Lender, shall, in the absence of manifest error, be presumed to be correct
and binding for all purposes.
SECTION 4.7 Taxes.
(a) Payments Free and Clear. Any and all payments by the Borrower
-----------------------
hereunder or under the Note or in respect of any Letter of Credit shall be made
free and clear of and without deduction for any and all present or future taxes,
levies, imposts, deductions, charges or withholding, and all liabilities with
respect thereto excluding, (i) income and franchise taxes imposed by the
jurisdiction under the laws of which the Lender is organized or is or should be
qualified to do business or any political subdivision thereof and (ii) income
and franchise taxes imposed by the jurisdiction of the Lender's Office or any
political subdivision thereof (all such non-excluded taxes, levies, imposts,
deductions, charges, withholdings and liabilities being hereinafter referred to
as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from
or in respect of any sum payable hereunder or under the Note or any Letter of
Credit, (A) the sum payable shall be increased as may be necessary so that after
making all required deductions (including deductions applicable to additional
sums payable under this Section 4.7) the Lender receives an amount equal to the
amount it would have received had no such deductions been made, (B) the Borrower
shall make such deductions, (C) the Borrower shall pay the full amount deducted
to the relevant taxing authority or other authority in accordance with
applicable law, and (D) the Borrower shall deliver to the Lender evidence of
such payment to the relevant taxing authority or other authority in the manner
provided in Section 4.7(d).
(b) Stamp and Other Taxes. In addition, the Borrower shall pay any present
---------------------
or future stamp, registration, recordation or documentary taxes or any other
similar fees or charges or excise or property taxes, levies of the United States
or any state or political subdivision thereof or any applicable foreign
jurisdiction which arise from any payment made hereunder or from the execution,
delivery or registration of, or otherwise with respect to, this Agreement, the
Loans, the Letters of Credit, the other Loan Documents, or the perfection of any
rights or security interest in respect thereto (hereinafter referred to as
"Other Taxes").
(c) Indemnity. The Borrower shall indemnify the Lender for the full amount
---------
of Taxes and Other Taxes (including, without limitation, any Taxes and Other
Taxes imposed by any jurisdiction on amounts payable under this Section 4.7)
paid by the Lender and any liability (including penalties, interest and
expenses) arising therefrom or with respect thereto, whether or
20
<PAGE>
not such Taxes or Other Taxes were correctly or legally asserted. Such
indemnification shall be made within thirty (30) days from the date the Lender
makes written demand therefor.
(d) Evidence of Payment. Within thirty (30) days after the date of any
-------------------
payment of Taxes or Other Taxes, the Borrower shall furnish to the Lender, at
its address referred to in Section 12.1, the original or a certified copy of a
receipt evidencing payment thereof or other evidence of payment satisfactory to
the Lender.
(e) Survival. Without prejudice to the survival of any other agreement of
--------
the Borrower hereunder, the agreements and obligations of the Borrower contained
in this Section 4.7 shall survive the payment in full of the Obligations and the
termination of the Commitments.
ARTICLE 5.
CLOSING; CONDITIONS OF CLOSING AND BORROWING
--------------------------------------------
SECTION 5.1 Closing. The closing shall take place at the offices of
-------
Troutman Sanders LLP at 9:00 a.m. on March 25, 1999, or on such other date as
the parties hereto shall mutually agree.
SECTION 5.2 Conditions to Closing and Initial Loan. The obligation
--------------------------------------
of the Lender to close this Agreement and to make the initial Loan or issue the
initial Letter of Credit is subject to the satisfaction of each of the following
conditions:
(a) Executed Loan Documents. This Agreement, the Note, the Security
-----------------------
Documents, and the Loan Documents, shall have been duly authorized, executed and
delivered to the Lender by the parties thereto, shall be in full force and
effect and no default shall exist thereunder, and the Borrower shall have
delivered original counterparts thereof to the Lender.
(b) Closing Certificates; etc.
-------------------------
(i) Officer's Certificate of the Borrower. The Lender shall have
-------------------------------------
received a certificate from the chief executive officer or chief financial
officer of the Borrower, in form and substance satisfactory to the Lender, to
the effect that all representations and warranties of the Borrower contained in
this Agreement and the other Loan Documents are true, correct and complete; that
the Borrower is not in violation of any of the covenants contained in this
Agreement and the other Loan Documents; that, after giving effect to the
transactions contemplated by this Agreement, no Default or Event of Default has
occurred and is continuing; and that the Borrower has satisfied each of the
closing conditions.
(ii) Certificate of Secretary of the Borrower. The Lender shall have
----------------------------------------
received a certificate of the secretary or assistant secretary of the Borrower
certifying that attached thereto is a true and complete copy of the articles of
incorporation of the Borrower and all amendments thereto, certified as of a
recent date by the appropriate Governmental Authority in its jurisdiction
21
<PAGE>
of incorporation; that attached thereto is a true and complete copy of the
bylaws of the Borrower as in effect on the date of such certification; that
attached thereto is a true and complete copy of resolutions duly adopted by the
Board of Directors of the Borrower authorizing the borrowings contemplated
hereunder and the execution, delivery and performance of this Agreement and the
other Loan Documents to which it is a party; and as to the incumbency and
genuineness of the signature of each officer of the Borrower executing Loan
Documents to which it is a party.
(iii) Certificate of Secretary of Guarantors. The Lender shall have
--------------------------------------
received a certificate of the secretary or assistant secretary of each Guarantor
certifying that attached thereto is a true and complete copy of the certificate
or articles of incorporation, articles of organization or comparable document of
such Guarantor and all amendments thereto, certified as of a recent date by the
appropriate Governmental Authority in its jurisdiction of incorporation or
formation; that attached thereto is a true and complete copy of the bylaws,
operating agreement or similar document or agreement of such Guarantor as in
effect on the date of such certification; that attached thereto is a true and
complete copy of resolutions duly adopted by the Board of Directors, managers,
members or comparable body of such Guarantor authorizing the execution, delivery
and performance of the Loan Documents to which it is a party; and as to the
incumbency and genuineness of the signature of each officer of such Guarantor
executing Loan Documents to which it is a party.
(iv) Certificates of Good Standing. The Lender shall have received
--------------- -------------
certificates (long-form, where available) as of a recent date of the good
standing of the Borrower and each Guarantor under the laws of its jurisdiction
of organization and each other jurisdiction where the Borrower or such Guarantor
is qualified to do business and a certificate of the relevant taxing authorities
of such jurisdictions certifying that such Person has filed required tax returns
and owes no delinquent taxes.
(v) Opinions of Counsel. The Lender shall have received favorable
-------------------
opinions of counsel to the Borrower and the Guarantor addressed to the Lender
with respect to the Borrower, the Loan Documents and such other matters as the
Lender shall request.
(c) Consents; Defaults.
------------------
(i) Governmental and Third Party Approvals. All necessary approvals,
--------------------------------------
authorizations and consents, if any be required, of any Person and of all
Governmental Authorities and courts having jurisdiction with respect to the
transactions contemplated by this Agreement and the other Loan Documents shall
have been obtained.
(ii) No Injunction. Etc. No action, proceeding, investigation,
------------------
regulation or legislation shall have been instituted, threatened or proposed
before any Governmental Authority to enjoin, restrain, or prohibit, or to obtain
substantial damages in respect of, or which is related to or arises out of this
Agreement or the other Loan Documents or the consummation of the transactions
contemplated hereby or thereby, or which, in the Lender's discretion, would make
it inadvisable to consummate the transactions contemplated by this Agreement and
such other Loan Documents.
22
<PAGE>
(iii) No Event of Default. No Default or Event of Default shall have
-------------------
occurred and be continuing.
(d) Financial Matters.
-----------------
(i) Financial Statements. The Lender shall have received the most
--------------------
recent audited consolidated and consolidating financial statements of the
Borrower and its Subsidiaries and the most recent unaudited consolidated and
consolidating financial statements of Borrower and its Subsidiaries, all in form
and substance satisfactory to the Lender.
(ii) Payment at Closing. There shall have been paid by the Borrower
------------------
to the Lender the fees set forth or referenced in Section 4.2 and any other
accrued and unpaid fees or commissions due hereunder (including, without
limitation, legal fees and expenses), and to any other Person such amount as may
be due thereto in connection with the transactions contemplated hereby,
including all taxes, fees and other charges in connection with the execution,
delivery, recording, filing and registration of any of the Loan Documents.
(e) Miscellaneous.
(i) Notice of Borrowing. The Lender shall have received a Notice of
-------------------
Borrowing from the Borrower in accordance with Section 2.2(a), and a Notice of
Account Designation specifying the account or accounts to which the proceeds of
any loans made after the Closing Date are to be disbursed.
(ii) Proceedings and Documents. All opinions, certificates and other
-------------------------
instruments and all proceedings in connection with the transactions contemplated
by this Agreement shall be satisfactory in form and substance to the Lender. The
Lender shall have received copies of all other instruments and other evidence as
the Lender may reasonably request, in form and substance satisfactory to the
Lender, with respect to the transactions contemplated by this Agreement and the
taking of all actions in connection therewith.
(iii) Due Diligence and Other Documents. The Borrower shall have
---------------------------------
delivered to the Lender such other documents, certificates and opinions as the
Lender reasonably requests.
SECTION 5.3 Conditions to All Loans and All Letters of Credit.
-------------------------------------------------
The obligations of the Lender to make any Loan or to issue any Letter of Credit
is subject to the satisfaction of the following conditions precedent on the
relevant borrowing or issue date, as applicable:
(a) Continuation of Representations and Warranties. The representations
----------------------------------------------
and warranties contained in Article 6 shall be true and correct on and as of
such borrowing or issuance date with the same effect as if made on and as of
such date.
(b) No Existing Default. No Default or Event of Default shall have
-------------------
occurred and be continuing hereunder (i) on the borrowing date with respect to
such Loan or after giving effect to
23
<PAGE>
the Loans to be made on such date or (ii) or the issue date with respect to such
Letter of Credit or after giving affect to such Letters of Credit on such date.
(c) No Material Adverse Change. Since November 30, 1998, there shall not
--------------------------
have occurred any material adverse change in the assets, liabilities, business,
operations or condition (financial or otherwise) of Borrower or its
Subsidiaries, or any event, condition, or state of facts which would be expected
materially and adversely to affect the prospects of Borrower or any of its
Subsidiaries subsequent to the making of such Loan to Borrower.
ARTICLE 6.
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
----------------------------------------------
SECTION 6.1 Representations and Warranties. To induce the Lender to
------------------------------
enter into this Agreement, to make the Loans and to issue Letters of Credit, the
Borrower hereby represents and warrants to the Lender that:
(a) Organization; Power; Qualification. Each of the Borrower and its
----------------------------------
Subsidiaries is duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or formation, has the power and
authority to own its properties and to carry on its business as now being and
hereafter proposed to be conducted and is duly qualified and authorized to do
business in each jurisdiction in which the character of its properties or the
nature of its business requires such qualification and authorization. The
jurisdictions in which the Borrower and its Subsidiaries are organized and
qualified to do business are described on Schedule 6.1(a).
---------------
(b) Ownership. Each Subsidiary of the Borrower is listed on Schedule
--------- --------
6.1(b). The capitalization of the Borrower and its Subsidiaries consists of the
- ------
number of shares, authorized, issued and outstanding, of such classes and
series, with or without par value, described on Schedule 6.1(b). All outstanding
---------------
shares have been duly authorized and validly issued and are fully paid and
nonassessable. The shareholders of the Subsidiaries of the Borrower and the
number of shares owned by each are described on Schedule 6.1(b). There are no
---------------
outstanding stock purchase warrants, subscriptions, options, securities,
instruments or other rights of any type or nature whatsoever, which are
convertible into, exchangeable for or otherwise provide for or permit the
issuance of Capital Stock of the Borrower or its Subsidiaries, except as
described on Schedule 6.1(b).
---------------
(c) Authorization of Agreement, Loan Documents and Borrowing. Each of the
--------------------------------------------------------
Borrower and its Subsidiaries has the right, power and authority and has taken
all necessary corporate and other action to authorize the execution, delivery
and performance of this Agreement and each of the other Loan Documents to which
it is a party in accordance with their respective terms. This Agreement and
each of the other Loan Documents have been duly executed and delivered by the
duly authorized officers of the Borrower and each of its Subsidiaries party
thereto, and each such document constitutes the legal, valid and binding
24
<PAGE>
obligation of the Borrower or its Subsidiary party thereto, enforceable in
accordance with its terms, except as such enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar state or federal
debtor relief laws from time to time in effect which affect the enforcement of
creditors' rights in general and the availability of equitable remedies.
(d) Compliance of Agreement, Loan Documents and Borrowing with Laws, Etc.
--------------------------------------------------------------------
The execution, delivery and performance by the Borrower and its Subsidiaries of
the Loan Documents to which each such Person is a party, in accordance with
their respective terms, the borrowings hereunder and the transactions
contemplated hereby do not and will not, by the passage of time, the giving of
notice or otherwise, (i) require any Governmental Approval or violate any
Applicable Law relating to the Borrower or any of its Subsidiaries, (ii)
conflict with, result in a breach of or constitute a default under the
certificate or articles of incorporation, bylaws or other organizational
documents of the Borrower or any of its Subsidiaries or any indenture, agreement
or other instrument to which such Person is a party or by which any of its
properties may be bound or any Governmental Approval relating to such Person, or
(iii) result in or require the creation or imposition of any Lien upon or with
respect to any property now owned or hereafter acquired by such Person other
than Liens arising under the Loan Documents.
(e) Compliance with Law; Governmental Approvals. Each of the Borrower and
-------------------------------------------
its Subsidiaries (i) has all material Governmental Approvals required by any
Applicable Law for it to conduct its business, each of which is in full force
and effect, is final and not subject to review on appeal and is not the subject
of any pending or, to the best of its knowledge, threatened attack by direct or
collateral proceeding, and (ii) is in material compliance with each Governmental
Approval applicable to it and in material compliance with all other Applicable
Laws relating to it or any of its respective properties.
(f) Tax Returns and Payments. Except as set forth on Schedule 6.1(f)
------------------------
hereto, each of the Borrower and its Subsidiaries has duly filed or caused to be
filed all federal, state, local and other tax returns required by Applicable Law
to be filed, and has paid, or made adequate provision for the payment of, all
federal, state, local and other taxes, assessments and governmental charges or
levies upon it and its property, income, profits and assets which are due and
payable. No Governmental Authority has asserted any Lien or other claim against
the Borrower or Subsidiary thereof with respect to unpaid taxes which has not
been discharged or resolved. The charges, accruals and reserves on the books of
the Borrower and any of its Subsidiaries in respect of federal, state, local and
other taxes for all Fiscal Years and portions thereof since the organization of
the Borrower and any of its Subsidiaries are in the judgment of the Borrower
adequate, and the Borrower does not anticipate any additional taxes or
assessments for any of such years.
(g) Intellectual Property Matters. Schedule 6.1(g) attached hereto
----------------------------- ---------------
contains a true, complete and current listing of all copyrights, copyright
applications, trademarks, trademark rights, trade names, patents, patent rights
or licenses, patent applications and other intellectual property rights of the
Borrower and its Subsidiaries that are registered with any Governmental
Authority as of the Closing Date. Each of the Borrower and its Subsidiaries owns
or possesses rights to use all franchises, licenses, copyrights, copyright
applications, patents, patent rights or
25
<PAGE>
licenses, patent applications, trademarks, trademark rights, trade names, trade
name rights, copyrights and rights with respect to the foregoing which are
required to conduct its business. No event has occurred which permits, or after
notice or lapse of time or both would permit, the revocation or termination of
any such rights, and neither the Borrower nor any Subsidiary thereof is liable
to any Person for infringement under Applicable Law with respect to any such
rights as a result of its business operations.
(h) Environmental Matters
---------------------
(i) The properties of the Borrower and its Subsidiaries do not
contain, and to their knowledge have not previously contained, any Hazardous
Materials in amounts or concentrations which (A) constitute or constituted a
violation of, and (B) could give rise to material liability to Borrower or any
of its Subsidiaries under, applicable Environmental Laws;
(ii) Such properties and all operations conducted by Borrower and its
Subsidiaries in connection therewith are in compliance in all material respects,
and have been in compliance in all material respects, with all applicable
Environmental Laws, and there is no contamination at, under or about such
properties or such operations which could interfere with the continued operation
of such properties or which would give rise to material liability to Borrower or
any of its Subsidiaries under applicable Environmental Laws;
(iii) Neither the Borrower nor any Subsidiary thereof has received
any notice of violation, alleged violation, non-compliance, liability or
potential liability regarding environmental matters or compliance with
Environmental Laws with regard to any of their properties or the operations
conducted in connection therewith, nor does the Borrower or any Subsidiary
thereof have knowledge or reason to believe that any such notice will be
received or is being threatened;
(iv) Hazardous Materials have not been transported or disposed of by
or on behalf of Borrower or its Subsidiaries from the properties of the Borrower
and its Subsidiaries in violation of, or in a manner or to a location which
could give rise to, liability under, Environmental Laws, nor have any Hazardous
Materials been generated, treated, stored or disposed of at, on or under any of
such properties in violation of, or in a manner that could give rise to
liability under, any applicable Environmental Laws;
(v) No judicial proceedings or governmental or administrative action
is pending, or, to the knowledge of the Borrower, threatened, under any
Environmental Law to which the Borrower or any Subsidiary thereof is or will be
named as a party with respect to such properties or operations conducted in
connection therewith, nor are there any consent decrees or other decrees,
consent orders, administrative orders or other orders, or other administrative
or judicial requirements outstanding under any Environmental Law with respect to
such properties or such operations; and
(vi) There has been no release, or to the best of the Borrower's
knowledge, no threat of release, of Hazardous Materials at or from such
properties, in violation of or in amounts
26
<PAGE>
or in a manner that could give rise to a material liability to Borrower or any
of its Subsidiaries under Environmental Laws.
(i) ERISA.
-----
(i) Neither the Borrower nor any ERISA Affiliate maintains or
contributes to, or has any obligation under, any Employee Benefit Plans other
than those identified on Schedule 6.1(i);
---------------
(ii) the Borrower and each ERISA Affiliate is in material compliance
with all applicable provisions of ERISA and the regulations and published
interpretations thereunder with respect to all Employee Benefit Plans except for
any required amendments for which the remedial amendment period as defined in
Section 401(b) of the Code has not yet expired. Each Employee Benefit Plan that
is intended to be qualified under Section 401(a) of the Code has been determined
by the Internal Revenue Service to be so qualified, and each trust related to
such plan has been determined to be exempt under Section 501(a) of the Code. No
liability has been incurred by the Borrower or any ERISA Affiliate which remains
unsatisfied for any taxes or penalties with respect to any Employee Benefit Plan
or any Multiemployer Plan;
(iii) No Pension Plan has been terminated, nor has any accumulated
funding deficiency (as defined in Section 412 of the Code) been incurred
(without regard to any waiver granted under Section 412 of the Code), nor has
any funding waiver from the Internal Revenue Service been received or requested
with respect to any Pension Plan, nor has the Borrower or any ERISA Affiliate
failed to make any contributions or to pay any amounts due and owing as required
by Section 412 of the Code, Section 302 of ERISA or the terms of any Pension
Plan prior to the due dates of such contributions under Section 412 of the Code
or Section 302 of ERISA, nor has there been any event requiring any disclosure
under Section 4041(c)(3)(C) or 4063(a) of ERISA with respect to any Pension
Plan;
(iv) Neither the Borrower nor any ERISA Affiliate has: (A) engaged in
a nonexempt prohibited transaction described in Section 406 of the ERISA or
Section 4975 of the Code, (B) incurred any liability to the PBGC which remains
outstanding other than the payment of premiums and there are no premium payments
which are due and unpaid, (C) failed to make a required contribution or payment
to a Multiemployer Plan, or (D) failed to make a required installment or other
required payment under Section 412 of the Code;
(v) No Termination Event has occurred or is reasonably expected to
occur; and
(vi) No proceeding, claim, lawsuit and/or investigation is existing
or, to the best knowledge of the Borrower after due inquiry, threatened
concerning or involving any (A) employee welfare benefit plan (as defined in
Section 3(1) of ERISA) currently maintained or contributed to by the Borrower or
any ERISA Affiliate, (B) Pension Plan or (C) Multiemployer Plan.
27
<PAGE>
(j) Margin Stock. Neither the Borrower nor any Subsidiary thereof is
------------
engaged principally or as one of its activities in the business of extending
credit for the purpose of "purchasing" or "carrying" any "margin stock" (as each
such term is defined or used in Regulation U of the Board of Governors of the
Federal Reserve System). No part of the proceeds of any of the Loans or of the
Letters of Credit will be used for purchasing or carrying margin stock or for
any purpose which violates, or which would be inconsistent with, the provisions
of Regulation T, U or X of such Board of Governors.
(k) Government Regulation. Neither the Borrower nor any Subsidiary
---------------------
thereof is an "investment company" or a company "controlled" by an "investment
company" (as each such term is defined or used in the Investment Company Act of
1940, as amended) and neither the Borrower nor any Subsidiary thereof is, or
after giving effect to any Loan will be, subject to regulation under the Public
Utility Holding Company Act of 1935 Act, as amended, or any other Applicable Law
which limits its ability to incur or consummate the transactions contemplated
hereby.
(l) Material Contracts. Schedule 6.1(l) sets forth a complete and
------------------ ---------------
accurate list of all Material Contracts of the Borrower and its Subsidiaries in
effect as of the Closing Date not listed on any other Schedule hereto; other
than as set forth in Schedule 6.1(l), each such Material Contract is, and after
---------------
giving effect to the consummation of the transactions contemplated by the Loan
Documents will be, in full force and effect in accordance with the terms
thereof. The Borrower and its Subsidiaries have delivered to the Lender a true
and complete copy of each Material Contract requested by Lender or its counsel.
(m) Employee Relations. Each of the Borrower and its Subsidiaries has a
------------------
stable work force in place and is not, except as set forth on Schedule 6.1(m),
---------------
party to any collective bargaining agreement nor has any labor union been
recognized as the representative of its employees. The Borrower knows of no
pending, threatened or contemplated strikes, work stoppage or other collective
labor disputes involving its employees or those of its Subsidiaries.
(n) Burdensome Provisions. Neither the Borrower nor any Subsidiary
---------------------
thereof is a party to any indenture, agreement, lease or other instrument, or
subject to any corporate or partnership restriction, Governmental Approval or
Applicable Law which is so unusual or burdensome as in the foreseeable future
could be reasonably expected to have a Material Adverse Effect. The Borrower and
its Subsidiaries do not presently anticipate that future expenditures needed to
meet the provisions of any statutes, orders, rules or regulations of a
Governmental Authority will be so burdensome as to have a Material Adverse
Effect.
(o) Financial Statements. The (i) consolidated balance sheets of the
--------------------
Borrower and its Subsidiaries as of May 31, 1998 and the related statements of
income and retained earnings and cash flows for the Fiscal Years then ended and
(ii) unaudited consolidated balance sheet of the Borrower and its Subsidiaries
as of November 30, 1998 and related unaudited interim statements of revenue and
retained earnings, copies of which have been furnished to the Lender, are
complete and correct and fairly present the assets, liabilities and financial
position of the Borrower and its Subsidiaries as at such dates, and the results
of the operations and changes of
28
<PAGE>
financial position for the periods then ended. All such financial statements,
including the related schedules and notes thereto, have been prepared in
accordance with GAAP. The Borrower and its Subsidiaries have no Debt, obligation
or other unusual forward or long-term commitment which is not fairly reflected
in the foregoing financial statements or in the notes thereto.
(p) Projections. The forecasted consolidated and consolidating financial
-----------
statements of Borrower and its Subsidiaries, consisting of consolidated and
consolidating balance sheets, income statements and cash flow statements for
Borrower and its Subsidiaries, giving effect to the consummation of the
transactions contemplated by this Agreement, covering the two-year period
commencing on the date hereof and prepared on a quarterly basis for the first
year and on an annual basis thereafter (the "Projections"): (i) are based on
reasonable estimates and assumptions; and (ii) reflected, as of the date
prepared, and continue to reflect, as of the date of this Agreement, the
reasonable estimate of Borrower of the results of operations and other
information projected therein for the periods covered thereby.
(q) No Material Adverse Change. Since December 31, 1998, there has been
--------------------------
no material adverse change in the properties, business, operations, prospects,
or condition (financial or otherwise) of the Borrower and its Subsidiaries and
no event has occurred or condition arisen that could reasonably be expected to
have a Material Adverse Effect.
(r) Solvency. As of the Closing Date and after giving effect to each Loan
--------
made hereunder, the Borrower and each of its Subsidiaries will be Solvent.
(s) Titles to Properties. Each of the Borrower and its Subsidiaries has
--------------------
such leasehold title to the real property leased by it as is necessary or
desirable to the conduct of its business and valid and legal title to all of its
personal property and assets, including, but not limited to, those reflected on
the balance sheets of the Borrower and its Subsidiaries delivered pursuant to
Section 6.1(o), except those which have been disposed of by the Borrower or its
Subsidiaries subsequent to such date which dispositions have been in the
ordinary course of business or as otherwise expressly permitted hereunder.
Neither the Borrower nor any of its Subsidiaries owns any real property.
(t) Liens. None of the properties and assets of the Borrower or any
-----
Subsidiary thereof is subject to any Lien, except Liens permitted pursuant to
Section 10.2. No financing statement under the Uniform Commercial Code of any
state which names the Borrower or any Subsidiary thereof or any of their
respective trade names or divisions as debtor and which has not been terminated,
has been filed in any state or other jurisdiction and neither the Borrower nor
any Subsidiary thereof has signed any such financing statement or any security
agreement authorizing any secured party thereunder to file any such financing
statement, except to perfect those Liens permitted by Section 10.2 hereof.
(u) Debt and Contingent Obligations. Schedule 6.1(u) is a complete and
------------------------------- ---------------
correct listing of all Debt and Contingent Obligations of the Borrower and its
Subsidiaries in excess of $1,000,000. The Borrower and its Subsidiaries have
performed and are in compliance with all of the terms of such Debt and
Contingent Obligations and all instruments and agreements relating
29
<PAGE>
thereto, and no default or event of default, or event or condition which with
notice or lapse of time or both would constitute such a default or event of
default on the part of the Borrower or its Subsidiaries exists with respect to
any such Debt or Contingent Obligation.
(v) Litigation. Except as set forth on Schedule 6.1(v), there are no
---------- ---------------
actions, suits or proceedings pending nor, to the knowledge of the Borrower,
threatened against or in any other way relating adversely to or affecting the
Borrower or any Subsidiary thereof or any of their respective properties in any
court or before any arbitrator of any kind or before or by any Governmental
Authority.
(w) Absence of Defaults. No event has occurred or is continuing which
-------------------
constitutes a Default or an Event of Default, or which constitutes, or which
with the passage of time or giving of notice or both would constitute, a default
or event of default by the Borrower or any Subsidiary thereof under any Material
Contract or judgment, decree or order to which the Borrower or its Subsidiaries
is a party or by which the Borrower or its Subsidiaries or any of their
respective properties may be bound or which would require the Borrower or its
Subsidiaries to make any payment thereunder prior to the scheduled maturity date
therefor.
(x) Year 2000 Compliance. Borrower and its Subsidiaries have adopted and
--------------------
implemented a plan which, no later than October 31, 1999, in the case of the
billing system for the Los Angeles campus, and not later than August 31, 1999,
in all other cases, and at all times thereafter, will cause all software and
other processing capabilities of Borrower and each of its Subsidiaries to be
Year 2000 Compliant.
(y) Flight Enterprises. The aggregate value of the assets of Flight
------------------
Enterprises is less than $1,000 and Flight Enterprises is not engaged in the
active conduct of any business.
(z) Accuracy and Completeness of Information. All written information,
----------------------------------------
reports and other papers and data produced by or on behalf of the Borrower or
any Subsidiary thereof and furnished to the Lender were, at the time the same
were so furnished, complete and correct in all respects to the extent necessary
to give the recipient a true and accurate knowledge of the subject matter. No
document furnished or written statement made to the Lender by the Borrower or
any Subsidiary thereof in connection with the negotiation, preparation or
execution of this Agreement or any of the Loan Documents contains or will
contain any untrue statement of a fact material to the creditworthiness of the
Borrower or its Subsidiaries or omits or will omit to state a fact necessary in
order to make the statements contained therein not misleading. The Borrower is
not aware of any facts which it has not disclosed in writing to the Lender
having a Material Adverse Effect, or insofar as the Borrower can now foresee,
could reasonably be expected to have a Material Adverse Effect.
SECTION 6.2 Survival of Representations and Warranties Etc. All
----------------------------------------------
representations and warranties set forth in this Article 6 and all
representations and warranties contained in any certificate, or any of the Loan
Documents (including but not limited to any such representation or warranty made
in or in connection with any amendment thereto) shall constitute representations
and warranties made under this Agreement. All representations and warranties
30
<PAGE>
made under this Agreement shall be made or deemed to be made at and as of the
Closing Date, shall survive the Closing Date and shall not be waived by the
execution and delivery of this Agreement, any investigation made by or on behalf
of the Lender or any borrowing hereunder.
ARTICLE 7.
FINANCIAL INFORMATION AND NOTICES
---------------------------------
Until all the Obligations have been paid and satisfied in full, all Letters
of Credit have expired or been terminated and the Commitment has been
terminated, unless the prior written consent of the Lender has been obtained,
the Borrower will furnish or cause to be furnished to the Lender at Lender's
Office or such other office as may be designated by the Lender from time to
time:
SECTION 7.1 Financial Statements and Projections.
------------------------------------
(a) Quarterly Financial Statements. As soon as practicable and in any
------------------------------
event within forty-five (45) days after the end of each fiscal quarter,
unaudited consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries as of the close of such fiscal quarter and unaudited consolidated
and consolidating statements of operations and cash flows for the fiscal quarter
then ended and that portion of the Fiscal Year then ended, including the notes
thereto, all in reasonable detail setting forth in comparative form the
corresponding figures for the preceding Fiscal Year and prepared by the Borrower
in accordance with GAAP (except as to the absence of footnotes) and, if
applicable, containing disclosure of the effect on the financial position or
results of operations of any change in the application of accounting principles
and practices during the period, and certified by the chief financial officer of
the Borrower to present fairly in all material respects the financial condition
of the Borrower and its Subsidiaries as of their respective dates and the
results of operations of the Borrower and its Subsidiaries for the respective
periods then ended, subject to normal year end adjustments.
(b) Annual Financial Statements. As soon as practicable and in any event
---------------------------
within one hundred and five (105) days after the end of each Fiscal Year,
audited consolidated and consolidating balance sheets of the Borrower and its
Subsidiaries as of the close of such Fiscal Year and audited consolidated and
consolidating statements of operations and cash flows for the Fiscal Year then
ended, including the notes thereto, all in reasonable detail setting forth in
comparative form the corresponding figures for the preceding Fiscal Year and
prepared by an independent certified public accounting firm acceptable to the
Lender in accordance with GAAP and, if applicable, containing disclosure of the
effect on the financial position or results of operation of any change in the
application of accounting principles and practices during the year, and
accompanied by a report thereon by such certified public accountants that is not
qualified with respect to scope limitations imposed by the Borrower or any of
its Subsidiaries or with respect to accounting principles followed by the
Borrower or any of its Subsidiaries not in accordance with GAAP.
31
<PAGE>
(c) Annual Business Plan and Financial Projections. As soon as
----------------------------------------------
practicable and in any event prior to the beginning of each Fiscal Year, a
business plan of the Borrower and its Subsidiaries for the ensuing four (4)
fiscal quarters, such plan to be prepared in accordance with GAAP and to
include, on a quarterly basis, the following: a quarterly operating and capital
budget, a projected income statements, statements of cash flows and balance
sheets and a report containing management's discussion and analysis of such
projections, accompanied by a certificate from the chief financial officer of
the Borrower to the effect that, to the best of such officer's knowledge, such
projections are good faith estimates of the financial condition and operations
of the Borrower and its Subsidiaries for such four (4) quarter period.
SECTION 7.2 Officer's Compliance Certificate. At each time
--------------------------------
financial statements are delivered pursuant to Sections 7.1(a) or (b) and at
such other times as the Lender shall reasonably request, a certificate of the
chief financial officer or the treasurer of the Borrower in the form of Exhibit
-------
E attached hereto (an "Officer's Compliance Certificate").
- -
SECTION 7.3 Accountants' Certificate. At each time financial
------------------------
statements are delivered pursuant to Section 7.1(b), a certificate of the
independent public accountants certifying such financial statements addressed to
the Lender:
(a) stating that in making the examination necessary for the certification
of such financial statements, they obtained no knowledge of any Default or Event
of Default or, if such is not the case, specifying such Default or Event of
Default and its nature and period of existence; and
(b) including the calculations prepared by such accountants required to
establish whether or not the Borrower and its Subsidiaries are in compliance
with the financial covenants set forth in Article 9 hereof as at the end of each
respective period.
SECTION 7.4 Other Reports.
-------------
(a) Promptly upon receipt thereof, copies of all reports, if any,
submitted to the Borrower or its Board of Directors by its independent public
accountants in connection with their auditing function, including, without
limitation, any management report and any management responses thereto; and
(b) Such other information regarding the operations, business affairs and
financial condition of the Borrower or any of its Subsidiaries as the Lender may
reasonably request.
SECTION 7.5 Notice of Litigation and Other Matters. Prompt (but
--------------------------------------
in no event later than ten (10) days after an officer of the Borrower obtains
knowledge thereof) telephonic and written notice of:
(a) the commencement of all proceedings and investigations by or before
any Governmental Authority and all actions and proceedings in any court or
before any arbitrator against or involving the Borrower or any Subsidiary
thereof or any of their respective properties,
32
<PAGE>
assets or businesses which, if adversely decided, could reasonably be expected
to have a Material Adverse Effect;
(b) any notice of any violation received by the Borrower or any Subsidiary
thereof from any Governmental Authority including, without limitation, any
notice of violation of Environmental Laws which in any such case could
reasonably be expected to have a Material Adverse Effect;
(c) any labor controversy that has resulted in, or threatens to result in,
a strike or other work action against the Borrower or any Subsidiary thereof:
(d) any attachment, judgment, lien, levy or order exceeding $250,000 that
may be assessed against or threatened against the Borrower or any Subsidiary
thereof;
(e) any Default or Event of Default, or any event which constitutes or
which with the passage of time or giving of notice or both would constitute a
default or event of default under any Material Contract to which the Borrower or
any of its Subsidiaries is a party or by which the Borrower or any Subsidiary
thereof or any of their respective properties may be bound;
(f) (i) any unfavorable determination letter from the Internal Revenue
Service regarding the qualification of an Employee Benefit Plan under Section
401(a) of the Code (along with a copy thereof), (ii) all notices received by the
Borrower or any ERISA Affiliate of the PBGC's intent to terminate any Pension
Plan or to have a trustee appointed to administer any Pension Plan, (iii) all
notices received by the Borrower or any ERISA Affiliate from a Multiemployer
Plan sponsor concerning the imposition or amount of withdrawal liability
pursuant to Section 4202 of ERISA and (iv) the Borrower obtaining knowledge or
reason to know that the Borrower or any ERISA Affiliate has filed or intends to
file a notice of intent to terminate any Pension Plan under a distress
termination within the meaning of Section 4041(c) of ERISA; and
(g) any event which makes any of the representations set forth in Section
6.1 inaccurate in any material respect.
SECTION 7.6 Accuracy of Information. All written information, reports
-----------------------
statements and other papers and data furnished by or on behalf of the Borrower
to the Lender (other than financial forecasts) whether pursuant to this Article
7 or any other provision of this Agreement, or any of the Security Documents,
shall be, at the time the same is so furnished, complete and correct in all
material respects to the extent necessary to give the Lender complete, true and
accurate knowledge of the subject matter based on the Borrower's knowledge
thereof.
33
<PAGE>
ARTICLE 8.
AFFIRMATIVE COVENANTS
---------------------
Until all the Obligations have been finally and indefeasibly paid and
satisfied in full, all Letters of Credit have expired or been terminated and the
Commitment has been terminated, unless the prior written consent of the Lender
has been obtained, the Borrower will, and will cause each of its Subsidiaries
to:
SECTION 8.1 Preservation of Corporate Existence and Related Matters.
-------------------------------------------------------
Except as permitted by Section 10.4, preserve and maintain its separate
corporate existence and all rights, franchises, licenses and privileges
necessary to the conduct of its business, and qualify and remain qualified as a
foreign corporation and authorized to do business in each jurisdiction in which
the failure to so qualify would have a Material Adverse Effect.
SECTION 8.2 Maintenance of Property. Protect and preserve all
-----------------------
properties useful in and material to its business, including copyrights,
patents, trade names and trademarks; maintain in good working order and
condition all buildings, equipment and other tangible real and personal
property; and from time to time make or cause to be made all renewals,
replacements and additions to such property necessary for the conduct of its
business, so that the business carried on in connection therewith may be
properly and advantageously conducted at all times.
SECTION 8.3 Insurance. Maintain insurance with financially sound
---------
and reputable insurance companies against such risks and in such amounts as are
customarily maintained by similar businesses and as may be required by
Applicable Law, and on the Closing Date and from time to time thereafter deliver
to the Lender upon its request a detailed list of the insurance then in effect,
stating the names of the insurance companies, the amounts and rates of the
insurance, the dates of the expiration thereof and the properties and risks
covered thereby.
SECTION 8.4 Accounting Methods and Financial Records. Maintain a
----------------------------------------
system of accounting, and keep such books, records and accounts (which shall be
true and complete in all material respects) as may be required or as may be
necessary to permit the preparation of financial statements in accordance with
GAAP and in compliance with the regulations of any Governmental Authority having
jurisdiction over it or any of its properties.
SECTION 8.5 Payment and Performance of Obligations. Pay and perform
--------------------------------------
all Obligations under this Agreement and the other Loan Documents, and pay or
perform (a) all taxes, assessments and other governmental charges that may be
levied or assessed upon it or any of its property, and (b) all other
indebtedness, obligations and liabilities in accordance with customary trade
practices; provided, that the Borrower or such Subsidiary may contest any item
--------
described in the foregoing clauses (a) or (b) in good faith so long as adequate
reserves are maintained with respect thereto in accordance with GAAP.
34
<PAGE>
SECTION 8.6 Compliance With Laws and Approvals. Observe and remain in
----------------------------------
compliance with all Applicable Laws in all material respects and maintain in
full force and effect all Governmental Approvals, in each case applicable to the
conduct of its business.
SECTION 8.7 Environmental Laws. In addition to and without limiting the
------------------
generality of Section 8.6, (a) comply with, and ensure such compliance by all
tenants and subtenants, if any, with, all applicable Environmental Laws and
obtain and comply with and maintain, and ensure that all tenants and subtenants
obtain and comply with and maintain, any and all licenses, approvals,
notifications, registrations or permits required by applicable Environmental
Laws, (b) conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal and other actions required under
Environmental Laws, and promptly comply with all lawful orders and directives of
any Governmental Authority regarding Environmental Laws, and (c) defend,
indemnify and hold harmless the Lender, and its parents, Subsidiaries,
Affiliates, employees, agents, officers and directors, from and against any
claims, demands, penalties, fines, liabilities, settlements, damages, costs and
expenses of whatever kind or nature known or unknown, contingent or otherwise,
arising out of, or in any way relating to the violation of, noncompliance with
or liability under any Environmental Laws applicable to the operations of the
Borrower or such Subsidiary, or any orders, requirements or demands of
Governmental Authorities related thereto, including, without limitation,
reasonable attorney 's and consultant's fees, investigation and laboratory fees,
response costs, court costs and litigation expenses, except to the extent that
any of the foregoing directly result from the gross negligence or willful
misconduct of the party seeking indemnification therefor.
SECTION 8.8 Compliance with ERISA. In addition to and without limiting
---------------------
the generality of Section 8.6, (a) comply with all applicable provisions of
ERISA and the regulations and published interpretations thereunder with respect
to all Employee Benefit Plans, (b) not take any action or fail to take action
the result of which could be a liability to the PBGC or to a Multiemployer Plan,
(c) not participate in any prohibited transaction that could result in any civil
penalty under ERISA or tax under the Code, (d) operate each Employee Benefit
Plan in such a manner that will not incur any tax liability under Section 4980B
of the Code or any liability to any qualified beneficiary as defined in Section
4980B of the Code and (e) furnish to the Lender upon the Lender's request such
additional information about any Employee Benefit Plan as may be reasonably
requested by the Lender.
SECTION 8.9 Compliance With Agreements. Comply in all respects with each
--------------------------
term, condition and provision of all material leases, agreements and other
instruments entered into in the conduct of its business including, without
limitation, any Material Contract.
SECTION 8.10 Conduct of Business. Engage only in businesses in
-------------------
substantially the same fields as the businesses conducted on the Closing Date
and in lines of business reasonably related thereto.
SECTION 8.11 Visits and Inspections. Permit representatives of the
----------------------
Lender, from time to time during normal business hours, to visit and inspect its
properties; inspect, audit and make extracts from its books, records and files,
including, but not limited to, management letters
35
<PAGE>
prepared by independent accountants; and discuss with its principal officers,
and its independent accountants, its business, assets, liabilities, financial
condition, results of operations and business prospects.
SECTION 8.12 Additional Guarantors. Cause each Person which becomes
---------------------
a Subsidiary of Borrower after the Closing Date, promptly following such
Person's becoming a Subsidiary, to execute a joinder agreement, in form and
substance satisfactory to Lender (a "Joinder Agreement"), pursuant to which such
new Subsidiary shall become a party to the Guaranty, the Security Agreement, and
the Pledge Agreement, and to execute such other agreements, documents,
instruments and financing statements as the Lender shall require to ensure that
such new Subsidiary has guaranteed the Obligations hereunder and to ensure that
the Lender has a perfected, first priority security interest in all of the
assets, whether real or personal, tangible or intangible, of such new
Subsidiary, and cause the Borrower and its other Subsidiaries to execute such
consents and acknowledgments as the Lender may require in connection therewith.
SECTION 8.13 Year 2000 Compliance. Cause, on or prior to October 31,
--------------------
1999, in the case of the billing system for the Los Angeles, California campus,
and on or prior to August 31, 1999, in all other case, and in all cases at all
times thereafter, all software and other processing capabilities of Borrower and
its Subsidiaries to be Year 2000 Compliant.
SECTION 8.14 Further Assurances. Make, execute and deliver all such
------------------
additional and further acts, things, deeds and instruments as the Lender may
reasonably require to document and consummate the transactions contemplated
hereby and to vest completely in and insure the Lender its rights under this
Agreement, the Note, the Letters of Credit and the other Loan Documents.
ARTICLE 9.
FINANCIAL COVENANTS
-------------------
Until all the Obligations have been finally and indefeasibly paid and
satisfied in full, all Letters of Credit have expired or been terminated and the
Commitment has been terminated, unless the prior written consent of the Lender
has been obtained, the Borrower and its Subsidiaries on a consolidated basis
will not:
SECTION 9.1. Net Worth. Permit at any time its Net Worth to be less
---------
than an amount equal to (a) in the case of the fiscal quarter of Borrower ending
March 31, 1999, $36,000,000; or (b) for any subsequent fiscal quarter, an amount
equal to the sum of (i) the Net Worth required pursuant to this Section 9.1 as
of the last day of the immediately preceding fiscal quarter of Borrower plus
----
(ii) 50% of the Borrower's Net Income (if positive) for such fiscal quarter plus
----
(iii) 75% of the net proceeds received by Borrower from the issuance of its
Capital Stock during such fiscal quarter, calculated in each case on a
consolidated basis for Borrower and its consolidated Subsidiaries in accordance
with GAAP.
36
<PAGE>
SECTION 9.2. Fixed Charge Coverage Ratio. As of any fiscal quarter end,
---------------------------
commencing with the fiscal quarter ending March 31, 2000, permit the Fixed
Charge Coverage Ratio to be less than 1.00 to 1.00.
SECTION 9.3. Leverage Ratio. As of any fiscal quarter end, commencing
--------------
with the fiscal quarter ending March 31, 2000, permit Borrower's Leverage Ratio
to be more than 5.00 to 1.00.
SECTION 9.4. Rent Expense Ratio. As of the last day of any fiscal
------------------
quarter, commencing with the fiscal quarter ending March 31, 2000, permit the
ratio of (a) Borrower's Scheduled Real Property Rent Expense for the next
succeeding twelve (12) month period to (b) Borrower's Revenues for the twelve
month period then ending, to be greater than 0.120 to 1.000.
SECTION 9.5. Ratio of Actual to Budgeted Revenues. For the period from
------------------------------------
the Closing Date to and including Decenber 31, 1999, permit Borrower's Revenues
for each fiscal quarter to be less than ninety percent (90%) of the revenues
budgeted by Borrower for such fiscal quarter in the budget set forth on SCHEDULE
9.5 hereto.
SECTION 9.6. Quarterly Rent Expense Ratio. As of the last day of any
----------------------------
fiscal quarter ending on or after the Closing Date but prior to January 1, 2000,
permit the ratio of (a) Borrower's Scheduled Real Property Rent Expense for the
next succeeding fiscal quarter to (b) Borrower's Revenues for the fiscal quarter
then ending, to be greater than 0.135 to 1.000.
ARTICLE 10.
NEGATIVE COVENANTS
------------------
Until all the Obligations have been finally and indefeasibly paid and
satisfied in full, all Letters of Credit have expired or been terminated and the
Commitment has been terminated, unless the prior written consent of the Lender
has been obtained, the Borrower has not and will not permit any of its
Subsidiaries to:
SECTION 10.1 Limitations on Debt. Create, incur, assume or suffer to
-------------------
exist any Debt or Contingent Obligations except:
(a) the Obligations;
(b) Debt incurred in connection with a Hedging Agreement with a
counterparty and upon terms and conditions reasonably satisfactory to the
Lender;
(c) Debt (i) existing on the Closing Date and not otherwise permitted under
this Section 10.1, as set forth on Schedule 6.1(u) and the renewal and
---------------
refinancing (but not the increase) thereof plus (ii) additional purchase money
----
Debt of the Borrower and its Subsidiaries or Debt incurred in connection with
Capital Lease in an aggregate outstanding amount not to
37
<PAGE>
exceed, in the case of this clause (ii), $4,000,000, during the Fiscal Year of
Borrower ending December 31, 1999, and $8,000,000 in the aggregate during the
term of this Agreement; and
(d) intercompany Debt between the Borrower and any Guarantor or between
Guarantors;
provided, that none of the Debt permitted to be incurred by this Section shall
- --------
restrict, limit or otherwise encumber (by covenant or otherwise) the ability of
any Subsidiary of the Borrower to make any payment to the Borrower or any of its
Subsidiaries (in the form of dividends, intercompany advances or otherwise) for
the purpose of enabling the Borrower to pay the Obligations.
SECTION 10.2 Limitations on Liens. Create, incur, assume or suffer to
--------------------
exist, any Lien on or with respect to any of its assets or properties (including
without limitation shares of Capital Stock), real or personal, whether now owned
or hereafter acquired, except:
(a) Liens for taxes, assessments and other governmental charges or levies
(excluding any Lien imposed pursuant to any of the provisions of ERISA or
Environmental Laws) not yet due or as to which the period of grace (not to
exceed thirty (30) days), if any, related thereto has not expired;
(b) the claims of materialmen, mechanics, carriers, warehousemen,
processors or landlords for labor, materials, supplies or rentals or similar
Liens imposed by law incurred in the ordinary course of business (i) which are
not overdue for a period of more than thirty (30) days or (ii) which are being
contested in good faith and by appropriate proceedings;
(c) Liens consisting of deposits or pledges made in the ordinary course of
business in connection with, or to secure payment of, obligations under workers'
compensation, unemployment insurance or similar legislation or obligations and
deposits made in the ordinary course of business in connection with, or to
secure payment of, obligations under insurance policies;
(d) Liens of the Lender;
(e) Liens not otherwise permitted by this Section 10.2 and in existence on
the Closing Date and described on Schedule 10.2; and
-------------
(f) Liens securing Debt permitted under Section 10.1(c)(ii); provided that
--------
(i) such Liens shall be created substantially simultaneously with the
acquisition of the related asset, (ii) such Liens do not at any time encumber
any property other than the property financed by such Debt, (iii) the amount of
Debt secured thereby is not increased and (iv) the principal amount of Debt
secured by any such Lien shall at no time exceed ninety percent (90%) of the
original purchase price of such property at the time it was acquired.
38
<PAGE>
SECTION 10.3 Limitations on Loans. Advances, Investments and Acquisitions.
------------------------------------------------------------
Purchase, own, invest in or otherwise acquire, directly or indirectly, any
Capital Stock, interests in any partnership or joint venture (including without
limitation the creation or capitalization of any Subsidiary), evidence of Debt
or other obligation or security, substantially all or a portion of the business
or assets of any other Person or any other investment or interest whatsoever in
any other Person, or make or permit to exist, directly or indirectly, any loans,
advances or extensions of credit to, or any investment in cash or by delivery of
property in, any Person, or enter into, directly or indirectly, any commitment
or option in respect of the foregoing except:
(a) investments in Subsidiaries existing on the Closing Date and the other
existing loans, advances and investments described on Schedule 10.3;
-------------
(b) investments in (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency thereof
maturing within 120 days from the date of acquisition thereof, (ii) commercial
paper maturing no more than 120 days from the date of creation thereof and
currently having the highest rating obtainable from either Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc. or Moody's
Investors Service, Inc., (iii) certificates of deposit maturing no more than 120
days from the date of creation thereof issued by commercial banks incorporated
under the laws of the United States of America, each having combined capital,
surplus and undivided profits of not less than $500,000,000 and having a rating
of "A" or better by a nationally recognized rating agency; provided, that the
--------
aggregate amount invested in such certificates of deposit shall not at any time
exceed $5,000,000 for any one such certificate of deposit and $10,000,000 for
any one such bank, or (iv) time deposits maturing no more than 30 days from the
date of creation thereof with commercial banks or savings banks or savings and
loan associations each having membership either in the FDIC or the deposits of
which are insured by the FDIC and in amounts not exceeding the maximum amounts
of insurance thereunder;
(c) investments made by Borrower or any Subsidiary in any Guarantor; and
(d) loans and advances made to employees in an aggregate principal amount
not to exceed $100,000 at any one time outstanding.
SECTION 10.4 Limitations on Mergers and Liquidation. Merge, consolidate or
--------------------------------------
enter into any similar combination with any other Person or liquidate, wind-up
or dissolve itself (or suffer any liquidation or dissolution) except:
(a) any Wholly-Owned Subsidiary of the Borrower may merge with any other
Wholly-Owned Subsidiary of the Borrower which is also a Guarantor;
(b) any Wholly-Owned Subsidiary may merge into the Person in connection
with an acquisition consented by Lender in accordance with Section 10.3;
provided that the Person surviving such merger (i) is a Wholly-Owned Subsidiary
- --------
and (ii) executes and delivers all instruments, documents and agreements
required by Section 8.12 hereof; and
39
<PAGE>
(c) any Wholly-Owned Subsidiary of the Borrower may wind-up into the
Borrower or any other Wholly-Owned Subsidiary of the Borrower which is a
Guarantor.
SECTION 10.5 Limitations on Sale of Assets. Convey, sell, lease, assign,
-----------------------------
transfer or otherwise dispose of any of its property, business or assets
(including, without limitation, the sale of any receivables and leasehold
interests and any sale-leaseback or similar transaction), whether now owned or
hereafter acquired except:
(a) the sale of inventory in the ordinary course of business;
(b) the sale of obsolete assets no longer used or usable in the business of
the Borrower which is a Guarantor or any of its Subsidiaries and having an
aggregate value of not greater than $750,000;
(c) the transfer of assets to the Borrower or any Wholly-Owned Subsidiary
of the Borrower pursuant to Section 10.4(c); and
(d) the sale or discount without recourse of accounts receivable arising in
the ordinary course of business in connection with the compromise or collection
thereof.
SECTION 10.6 Limitations on Dividends and Distributions. Declare or pay
------------------------------------------
any dividends upon any of its Capital Stock; purchase, redeem, retire or
otherwise acquire, directly or indirectly, any shares of its Capital Stock, or
make any distribution of cash, property or assets among the holders of shares of
its Capital Stock, or make any change in its capital structure; provided that:
--------
(a) the Borrower or any Subsidiary may pay dividends in shares of its own
Capital Stock;
(b) any Subsidiary may pay cash dividends to the Borrower or to any Wholly-
Owned Subsidiary of Borrower; and
(c) the Borrower may purchase up to one million shares of its common stock
for an aggregate purchase price not to exceed $1,000,000 during the Fiscal Year
ending December 31, 1999 and not to exceed $5,000,000 in the aggregate during
the term of this Agreement; provided, however, that at the time of such
-------- -------
purchase, and giving effect thereto, there does not exist a Default or Event of
Default.
SECTION 10.7 Limitations on Exchange and Issuance of Capital Stock.
-----------------------------------------------------
Issue, sell or otherwise dispose of any class or series of Capital Stock that,
by its terms or by the terms of any security into which it is convertible or
exchangeable, is, or upon the happening of an event or passage of time would be,
(a) convertible or exchangeable into Debt or (b) required to be redeemed or
repurchased, including at the option of the holder, in whole or in part, or has,
or
40
<PAGE>
upon the happening of an event or passage of time would have, a redemption or
similar payment due.
SECTION 10.8 Transactions with Affiliates. Directly or indirectly: (a)
----------------------------
make any loan or advance to, or purchase or assume any note or other obligation
to or from, any of its officers, directors, shareholders or other Affiliates, or
to or from any member of the immediate family of any of its officers, directors,
shareholders or other Affiliates, or subcontract any operations to any of its
Affiliates, or (b) enter into, or be a party to, any transaction with any of its
Affiliates, except pursuant to the reasonable requirements of its business and
upon fair and reasonable terms that are fully disclosed to the Lender (which
disclosure may be made by the delivery to Lender of reports or other documents
disclosing such transactions which are filed by the Borrower with the Securities
and Exchange Commission) and are no less favorable to it than it would obtain in
a comparable arm's length transaction with a Person not its Affiliate.
SECTION 10.9 Certain Accounting Changes. Change its Fiscal Year end, or
--------------------------
make any change in its accounting treatment and reporting practices except as
required by GAAP.
SECTION 10.10 Restrictive Agreements. Enter into any Debt which contains
----------------------
any negative pledge on assets or any covenants more restrictive than the
provisions of Articles 8, 9 and 10 hereof, or which restricts, limits or
otherwise encumbers its ability to incur Liens on or with respect to any of its
assets or properties other than the assets or properties securing such Debt.
SECTION 10.11 Flight Enterprises. Permit Flight Enterprises to own
------------------
any material assets or conduct any business.
ARTICLE 11.
DEFAULT AND REMEDIES
--------------------
SECTION 11.1 Events of Default. Each of the following shall constitute
-----------------
an Event of Default, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment or order of any court or any order, rule or regulation of any
Governmental Authority or otherwise:
(a) Default in Payment of Principal of Loans. The Borrower shall default in
----------------------------------------
any payment of principal of any Loan or the Note when and as due (whether at
maturity, by reason of acceleration or otherwise).
(b) Other Payment Default. The Borrower shall default in the payment when
---------------------
and as due (whether at maturity, by reason of acceleration or otherwise) of
interest on any Loan or Note or the payment of any other Obligation, and such
default shall continue unremedied for five (5) Business Days.
41
<PAGE>
(c) Misrepresentation. Any representation or warranty made or deemed to be
-----------------
made by the Borrower or any of its Subsidiaries under this Agreement, any Loan
Document or any amendment hereto or thereto, shall at any time prove to have
been incorrect or misleading in any material respect when made or deemed made.
(d) Default in Performance of Covenants and Conditions. The Borrower or any
--------------------------------------------------
Subsidiary thereof shall default in the performance or observance of (i) any
term, covenant, condition or agreement contained in Article 7 or 8 hereof
(excluding Section 7.5 hereof) and such default shall continued unremedied for
thirty (30) days or (ii) any other term, covenant, condition or agreement
contained in this Agreement (other than as specifically provided for otherwise
in this Section 11.1) or any other Loan Document.
(e) Hedging Agreement. Any termination payment shall be due by the Borrower
-----------------
under any Hedging Agreement and such amount is not paid within three (3)
Business Days of the due date thereof.
(f) Debt Cross-Default. The Borrower or any of its Subsidiaries shall (i)
------------------
default in the payment of any Debt (other than the Obligations) which is
outstanding in a principal amount of at least $200,000 beyond the period of
grace if any, provided in the instrument or agreement under which such Debt was
created, or (ii) default in the observance or performance of any other agreement
or condition relating to any Debt (other than the Obligations) which is
outstanding in a principal amount of at least $200,000 or contained in any
instrument or agreement evidencing, securing or relating thereto or any other
event shall occur or condition exist, the effect of which default or other event
or condition is to cause, or to permit the holder or holders of such Debt (or a
trustee or agent on behalf of such holder or holders) to cause with the giving
of notice if required, any such Debt to become due prior to its stated maturity
(any applicable grace period having expired).
(g) Other Cross-Defaults. The Borrower or any of its Subsidiaries shall
--------------------
default in the payment when due, or in the performance or observance, of any
obligation or condition of any Material Contract beyond the period of grace if
any, provided in such Material Contract.
(h) Change in Control. Steve Bostic shall fail to beneficially own (within
-----------------
the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended,
as in effect on the date hereof) shares of Capital Stock with the power to vote
at least a majority of the votes entitled to be cast for the election of
directors of the Borrower (it being understood that the shares of Capital Stock
so owned by Steve Bostic need only represent a majority of the voting power of
the Borrower and need not be a majority of the issued and outstanding shares of
Capital Stock of the Borrower).
(i) Voluntary Bankruptcy Proceeding. The Borrower or any Subsidiary thereof
-------------------------------
shall (i) commence a voluntary case under the federal bankruptcy laws (as now or
hereafter in effect), (ii) file a petition seeking to take advantage of any
other laws, domestic or foreign, relating to bankruptcy, insolvency,
reorganization, winding up or composition for adjustment of debts, (iii) consent
to or fail to contest in a timely and appropriate manner any petition filed
against it in an
42
<PAGE>
involuntary case under such bankruptcy laws or other laws, (iv) apply for or
consent to, or fail to contest in a timely and appropriate manner, the
appointment of, or the taking of possession by, a receiver, custodian, trustee,
or liquidator of itself or of a substantial part of its property, domestic or
foreign, (v) admit in writing its inability to pay its debts as they become due,
(vi) make a general assignment for the benefit of creditors, or (vii) take any
corporate action for the purpose of authorizing any of the foregoing.
(j) Involuntary Bankruptcy Proceeding. A case or other proceeding shall be
---------------------------------
commenced against the Borrower or any Subsidiary thereof in any court of
competent jurisdiction seeking (i) relief under the federal bankruptcy laws (as
now or hereafter in effect) or under any other laws, domestic or foreign,
relating to bankruptcy, insolvency, reorganization, winding up or adjustment of
debts, or (ii) the appointment of a trustee, receiver, custodian, liquidator or
the like for the Borrower or any Subsidiary thereof or for all or any
substantial part of their respective assets, domestic or foreign, and such case
or proceeding shall continue undismissed or unstayed for a period of sixty (60)
consecutive days, or an order granting the relief requested in such case or
proceeding (including, but not limited to, an order for relief under such
federal bankruptcy laws) shall be entered.
(k) Failure of Agreements. This Agreement or of any other Loan Document
---------------------
shall for any reason cease to be valid and binding on the Borrower or Subsidiary
party thereto or any such Person shall so state in writing, or any Security
Document shall for any reason cease to create a valid and perfected first
priority Lien on, or security interest in, any of the collateral purported to be
covered thereby, in each case other than in accordance with the express terms
hereof or thereof.
(l) Termination Event. The occurrence of any of the following events: (i)
-----------------
the Borrower or any ERISA Affiliate fails to make full payment when due of all
amounts which, under the provisions of any Pension Plan or Section 412 of the
Code, the Borrower or any ERISA Affiliate is required to pay as contributions
thereto, (ii) an accumulated funding deficiency in excess of $100,000 occurs or
exists, whether or not waived, with respect to any Pension Plan, (iii) a
Termination Event or (iv) the Borrower or any ERISA Affiliate as employers under
one or more Multiemployer Plan makes a complete or partial withdrawal from any
such Multiemployer Plan and the plan sponsor of such Multiemployer Plans
notifies such withdrawing employer that such employer has incurred a withdrawal
liability requiring payments in an amount exceeding $100,000.
(m) Judgment. A judgment or order for the payment of money which causes the
--------
aggregate amount of all such judgments to exceed $250,000 in any Fiscal Year
shall be entered against the Borrower or any of its Subsidiaries by any court
and such judgment or order shall continue undischarged or unstayed for a period
of thirty (30) days.
SECTION 11.2 Remedies. Upon the occurrence of an Event of Default, the
--------
Lender may, by notice to the Borrower:
43
<PAGE>
(a) Acceleration; Termination of Facilities. Declare the principal of and
---------------------------------------
interest on the Loans, the Note, the Reimbursement Obligations and the other
Obligations at the time outstanding, and all other amounts owed to the Lender
under this Agreement or any of the other Loan Documents (including, without
limitation, all L/C Obligations, whether or not the beneficiaries of the then
outstanding Letters of Credit shall have presented the documents required
thereunder), to be forthwith due and payable, whereupon the same shall
immediately become due and payable without presentment, demand, protest or other
notice of any kind, all of which are expressly waived, anything in this
Agreement or the other Loan Documents to the contrary notwithstanding, and
terminate the Credit Facility and any right of the Borrower to request
borrowings or Letters of Credit thereunder; provided, that upon the occurrence
--------
of an Event of Default specified in Section 11.1(i) or (j), the Credit Facility
shall be automatically terminated and all Obligations shall automatically become
due and payable.
(b) Letters of Credit. With respect to all Letters of Credit with respect
-----------------
to which presentment for honor shall not have occurred at the time of an
acceleration pursuant to the preceding paragraph, require the Borrower at such
time to deposit in a cash collateral account opened by the Lender an amount
equal to the aggregate then undrawn and unexpired amount of such Letters of
Credit. Amounts held in such cash collateral account shall be applied by the
Lender to the payment of drafts drawn under such Letters of Credit, and the
unused portion thereof after all such Letters of Credit shall have expired, been
terminated or been fully drawn upon, if any, shall be applied to repay the other
Obligations. After all such Letters of Credit shall have expired, been
terminated or been fully drawn upon, the Reimbursement Obligations shall have
been satisfied and all other Obligations shall have been paid in full, the
balance, if any, in such cash collateral account shall be returned to the
Borrower.
(c) Rights of Collection. Exercise all of its other rights and remedies
--------------------
under this Agreement, the other Loan Documents and Applicable Law, in order to
satisfy all of the Borrower's Obligations.
SECTION 11.3 Rights and Remedies Cumulative; Non-Waiver; etc.. The
------------------------------------------------
enumeration of the rights and remedies of the Lender set forth in this Agreement
is not intended to be exhaustive and the exercise by the Lender of any right or
remedy shall not preclude the exercise of any other rights or remedies, all of
which shall be cumulative, and shall be in addition to any other right or remedy
given hereunder or under the Loan Documents or that may now or hereafter exist
in law or in equity or by suit or otherwise. No delay or failure to take action
on the part of the Lender in exercising any right, power or privilege shall
operate as a waiver thereof, nor shall any single or partial exercise of any
such right, power or privilege preclude other or further exercise thereof or the
exercise of any other right, power or privilege or shall be construed to be a
waiver of any Event of Default. No course of dealing between the Borrower, the
Lender or its agents or employees shall be effective to change, modify or
discharge any provision of this Agreement or any of the other Loan Documents or
to constitute a waiver of any Event of Default.
44
<PAGE>
ARTICLE 12.
MISCELLANEOUS
-------------
SECTION 12.1 Notices.
-------
(a) Method of Communication. Except as otherwise provided in this
-----------------------
Agreement, all notices and communications hereunder shall be in writing, or by
telephone subsequently confirmed in writing. Any notice shall be effective if
delivered by hand delivery or sent via telecopy, recognized overnight courier
service or certified mail, return receipt requested, and shall be presumed to be
received by a party hereto (i) on the date of delivery if delivered by hand or
sent by telecopy, (ii) on the next Business Day if sent by recognized overnight
courier service and (iii) on the third Business Day following the date sent by
certified mail, return receipt requested. A telephonic notice to the Lender as
understood by the Lender will be deemed to be the controlling and proper notice
in the event of a discrepancy with or failure to receive a confirming written
notice.
(b) Addresses for Notices. Notices to any party shall be sent to it at the
---------------------
following addresses, or any other address as to which all the other parties are
notified in writing.
If to the Borrower: Edutrek International Inc.
6600 Peachtree Dunwoody Road
500 Embassy Row
Atlanta, GA 30328
Attention: Daniel D. Moore
Telephone No.: (404) 812-8200
Telecopy No.: (404) 965-8005
With copies to: Smith Gambrell & Russell, LLP
Suite 3100 Promenade II
1230 Peachtree Street N.E.
Atlanta, GA 30309
Attention: Arthur Jay Schwartz, Esq.
Telephone No.: (404) 815-3632
Telecopy No.: (404) 685-6932
If to Lender: First Union National Bank
P.O. Box 740074
Atlanta, GA 30374
Attention: Tim King
Telephone No. (404) 225-4012
Telecopy No.: (404) 225-4286
45
<PAGE>
With copies to: Troutman Sanders LLP
600 Peachtree Street N.E.
Suite 5200
Atlanta, GA 30308
Attention: Hazen H. Dempster, Esq.
Telephone No.: (404) 885-3126
Telecopy No.: (404) 885-3995
(c) Lender's Office. The Lender hereby designates its office located at the
---------------
address set forth above, or any subsequent office which shall have been
specified for such purpose by written notice to the Borrower, as the Lender's
Office referred to herein, to which payments due are to be made and at which
Loans will be disbursed and Letters of Credit will be issued.
SECTION 12.2 Expenses; Indemnity. The Borrower will (a) pay all out-of-
-------------------
pocket expenses of the Lender in connection with: (i) the preparation, execution
and delivery of this Agreement and each other Loan Document, whenever the same
shall be executed and delivered, including without limitation all due diligence
expenses and reasonable fees and disbursements of counsel for the Lender, (ii)
the preparation, execution and delivery of any waiver, amendment or consent by
the Lender relating to this Agreement or any other Loan Document, including
without limitation reasonable fees and disbursements of counsel for the Lender
and (iii) the administration and enforcement of any rights and remedies of the
Lender under the Credit Facility, including consulting with appraisers,
accountants, engineers, attorneys and other Persons concerning the nature, scope
or value of any right or remedy of the Lender hereunder or under any other Loan
Document or any factual matters in connection therewith, which expenses shall
include without limitation the reasonable fees and disbursements of such
Persons, and (b) defend, indemnify and hold harmless the Lender, and its parent,
Subsidiaries, Affiliates, employees, agents, officers and directors, from and
against any losses, penalties, fines, liabilities, settlements, damages, costs
and expenses, suffered by any such Person in connection with any claim,
investigation, litigation or other proceeding (whether or not the Lender is a
party thereto) and the prosecution and defense thereof, arising out of or in any
way connected with the Agreement, any other Loan Document or the Loans,
including without limitation reasonable attorneys' and consultants' fees, except
to the extent that any of the foregoing directly result from the gross
negligence or willful misconduct of the party seeking indemnification therefor.
SECTION 12.3 Set-off. In addition to any rights now or hereafter granted
-------
under Applicable Law and not by way of limitation of any such rights, upon and
after the occurrence of any Event of Default and during the continuance thereof,
the Lender in accordance with Section 12.10 is hereby authorized by the Borrower
at any time or from time to time, without notice to the Borrower or to any other
Person, any such notice being hereby expressly waived, to set off and to
appropriate and to apply any and all deposits (general or special, time or
demand, including, but not limited to, indebtedness evidenced by certificates of
deposit, whether matured or unmatured) and any other indebtedness at any time
held or owing by the Lender to or for the credit or the account of the Borrower
against and on account of the Obligations irrespective of whether or not (a) the
Lender shall have made any demand under this Agreement or any of the other Loan
Documents or (b) the Lender shall have declared any or all of the Obligations to
be
46
<PAGE>
due and payable as permitted by Section 11.2 and although such Obligations shall
be contingent or unmatured.
SECTION 12.4 Governing Law. This Agreement, the Note and the other Loan
-------------
Documents, unless otherwise expressly set forth therein, shall be governed by,
construed and enforced in accordance with the laws of the State of Georgia,
without reference to the conflicts or choice of law principles thereof.
SECTION 12.5 Consent to Jurisdiction. The Borrower hereby irrevocably
-----------------------
consents to the personal jurisdiction of the state and federal courts located in
Fulton County, Georgia, in any action, claim or other proceeding arising out of
any dispute in connection with this Agreement, the Note and the other Loan
Documents, any rights or obligations hereunder or thereunder, or the performance
of such rights and obligations. The Borrower hereby irrevocably consents to the
service of a summons and complaint and other process in any action, claim or
proceeding brought by the Lender in connection with this Agreement, the Note or
the other Loan Documents, any rights or obligations hereunder or thereunder, or
the performance of such rights and obligations, on behalf of itself or its
property in the manner specified in Section 12.1. Nothing in this Section 12.5
shall affect the right of the Lender to serve legal process in any other manner
permitted by Applicable Law or affect the right of the Lender to bring any
action or proceeding against the Borrower or its properties in the courts of any
other jurisdictions.
SECTION 12.6 Binding Arbitration; Waiver of Jury Trial.
-----------------------------------------
(a) Binding Arbitration. Upon demand of any party, whether made before or
-------------------
after institution of any judicial proceeding, any dispute, claim or controversy
arising out of, connected with or relating to the Note or any other Loan
Documents ("Disputes"), between or among parties to the Note or any other Loan
Document shall be resolved by binding arbitration as provided herein.
Institution of a judicial proceeding by a party does not waive the right of that
party to demand arbitration hereunder. Disputes may include, without
limitation, tort claims, counterclaims, claims brought as class actions, claims
arising from Loan Documents executed in the future, or claims concerning any
aspect of the past, present or future relationships arising out of or connected
with the Loan Documents. Arbitration shall be conducted under and governed by
the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of
the American Arbitration Association and Title 9 of the U.S. Code. All
arbitration hearings shall be conducted in Atlanta, Georgia. The expedited
procedures set forth in Rule 51, et seq. of the Arbitration Rules shall be
-- ---
applicable to claims of less than $250,000. All applicable statutes of
limitation shall apply to any Dispute. A judgment upon the award may be entered
in any court having jurisdiction. The panel from which all arbitrators are
selected shall be comprised of licensed attorneys. The single arbitrator
selected for expedited procedure shall be a retired judge from the highest court
of general jurisdiction, state or federal, of the state where the hearing will
be conducted. Notwithstanding the foregoing, this paragraph shall not apply to
any Hedging Agreement that is a Loan Document.
(b) Jury Trial. TO THE EXTENT PERMITTED BY LAW, THE LENDER AND THE BORROWER
----------
HEREBY IRREVOCABLY WAIVE THEIR RESPECTIVE RIGHTS
47
<PAGE>
TO A JURY TRIAL WITH RESPECT TO ANY ACTION, CLAIM OR OTHER PROCEEDING ARISING
OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTE OR THE OTHER LOAN
DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER, OR THE PERFORMANCE
OF SUCH RIGHTS AND OBLIGATIONS.
(c) Preservation of Certain Remedies. Notwithstanding the preceding
--------------------------------
binding arbitration provisions, the parties hereto and the other Loan Documents
preserve, without diminution, certain remedies that such Persons may employ or
exercise freely, either alone, in conjunction with or during a Dispute. Each
such Person shall have and hereby reserves the right to proceed in any court of
proper jurisdiction or by self help to exercise or prosecute the following
remedies: (i) all rights to foreclose against any real or personal property or
other security by exercising a power of sale granted in the Loan Documents or
under applicable law or by judicial foreclosure and sale, (ii) all rights of
self help including peaceful occupation of property and collection of rents, set
off, and peaceful possession of property, (iii) obtaining provisional or
ancillary remedies including injunctive relief, sequestration, garnishment,
attachment, appointment of receiver and in filing an involuntary bankruptcy
proceeding, and (iv) when applicable, a judgment by confession of judgment.
Preservation of these remedies does not limit the power of an arbitrator to
grant similar remedies that may be requested by a party in a Dispute.
SECTION 12.7 Reversal of Payments. To the extent the Borrower makes a
--------------------
payment or payments to the Lender or the Lender receives any payment or proceeds
of the collateral which payments or proceeds or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then, to
the extent of such payment or proceeds repaid, the Obligations or part thereof
intended to be satisfied shall be revived and continued in full force and effect
as if such payment or proceeds had not been received by the Lender.
SECTION 12.8 Injunctive Relief; Punitive Damages.
-----------------------------------
(a) The Borrower recognizes that, in the event the Borrower fails to
perform, observe or discharge any of its obligations or liabilities under this
Agreement, any remedy of law may prove to be inadequate relief to the Lender.
Therefore, the Borrower agrees that the Lender, at its option, shall be entitled
to temporary and permanent injunctive relief in any such case without the
necessity of proving actual damages.
(b) The Lender and Borrower (on behalf of itself and its Subsidiaries)
hereby agree that no such Person shall have a remedy of punitive or exemplary
damages against any other party to a Loan Document and each such Person hereby
waives any right or claim to punitive or exemplary damages that they may now
have or may arise in the future in connection with any Dispute, whether such
Dispute is resolved through arbitration or judicially.
48
<PAGE>
(c) The parties agree that they shall not have a remedy of punitive or
exemplary damages against any other party in any Dispute and hereby waive any
right or claim to punitive or exemplary damages they have now or which may arise
in the future in connection with any Dispute whether the Dispute is resolved by
arbitration or judicially.
SECTION 12.9 Accounting Matters. All financial and accounting
------------------
calculations, measurements and computations made for any purpose relating to
this Agreement, including, without limitation, all computations utilized by the
Borrower or any Subsidiary thereof to determine compliance with any covenant
contained herein, shall, except as otherwise expressly contemplated hereby or
unless there is an express written direction by the Lender to the contrary
agreed to by the Borrower, be performed in accordance with GAAP as in effect on
the Closing Date. In the event that changes in GAAP shall be mandated by the
Financial Accounting Standards Board, or any similar accounting body of
comparable standing, or shall be recommended by the Borrower's certified public
accountants, to the extent that such changes would modify such accounting terms
or the interpretation or computation thereof, such changes shall be followed in
defining such accounting terms only from and after the date the Borrower and the
Lender shall have amended this Agreement to the extent necessary to reflect any
such changes in the financial covenants and other terms and conditions of this
Agreement.
SECTION 12.10 Successors and Assigns; Confidentiality.
---------------------------------------
(a) Benefit of Agreement. This Agreement shall be binding upon and inure to
--------------------
the benefit of the Borrower, the Lender, all future holders of the Note, and
their respective successors and assigns, except that the Borrower shall not
assign or transfer any of its rights or obligations under this Agreement without
the prior written consent of the Lender.
(b) Disclosure of Information; Confidentiality. The Lender shall hold all
------------------------------------------
non-public information with respect to the Borrower obtained pursuant to the
Loan Documents in accordance with its customary procedures for handling
confidential information. Lender may, in connection with any assignment,
proposed assignment, participation or proposed participation of the Obligations
or this Agreement, disclose to the assignee, participant. proposed assignee or
proposed participant, any information relating to the Borrower furnished to the
Lender by or on behalf of the Borrower; provided, that prior to any such
--------
disclosure, each such assignee, proposed assignee, participant or proposed
participant shall agree with the Borrower or the Lender to preserve the
confidentiality of any confidential information relating to the Borrower
received from the Lender.
SECTION 12.11 Amendments, Waivers and Consents. Any term, covenant,
--------------------------------
agreement or condition of this Agreement or any of the other Loan Documents may
be amended or waived by the Lender, and any consent given by the Lender, if, but
only if, such amendment, waiver or consent is in writing signed by the Lender
and, in the case of an amendment, signed by the Borrower.
49
<PAGE>
SECTION 12.12 Performance of Duties. The Borrower's obligations under
---------------------
this Agreement and each of the Loan Documents shall be performed by the Borrower
at its sole cost and expense.
SECTION 12.13 All Powers Coupled with Interest. All powers of attorney
--------------------------------
and other authorizations granted to the Lender and any Persons designated by the
Lender pursuant to any provisions of this Agreement or any of the other Loan
Documents shall be deemed coupled with an interest and shall be irrevocable so
long as any of the Obligations remain unpaid or unsatisfied or the Credit
Facility has not been terminated.
SECTION 12.14 Survival of Indemnities. Notwithstanding any termination
-----------------------
of this Agreement, the indemnities to which the Lender is entitled under the
provisions of this Article 12 and any other provision of this Agreement and the
Loan Documents shall continue in full force and effect and shall protect the
Lender against events arising after such termination as well as before.
SECTION 12.15 Titles and Captions. Titles and captions of Articles,
-------------------
Sections and subsections in this Agreement are for convenience only, and neither
limit nor amplify the provisions of this Agreement.
SECTION 12.16 Severability of Provisions Any provision of this Agreement
--------------------------
or any other Loan Document which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
of such prohibition or unenforceability without invalidating the remainder of
such provision or the remaining provisions hereof or thereof or affecting the
validity or enforceability of such provision in any other jurisdiction.
SECTION 12.17 Counterparts. This Agreement may be executed in any number
------------
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and shall be binding
upon all parties, their successors and assigns, and all of which taken together
shall constitute one and the same agreement.
SECTION 12.18 Term of Agreement. This Agreement shall remain in effect
-----------------
from the Closing Date through and including the date upon which all Obligations
shall have been indefeasibly and irrevocably paid and satisfied in full. No
termination of this Agreement shall affect the rights and obligations of the
parties hereto arising prior to such termination.
[Signature pages to follow]
50
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed under seal by their duly authorized officers, all as of the day and
year first written above
[CORPORATE SEAL] EDUTREK INTERNATIONAL, INC.
By:_________________________
R. Steven Bostic:
Chairman of the Board and CEO
Attest:_____________________
Douglas Chait
Secretary
FIRST UNION NATIONAL BANK
By:_________________________
Name:______________________
Title:_____________________
51
<PAGE>
EXHIBIT 10.6
SUMMARY OF BASIC LEASE INFORMATION
----------------------------------
This Summary of Basic Lease Information ("SUMMARY") is hereby
incorporated into and made a part of the attached Office Lease. Each reference
in the Office Lease to any term of this Summary shall have the meaning as set
forth in this Summary for such term. In the event of a conflict between the
terms of this Summary and the Office Lease, the terms of the Office Lease shall
prevail. Any capitalized terms used herein and not otherwise defined herein
shall have the meaning as set forth in the Office Lease.
<TABLE>
<CAPTION>
TERMS OF LEASE DESCRIPTION
<S> <C>
(References are to
the Office Lease)
1. Date: June 19, 1998.
2. Landlord: W9/WLA REAL ESTATE LIMITED
PARTNERSHIP,
a Delaware limited partnership
3. Address of Landlord's Agent LPC MS, Inc.
(Section 24.19): 4041 MacArthur Boulevard
Suite 175
Newport Beach, California 92600
Attn: Steven Center
with a copy to:
LPC MS, Inc.
455 Market Street, Suite 1520
San Francisco, California 94105
Attn: Mr. D. Allen Palmer
4. Tenant: EDUTREK INTERNATIONAL, INC., a Georgia
corporation
5. Address of Tenant Edutrek International
(Section 24.19): 3340 Peachtree Road Northeast
Suite 2000
Atlanta, Georgia 30326
Attention: Ms. Stephanie Kirkpatrick
with a copy to:
Smith, Gambrell & Russell, LLP
1230 Peachtree Street, N.E.
Suite 3100, Promenade 11
Atlanta, Georgia 30309-3595
Attention: Arthur Jay Schwartz, Esq.
and
Cushman & Wakefield
3300 One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Attention: Mr. Andrew Ghertner
(Prior to Lease Commencement Date)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
and
Edutrek International, Inc.
12655 West Jefferson Boulevard
Los Angeles, California 90066
Attention: Mr. Kevin Martin
with a copy to:
Smith, Gambrell & Russell, LLP
1230 Peachtree Street, N.E.
Suite 3100, Promenade 11
Atlanta, Georgia 30309-3595
Attention: Arthur Jay Schwartz, Esq.
and
Cushman & Wakefield
3300 One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Attention: Mr. Andrew Ghertner
(After Lease Commencement Date)
6. Premises (Article 1): Approximately 86,471 rentable (83,503 usable)
square feet of space, as set forth on
Exhibit A, attached hereto (the "Initial
Premises"),which Initial Premises consists of
the entire rentable area of the Building other
than the "Expansion Premises," as that term is
defined in Section 1.3 of this Lease. As of
the "Expansion Premises Commencement Date," as
that term is defined in Section 1.3 of this
Lease, the Premises shall consist of all of the
rentable area of the Building, which consists
of approximately 88,215 rentable (85,101
usable) square feet of space.
7. Term (Article 2).
7.1 Lease Term: Ten (10) years and nine (9) months.
7.2 Lease Commencement
Date: The earlier to occur of (i) ninety (90) days
following the date Tenant receives final,
nonappealable "Governmental Approvals," as that
term is defined in Section 2.2.1 of this Lease,
(ii) October 15, 1998, and (iii) the date
Tenant commences to conduct business from the
Premises.
7.3 Lease Expiration Date: The last day of the month in which the ten (10)
year and nine (9) month anniversary of the
Lease Commencement Date occurs.
7.4 Amendment to Lease: Landlord and Tenant shall confirm the Lease
Commencement Date and Lease Expiration Date in
an Amendment to Lease (Exhibit "C") to be
-----------
executed pursuant to Article 2 of the Office
Lease.
8. Base Rent (Article 3):
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Month of Annual Installment
Lease Term Base Rent of Base Rent
---------- --------- ------------
<S> <C> <C>
One (1) through Five (5) $ 529,202.52 $ 44,100.21
Six (6) through Eight (8) $ 653,720.76 $ 54,476.73
Nine (9) through Eleven (11) $ 944,263.32 $ 78,688.61
Twelve (12) through Fourteen (14) $1,224,429.30 $102,035.78
Fifteen (15) through Seventeen (17) $1,680,996.20 $140,083.02
Eighteen (18) through Thirty (30) $2,137,563.10 $178,130.26
Thirty-One (31) through Sixty (60) $2,365,846.50 $197,153.88
Sixty-One (61) through Ninety (90) $2,614,883.00 $217,906.92
Ninety (91) through One Hundred Twenty $2,895,049.00 $241,254.09
(120)
One Hundred Twenty-One (121) through $3,206,344.60 $267,195.39
One Hundred Twenty-Nine (129)
</TABLE>
THE BASE RENT SET FORTH ABOVE DOES NOT REFLECT TENANT'S LEASE OF THE EXPANSION
PREMISES AND THEREFORE SHALL INCREASE AS OF THE EXPANSION PREMISES COMMENCEMENT
DATE IN ACCORDANCE WITH THE TERMS OF SECTION 1.3 OF THIS LEASE.
<TABLE>
<S> <C>
9. Additional Rent (Article 4):
9.1 Base Year: The first twelve (12) months of the Lease Term
beginning on the Lease Commencement Date.
9.2 Tenant's Share of
Direct Expenses: Approximately 98.02%, provided that, as of the
Expansion Premises Commencement Date, Tenant's
Share of Direct Expenses shall be 100%.
10. Security Deposit/Letter of Credit $522,584.35.
(Article 20):
11. Parking (Article 23): All parking spaces less six (6) parking spaces,
provided that, as of the Expansion Premises
Commencement Date, Tenant shall be entitled to
all of the parking spaces servicing the
Building.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
12. Brokers (Section 24.25): The Seeley Company
11111 Santa Monica Boulevard
Suite 350
Los Angeles, California 90025
and
Cushman & Wakefield
1801 Century Park East
Suite 120
Los Angeles, California 90067
</TABLE>
<PAGE>
12655 WEST JEFFERSON BOULEVARD
OFFICE LEASE
------------
This Office Lease, which includes the preceding Summary attached hereto
and incorporated herein by this reference (the Office Lease and Summary to be
known sometimes collectively hereafter as the "LEASE"), dated as of the date set
forth in Section 1 of the Summary, is made by and between W9/WLA REAL ESTATE
LIMITED PARTNERSHIP, a Delaware limited partnership ("LANDLORD"), and EDUTREK
INTERNATIONAL, INC., a Georgia corporation ("TENANT").
ARTICLE 1
---------
REAL PROPERTY, BUILDING AND PREMISES; EXPANSION PREMISES
--------------------------------------------------------
1.1 Real Property, Building and Premises. Upon and subject to the
------------------------------------
terms, covenants and conditions hereinafter set forth in this Lease, Landlord
hereby leases to Tenant and Tenant hereby leases from Landlord the premises set
forth in Section 6 of the Summary (the "PREMISES"), which Premises are part of
the building (the "BUILDING") located at 12655 West Jefferson Boulevard, Los
Angeles, California. The outline of the floor plan of the Premises is set forth
in Exhibit A attached hereto. Landlord and Tenant hereby acknowledge and agree
that the rentable and usable square footage of the Initial Premises and the
Expansion Premises shall be as set forth in this Lease and shall not be subject
to remeasurement or modification. The Building, the Building's parking facility
("BUILDING PARKING FACILITY"), any outside plaza areas, land and other
improvements surrounding the Building which are designated from time to time by
Landlord as common areas appurtenant to or servicing the Building, and the land
upon which any of the foregoing are situated, are herein sometimes collectively
referred to as the "REAL PROPERTY." Tenant is hereby granted the right to the
nonexclusive use of the common corridors and hallways, stairwells, elevators,
restrooms and other public or common areas located on the Real Property (the
"COMMON AREAS") to the extent the same are not otherwise included within the
definition of the Premises; provided, however, that the use thereof shall be
subject to such rules, regulations and restrictions as Landlord may make from
time to time. Landlord reserves the right to make alterations or additions to or
to change the location of elements of the Real Property and the common areas
thereof, provided that such alterations, additions or changes are reasonable and
do not materially interfere with Tenant's ability to access, use and occupy of
the Premises and the Building Parking Facility.
1.2 Condition of Premises. Except as expressly set forth in this Lease
---------------------
and in the Tenant Work Letter attached hereto as Exhibit B, Landlord shall not
be obligated to provide or pay for any improvement, remodeling or refurbishment
work or services related to the improvement, remodeling or refurbishment of the
Premises, and Tenant shall accept the Premises and the Building in their "As Is"
condition on the Lease Commencement Date.
1.3 Expansion Premises. Landlord and Tenant hereby acknowledge and
------------------
agree that approximately 1,744 rentable (1,598 usable) square feet of space
located on the ground floor of the Building, as more particularly set forth on
Exhibit A-1, attached hereto (the "EXPANSION PREMISES"), are as of the date
hereof leased to an existing third party tenant (the "EXISTING TENANT"). The
term of the Existing Tenant's lease of the Expansion Premises is scheduled to
expire on or about December 4, 1998. As more particularly set forth in Section 6
of the Summary, prior to the Expansion Premises Commencement Date, the Premises
shall be comprised of all of the rentable area of the Building other than the
Expansion Premises. Commencing upon the date (the "EXPANSION PREMISES
COMMENCEMENT DATE") which is ninety (90) days following the later to occur of
(a) the expiration or earlier termination of the Existing Tenant's lease of the
Expansion Premises, and (b) the Existing Tenant's vacation and surrender of the
Expansion Premises, the Premises shall automatically be comprised of (i) the
Initial Premises, and (ii) the Expansion Premises. The Initial Premises and the
Expansion Premises comprise all of the rentable area of the Building. Tenant's
lease of the Expansion Premises shall expire coterminously with Tenant's lease
of the Initial Premises. Tenant's lease of the Expansion Premises shall be upon
all of the terms and conditions set forth in this Lease, except as specifically
set forth in this Section 1.3.
1.3.1 Expansion Rent. The "Base Rent," as that term is defined in
--------------
Article 3 of this Lease, payable for the Expansion Premises shall be at the same
rate per rentable square foot as Base Rent is payable by Tenant with respect to
the Initial Premises (as and when such Initial Premises Base Rent is increased
pursuant to the terms of this Lease). Effective as of the Expansion Premises
Commencement Date, Tenant's Share shall equal 100%.
1.3.2 Construction of Expansion Premises. Tenant shall accept the
----------------------------------
Expansion Premises on the Expansion Premises Commencement Date in its then
existing, "as is" condition; provided, however, that Landlord shall deliver the
Expansion Premises to Tenant (i) in a broom clean condition, (ii) with all "Base
Building Systems," as that term is defined below, in good working order, and
(iii) with all of the Existing Tenant's furniture, fixtures and equipment
removed (unless Tenant delivers notice to Landlord not less than thirty (30)
days prior to the Expansion Premises Commencement Date indicating Tenant's
election to have all or a portion of the equipment which the Existing Tenant may
not remove from the Expansion Premises remain in the Expansion Premises as of
the Expansion Premises Commencement Date), provided that Landlord shall not be
obligated to repair any damage to the Expansion Premises caused by Landlord's
removal of any of the Existing Tenant's furniture, fixtures and equipment,
provided further that Landlord shall cap all applicable utility lines. Landlord
shall endeavor to provide Tenant with not less than thirty (30) days prior
written notice of the date of Landlord's intended delivery of the Expansion
Premises to Tenant. The terms of the Tenant Work Letter shall be inapplicable
with respect to the Expansion Premises, and the construction of the improvements
in the Expansion Premises shall comply with the terms of Article 8 of this
Lease. Tenant shall be entitled to a one-time allowance (the "EXPANSION PREMISES
ALLOWANCE") for the design and installation of improvements which are
permanently affixed to the Expansion Premises and for telephone and data cabling
(collectively, the "EXPANSION IMPROVEMENTS") in an amount up to but not
exceeding the product of (i) $25.00 and (ii) the usable square footage of the
Expansion Premises. The Expansion Premises Allowance shall be disbursed by
Landlord upon receipt by Landlord of invoices, mechanics lien releases and such
other documentation as may reasonably be required by Landlord, and otherwise in
accordance with Landlord's reasonable disbursement procedure. In the event that
Tenant shall fail to utilize all or a portion of the Expansion Premises
Allowance for Expansion Improvements on or before the date which is six (6)
months following the Expansion Premises Commencement Date, such unused amounts
shall revert to Landlord and Tenant shall have no further rights with respect
thereto. For purposes of this Lease, the "BASE BUILDING SYSTEMS" shall mean (a)
the structural portions of the Building and Building Parking Facility, (b) the
base building plumbing, heating, ventilating, air-conditioning, fire/life
safety, elevator and electrical systems installed or furnished by Landlord and
located within the core of the Building, and (c) the telecommunications
equipment located on and servicing the Real Property (up to the point of entry
into the Building).
<PAGE>
1.3.3 Parking. Commencing upon the Expansion Premises Commencement
-------
Date and continuing throughout the Lease Term, notwithstanding anything in
Section 11 of the Summary to the contrary, Tenant shall be entitled to use all
of the parking spaces servicing the Building upon the terms and conditions set
forth in Article 23 of this Lease.
1.3.4 Amendment to Lease. Within thirty (30) days following the
------------------
Expansion Premises Commencement Date, Landlord and Tenant shall execute an
amendment to this Lease setting forth Tenant's lease of the Expansion Premises
upon the terms and conditions set forth in this Section 1.3.
ARTICLE 2
---------
INITIAL LEASE TERM; GOVERNMENTAL APPROVALS; TENANT TERMINATION RIGHT;
---------------------------------------------------------------------
OPTION TERMS
------------
2.1 Initial Lease Term. The terms and provisions of this Lease shall be
------------------
effective as of the date of this Lease except for the provisions of this Lease
relating to the payment of Rent. The term of this Lease (the "LEASE TERM") shall
be as set forth in Section 7.1 of the Summary and shall commence on the date
(the "LEASE COMMENCEMENT DATE") set forth in Section 7.2 of the Summary
(subject, however, to the terms of the Tenant Work Letter), and shall terminate
on the date (the "LEASE EXPIRATION DATE") set forth in Section 7.3 of the
Summary, unless this Lease is sooner terminated as hereinafter provided. For
purposes of this Lease, the term "LEASE YEAR" shall mean each consecutive twelve
(12) month period during the Lease Term, provided that the last Lease Year shall
end on the Lease Expiration Date. At any time during the Lease Term, Landlord or
Tenant may deliver to the other party an amendment in the form as set forth in
Exhibit C, attached hereto, which amendment Tenant or Landlord, as the case may
- ---------
be, shall execute and return to the other party within five (5) business days
after receipt thereof.
2.2 Governmental Approvals; Tenant Termination Right.
------------------------------------------------
2.2.1 Governmental Approvals. Landlord and Tenant hereby
----------------------
acknowledge and agree that Tenant shall be required to obtain certain approvals,
variances and/or permits from applicable governmental authorities in order to
utilize the Premises as an education institution (the "GOVERNMENTAL APPROVALS").
Immediately following the full execution and delivery of this Lease, Tenant
shall, at Tenant's sole cost and expense, in good faith, use commercially
reasonable efforts and diligently seek to obtain the Governmental Approvals.
Landlord shall reasonably cooperate with Tenant in order to assist Tenant in
obtaining the Governmental Approvals. Upon request from Landlord from time to
time, Tenant shall deliver to Landlord reasonable information and documentation
relating to Tenant's efforts to obtain the Governmental Approvals. In addition,
immediately upon receipt or rejection of the Governmental Approvals, Tenant
shall deliver notice of such approval or notice of such rejection, as the case
may be, to Landlord.
2.2.2 Tenant Termination Right.
------------------------
2.2.2.1 Deadline Date. In consideration for, and as a
--------------
condition precedent to, the rights granted to Tenant pursuant to the terms of
this Section 2.2.2, concurrently with the execution of this Lease by Tenant,
Tenant shall deliver to Landlord an amount equal to $100,000.00 (the
"TERMINATION FEE"). In the event that (i) Tenant is not in default under this
Lease as of the date of Tenant's delivery of the "Election Notice," as that term
is defined below, and (ii) Tenant has not obtained, but has employed
commercially reasonable efforts and diligently sought to obtain, final,
nonappealable Governmental Approvals on or before July 15, 1998 (the "DEADLINE
DATE"), then the "Original Tenant," as that term is defined in Section 2.3.1 of
this Lease, shall have the right, at its option, to deliver notice (the
"ELECTION NOTICE") to Landlord following the Deadline Date but before 5:00 p.m.
Los Angeles time on July 16, 1998, which Election Notice shall indicate Tenant's
election to terminate this Lease, effective upon Landlord's receipt of such
notice
2.2.2.2 Personal Nature of Rights. The rights contained in
--------------------------
this Section 2.2.2 shall be personal to the Original Tenant and may only be
exercised by the Original Tenant (and not any assignee, sublessee or other
transferee of the Original Tenant's interest in this Lease).
2.2.2.3 Termination of Rights. Notwithstanding anything in
----------------------
this Section 2.2.2 to the contrary, Tenant's right to terminate this Lease
pursuant to the terms of this Section 2.2.2 shall terminate immediately upon
Tenant's receipt of final, nonappealable Governmental Approvals.
2.2.3 Termination/Continuation of this Lease.
--------------------------------------
2.2.3.1 In the event that Tenant timely and properly
terminates this Lease pursuant to the terms of this Section 2.2, then (i) the
Termination Fee shall be the sole property of Landlord and Tenant shall have no
rights with respect thereto, and (ii) this Lease shall automatically terminate
and be of no further force or effect and Landlord and Tenant shall be relieved
of their respective obligations under the Lease as of the termination date,
except those obligations set forth in the Lease, which specifically survive the
expiration or earlier termination of the Lease.
2.2.3.2 In the event that Tenant fails to timely and properly
terminate this Lease pursuant to the terms of this Section 2.2, then (i) the
Termination Fee shall be held by Landlord and applied to the first Rent due
under this Lease, and (ii) this Lease shall continue in full force and effect
and Tenant shall have no further right to terminate this Lease pursuant to the
terms of this Section 2.2.
2.2.4 Tenant Improvement Allowance. Notwithstanding anything in
----------------------------
this Lease or the Tenant Work Letter to the contrary, in no event shall Landlord
be obligated to disburse all or any portion of the "Tenant Improvement
Allowance," as that term is defined in Section 2.1 of the Tenant Work Letter,
unless and until Tenant's right to terminate this Lease pursuant to the terms
and conditions set forth in this Section 2.2 has been waived or has expired or
otherwise has no further applicability.
2.3 Option Terms.
------------
2.3.1 Option Right. Landlord hereby grants the Tenant named in
------------
this Lease (the "ORIGINAL TENANT") or a "Permitted Assignee," as that term is
defined, below, two (2) options to extend the Lease Term for a period of five
(5) years each (each, an "OPTION TERM"), which options shall be exercisable only
by Tenant's delivery of the "Exercise Notice," as that term is defined in
Section 2.3.3, below, delivered by Tenant to Landlord as provided below,
provided that, as of the date of delivery of each applicable Exercise Notice,
Tenant is not in monetary default or material non-monetary default under the
Lease after the expiration of the applicable cure period. Upon the proper
exercise of such option to extend, and, at Landlord's option, provided that, as
of the end of the initial Lease Term or the first Option Term, as applicable,
Tenant is not in monetary default or material non-monetary default under this
Lease after the expiration of the applicable cure period, the Lease Term shall
be extended for the Option Term. The rights contained in this Section 2.3 shall
be personal to the Original Tenant or a Permitted Assignee and may only be
exercised by the Original Tenant or a Permitted Assignee (and not any other
assignee, sublessee or other transferee of the Original Tenant's interest in
<PAGE>
this Lease) if the Original Tenant, a Permitted Assignee or any sublessee under
a "Permitted Assignment," as that term is defined in Section 14.7 of this Lease,
collectively occupies seventy-five percent (75%) or more of the rentable area of
the Premises as of the date of the Exercise Notice. In addition, Tenant's right
to lease the Premises during the second Option Term shall be of no force or
effect in the event that Tenant fails to lease the Premises during the first
Option Term. For purposes of this Lease, a "PERMITTED ASSIGNEE" shall mean
either (i) an assignee of Tenant's entire interest in this Lease approved by
Landlord or otherwise permitted pursuant to the terms of Article 14 of this
Lease, or (ii) an assignee of Tenant's entire interest in this Lease as a result
of a "Permitted Assignment," as that term is defined in Section 14.7 of this
Lease.
2.3.2 Option Rent. The Annual Base Rent payable by Tenant
-----------
during the applicable Option Term (the "OPTION RENT") shall be equal to the then
prevailing fair market rental rate (projected to the commencement date of the
applicable Option Term) that would be agreed to by a comparable landlord and a
comparable tenant (including comparable size and creditworthiness) each of whom
is willing, but neither of whom is compelled, to enter into a lease transaction
(for other than an equity, sublease or expansion lease transaction), for space
comparable in size, location and quality to the Premises for a comparable term,
which comparable space is located in the "Comparable Buildings," as that term is
defined, below, taking into account all relevant factors, including, without
limitation, (i) the modified gross nature of this Lease (i.e., the fact that
Tenant is responsible for paying for the cost of all utilities utilized at the
Real Property), (ii) rental abatement concessions being granted such tenants, if
any, in connection with such comparable space, (iii) tenant improvements or
allowances being granted in connection with such comparable space (giving due
consideration to the value of the existing improvements in the Premises as of
the first day of the applicable Option Term, with such value to be based on the
age, quality and layout of such improvements and the extent to which they can be
utilized by a general office user), and (iii) other monetary concessions being
granted such tenants in connection with such comparable space; provided,
however, that in calculating the Option Rent, no consideration shall be given to
any period of rental abatement, if any, granted to tenants in comparable
transactions in connection with the design, permitting and construction of
tenant improvements in such comparable spaces. All other terms and conditions of
the Lease shall apply throughout each applicable Option Term, except that the
Base Year shall be the calendar year in which the applicable Option Term
commences; provided, however, that any obligation of Landlord to construct
tenant improvements or provide an allowance shall not apply during either Option
Term and Tenant shall in no event have the option to extend the Lease Term
beyond the second Option Term described in Section 2.3.1, above. For purposes of
this Lease, the term "COMPARABLE BUILDINGS" shall mean comparable first class,
high-rise office buildings in Marina del Rey and Playa del Rey, California.
2.3.3 Exercise of Option. Each of the options contained in
------------------
this Section 2.3 shall be exercised by Tenant, if at all, only in the following
manner: (i) Tenant shall deliver written notice to Landlord not more than
twenty-four (24) months nor less than twelve (12) months prior to the expiration
of the initial Lease Term or the first Option Term, as the case may be, stating
that Tenant may be interested in exercising its option; (ii) Landlord, after
receipt of Tenant's notice, shall deliver notice (the "OPTION RENT NOTICE") to
Tenant not less than ten (10) months prior to the expiration of the initial
Lease Term or the first Option Term, as the case may be, setting forth the
Option Rent; and (iii) if Tenant wishes to exercise such option, Tenant shall,
on or before the date (the "EXERCISE DATE") which is the earlier of (A) the date
occurring nine (9) months prior to the expiration of the initial Lease Term or
the first Option Term, as the case may be, and (B) the date occurring thirty
(30) days after Tenant's receipt of the applicable Option Rent Notice, exercise
the option by delivering written notice ("EXERCISE NOTICE") thereof to Landlord,
and upon, and concurrent with, such exercise, Tenant may, at its option, object
to Landlord's determination of the Option Rent contained in the Option Rent
Notice, in which case the parties shall follow the procedure, and the Option
Rent shall be determined, as set forth in Section 2.3.4, below. Tenant's failure
to timely deliver the Exercise Notice shall be deemed to constitute Tenant's
waiver of its extension right hereunder.
2.3.4 Determination of Option Rent. In the event Tenant timely
----------------------------
objects in writing to the Option Rent initially determined by Landlord in the
Option Rent Notice, Landlord and Tenant shall attempt to agree upon the Option
Rent, using their best good-faith efforts. If Landlord and Tenant fail to reach
agreement within twenty (20) days following Tenant's objection to the Option
Rent submitted by Landlord in the Option Rent Notice (the "OUTSIDE AGREEMENT
DATE"), then each party shall make a separate determination of the Option Rent,
as the case may be, within fifteen (15) business days, and such determinations
shall be submitted to arbitration in accordance with Sections 2.3.4.1 through
2.3.4.7 below.
2.3.4.1 Landlord and Tenant shall each appoint one
arbitrator who shall by profession be a real estate broker or appraiser who
shall have been active over the five (5) year period ending on the date of such
appointment in the leasing (or appraisal, as the case may be) of commercial
high-rise properties in the West Los Angeles, California area. The
determination of the arbitrators shall be limited solely to the issue area of
whether Landlord's or Tenant's submitted Option Rent is the closest to the
actual Option Rent, as determined by the arbitrators, taking into account the
requirements of Section 2.3.2 of this Lease. Each such arbitrator shall be
appointed within fifteen (15) business days after the Outside Agreement Date.
2.3.4.2 The two arbitrators so appointed shall within
ten (10) days of the date of the appointment of the last appointed arbitrator
agree upon and appoint a third arbitrator who shall be qualified under the same
criteria set forth hereinabove for qualification of the initial two arbitrators.
2.3.4.3 The three arbitrators shall within thirty (30)
days of the appointment of the third arbitrator reach a decision as to whether
the parties shall use Landlord's or Tenant's submitted Option Rent and shall
notify Landlord and Tenant thereof.
2.3.4.4 The decision of the majority of the three
arbitrators shall be binding upon Landlord and Tenant.
2.3.4.5 If either Landlord or Tenant fails to appoint
an arbitrator within fifteen (15) business days after the Outside Agreement
Date, the arbitrator appointed by one of them shall reach a decision, notify
Landlord and Tenant thereof, and such arbitrator's decision shall be binding
upon Landlord and Tenant.
2.3.4.6 If the two arbitrators fail to agree upon and
appoint a third arbitrator, or both parties fail to appoint an arbitrator, then
the appointment of the third arbitrator or any arbitrator shall be dismissed and
the matter to be decided shall be forthwith submitted to arbitration under the
provisions of the American Arbitration Association, but subject to the
instruction set forth in this Section 2.3.4.
2.3.4.7 The cost of arbitration shall be paid by
Landlord and Tenant equally.
<PAGE>
ARTICLE 3
---------
BASE RENT
---------
Tenant shall pay, without notice or demand, to Landlord or Landlord's
agent at the management office of the Building, or at such other place as
Landlord may from time to time designate in writing, in currency or a check for
currency which, at the time of payment, is legal tender for private or public
debts in the United States of America, base rent ("BASE RENT") as set forth in
Section 8 of the Summary, payable in equal monthly installments as set forth in
Section 8 of the Summary in advance on or before the first day of each and every
month during the Lease Term, without any setoff or deduction whatsoever, except
as specifically set forth in this Lease. Within five (5) days following the date
the termination right set forth in Section 2.2.2 of this Lease expires, is
waived, or otherwise has no further applicability, Tenant shall deliver a check
payable to Landlord in the amount of Forty-Four Thousand One Hundred and 21/100
Dollars ($44,100.21), which amount shall be applied to the Base Rent due for the
first month of the Lease Term. If any rental payment date (including the Lease
Commencement Date) falls on a day of the month other than the first day of such
month or if any rental payment is for a period which is shorter than one month,
then the rental for any such fractional month shall be a proportionate amount of
a full calendar month's rental based on the proportion that the number of days
in such fractional month bears to the number of days in the calendar month
during which such fractional month occurs. All other payments or adjustments
required to be made under the terms of this Lease that require proration on a
time basis shall be prorated on the same basis.
ARTICLE 4
---------
ADDITIONAL RENT
---------------
4.1 Additional Rent. In addition to paying the Base Rent specified in
---------------
Article 3 of this Lease, Tenant shall pay as additional rent "Tenant's Share" of
the annual "Direct Expenses," as those terms are defined in Sections 4.2.8 and
4.2.3 of this Lease, respectively, which are in excess of the amount of Direct
Expenses applicable to the "Base Year," as that term is defined in Section 4.2.1
of this Lease. Such additional rent, together with any and all other amounts
payable by Tenant to Landlord pursuant to the terms of this Lease (including,
without limitation, pursuant to Article 6), shall be hereinafter collectively
referred to as the "ADDITIONAL RENT." The Base Rent and Additional Rent are
herein collectively referred to as the "RENT." All amounts due under this
Article 4 as Additional Rent shall be payable for the same periods and in the
same manner, time and place as the Base Rent. Without limitation on other
obligations of Tenant which shall survive the expiration of the Lease Term, the
obligations of Tenant to pay the Additional Rent provided for in this Article 4
shall survive the expiration of the Lease Term.
4.2 Definitions. As used in this Article 4, the following terms
-----------
shall have the meanings hereinafter set forth:
4.2.1 "BASE YEAR" shall mean the year set forth in Section 9.1
of the Summary.
4.2.2 "CALENDAR YEAR" shall mean each calendar year in which
any portion of the Lease Term falls, through and including the calendar year in
which the Lease Term expires.
4.2.3 "DIRECT EXPENSES" shall mean "Operating Expenses" and "Tax
Expenses."
4.2.4 "EXPENSE YEAR" shall mean each Calendar Year, provided that
Landlord, upon notice to Tenant, may change the Expense Year from time to time
to any other twelve (12) consecutive-month period, and, in the event of any such
change, Tenant's Share of Direct Expenses shall be equitably adjusted for any
Expense Year involved in any such change.
4.2.5 "OPERATING EXPENSES" shall mean all expenses, costs and
amounts of every kind and nature which Landlord shall pay during any Expense
Year because of or in connection with the ownership, management, maintenance,
repair, replacement, restoration or operation of the Building and Real Property,
including, without limitation, any amounts paid for: (i) the cost of operating,
maintaining, repairing, renovating and managing the utility systems, mechanical
systems, sanitary and storm drainage systems, any elevator systems and all other
"Systems and Equipment" (as defined in Section 4.2.6 of this Lease), and the
cost of supplies and equipment and maintenance and service contracts in
connection therewith; (ii) the cost of licenses, certificates, permits and
inspections, and the cost of contesting the validity or applicability of any
governmental enactments which may affect Operating Expenses, and the costs
incurred in connection with implementation and operation of a governmentally
mandated transportation system management program or similar program (unless
Tenant elects, and is permitted pursuant to applicable law, to implement and
operate such program or programs in lieu of Landlord, in which event Landlord
shall refrain from incurring such costs and the same will be excluded from
Operating Expenses); (iii) the cost of insurance carried by Landlord, in such
amounts as Landlord may reasonably determine or as may be required by any
mortgagees or the lessor of any underlying or ground lease affecting the Real
Property and/or the Building; (iv) the cost of landscaping, relamping, supplies,
tools, equipment and materials, and all fees, charges and other costs (including
consulting fees, legal fees and accounting fees) incurred in connection with the
management, operation, repair and maintenance of the Building and Real Property;
(v) the cost of parking area repair, restoration, and maintenance; (vi) any
equipment rental agreements or management agreements (including the cost of any
management fee and the fair rental value of any office space provided
thereunder); (vii) wages, salaries and other compensation and benefits of all
persons engaged in the operation, management, maintenance or security of the
Building and Real Property, and employer's Social Security taxes, unemployment
taxes or insurance, and any other taxes which may be levied on such wages,
salaries, compensation and benefits; (viii) payments under any easement,
license, operating agreement, declaration, restrictive covenant, underlying or
ground lease (excluding rent), or instrument pertaining to the sharing of costs
by the Building or Real Property; (ix) the cost of janitorial service, alarm and
security service, window cleaning, trash removal, replacement of wall and floor
coverings, ceiling tiles and fixtures in lobbies, corridors, restrooms and other
common or public areas or facilities, maintenance and replacement of curbs and
walkways, repair to roofs and re-roofing; (x) amortization (including interest
on the unamortized cost) of the cost of acquiring or the rental expense of
personal property used in the maintenance, operation and repair of the Building
and Real Property; (xi) the cost 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 Building and Real Property, or (II) made to the
Building or Real Property after the Lease Commencement Date that are required
under any governmental law or regulation enacted after the Lease Commencement
Date; provided, however, that if any such cost described in (I) or (II) above,
is a capital expenditure, such cost shall be amortized (including interest on
the unamortized cost) over its useful life as Landlord shall reasonably
determine; and further provided that in the case of any expenditure described in
(I), the amount included in Operating Expenses shall in no event exceed the
Operating Expense savings achieved, for the period in question, as a consequence
of such expenditure; and
<PAGE>
(xii) the cost of utilities (other than electricity) supplied to the Building
and Real Property. If the Building is not fully occupied during all or a portion
of any Expense Year (including the Base Year), Landlord shall make an
appropriate adjustment to the variable components of Direct Expenses for such
year or applicable portion thereof, employing sound accounting and management
principles, to determine the amount of Direct Expenses that would have been paid
had the Building been fully occupied; and the amount so determined shall be
deemed to have been the amount of Direct Expenses for such year, or applicable
portion thereof. Notwithstanding anything to the contrary set forth in this
Article 4, when calculating Direct Expenses for the Base Year, Operating
Expenses shall exclude temporary market-wide labor-rate increases due to
extraordinary circumstances, including, but not limited to, boycotts and
strikes, provided that such temporary increases are of short duration and are
not likely to be repeated on a routine basis.
Notwithstanding the foregoing, Operating Expenses shall not,
however, include: (A) all marketing or advertising expenses, costs of leasing
commissions, attorneys' fees and other costs and expenses incurred in connection
with negotiations or disputes with present or prospective tenants or other
occupants of the Building; (B) costs (including permit, license, design and
inspection costs) incurred in renovating or otherwise improving, decorating or
redecorating rentable space for other tenants or vacant rentable space,
including the Premises; (C) costs incurred due to the violation by Landlord of
the terms and conditions of this Lease or any other lease of space in the
Building; (D) costs of overhead or profit increment paid to Landlord or to
subsidiaries or affiliates of Landlord for services in or in connection with the
Building to the extent the same exceeds the costs of overhead and profit
increment included in the costs of such services which could be obtained from
third parties on a competitive basis; (E) except as otherwise specifically
provided in this Section 4.2.5, costs of interest on debt or amortization on any
mortgages, and rent payable under any ground lease of the Real Property; (F) the
cost of utilities consumed at the Real Property, (G) expenses incurred by
Landlord for repairs or other work occasioned by fire, windstorm, or other
insurable casualty to the extent of the insurance proceeds received by Landlord
(or the insurance proceeds Landlord would have received had Landlord, using its
good faith, commercially reasonable judgment, elected to file a claim against
its insurance company with respect to such casualty); (H) expenses for the
replacement of any item covered under warranty; (I) except as specifically
permitted in this Section 4.2.5, any interest or penalties due for late payment
by Landlord of any of the building operating expenses; (J) cost of repairs
necessitated by Landlord's gross negligence, or of correcting any latent defects
or original design defects in the base, shell and core of the Building; (K)
expenses for any item or service which Tenant pays directly to a third party or
separately reimburses Landlord and expenses incurred by Landlord to the extent
the same are reimbursed from any other tenants, occupants of the property, or
third parties; (L) expenses for any item or service not provided to Tenant but
exclusively to certain other tenants in the Building; (M) a property management
fee for the Building in excess the lesser of (i) five percent (5%) of the gross
revenues of the Building (exclusive of security deposits and interest thereon)
for the relevant Expense Year, and (ii) $1.50 per rentable square foot of the
Building; (N) salaries of (i) employees above the grade of Building
superintendent or Building manager, and (ii) employees whose time is not spent
exclusively in the operation of the Real Property, unless such salaries are
prorated to reflect time spent on operating and managing the Real Property
vis-a-vis time spent on matters unrelated to operating and managing the Real
Property; (O) Landlord's general corporate overhead and administrative expenses
except if it is solely for the Building; (P) business interruption insurance;
(Q) reserves; (R) Tax Expenses; (S) operating costs incurred by Landlord in
connection with retail stores and any specialty service in the Building; (T)
operating expenses which are the responsibility of any other tenant; (U) the
cost of any service that Landlord sells to tenants and for which Landlord is
entitled to be reimbursed by such tenants; (V) any costs or expenses for which
Landlord is separately reimbursed or for which Landlord receives a credit from
any other party; (W) costs for the acquisition of sculptures, paintings or other
objects of art; (X) the cost of installing, operating or maintaining any
specialty services such as observatory, broadcasting facility or special
facility for any building dining facility or club; (Y) charitable or political
contributions; (Z) the cost of any capital improvements that are not
specifically identified as being allowed pursuant to clause (x) and (xi) of the
preceding paragraph and then only to the extent provided for in such clauses;
(AA) costs incurred to comply with laws relating to the removal of "Hazardous
Material," as that term is defined in Article 5 of this Lease, which was in
existence in the Building or on the Real Property prior to the Lease
Commencement Date, and was of such a nature that a federal, state or municipal
governmental authority, if it had then had knowledge of the presence of such
Hazardous Material, in the state, and under the conditions that it then existed
in the Building or on the Real Property, would have then required the removal of
such Hazardous Material or other remedial or containment action with respect
thereto; (BB) costs incurred to remove, remedy, contain, or treat Hazardous
Material, which Hazardous Material is brought into the Building or onto the Real
Property after the date hereof by Landlord or any other tenant of the Real
Property and is of such a nature, at that time, that a federal, state or
municipal governmental authority, if it had then had knowledge of the presence
of such Hazardous Material, in the state, and under the conditions, that it then
exists in the Building or on the Real Property, would have then required the
removal of such Hazardous Material or other remedial or containment action with
respect thereto; (CC) other items not customarily included as operating expenses
for Comparable Buildings; and (DD) costs of structural alterations to the
columns located in the Building Parking Facility to the extent required by
governmental authorities as a result of the 1994 Northridge earthquake.
4.2.6 "SYSTEMS AND EQUIPMENT" shall mean any plant,
machinery, transformers, duct work, cable, wires, and other equipment,
facilities, and systems designed to supply heat, ventilation, air conditioning
and humidity or any other services or utilities, or comprising or serving as any
component or portion of the electrical, gas, steam, plumbing, sprinkler,
communications, alarm, security, or fire/life safety systems or equipment, or
any other mechanical, electrical, electronic, computer or other systems or
equipment which serve the Building in whole or in part.
4.2.7 "TAX EXPENSES" shall mean all federal, state, county,
or local governmental or municipal taxes, fees, assessments, charges or other
impositions of every kind and nature, whether general, special, ordinary or
extraordinary, (including, without limitation, real estate taxes, general and
special assessments, transit assessments, fees and taxes, child care subsidies,
fees and/or assessments, job training subsidies, fees and/or assessments, open
space fees and/or assessments, housing subsidies and/or housing fund fees or
assessments, public art fees and/or assessments, leasehold taxes or taxes based
upon the receipt of rent, including gross receipts or sales taxes applicable to
the receipt of rent, personal property taxes imposed upon the fixtures,
machinery, equipment, apparatus, systems and equipment, appurtenances, furniture
and other personal property used in connection with the Real Property), which
Landlord shall pay during any Expense Year because of or in connection with the
ownership, leasing and operation of the Real Property or Landlord's interest
therein. For purposes of this Lease, Tax Expenses shall be calculated as if the
tenant improvements in the Building were fully constructed and the Real
Property, the Building, and all tenant improvements in the Building were fully
assessed for real estate tax purposes.
4.2.7.1 Tax Expenses shall include, without
limitation:
<PAGE>
(i) Any tax on Landlord's rent, right to rent or other
income from the Real Property or as against Landlord's business of leasing any
of the Real Property;
(ii) Any assessment, tax, fee, levy or charge in addition
to, or in substitution, partially or totally, of any assessment, tax, fee, levy
or charge previously included within the definition of real property tax, it
being acknowledged by Tenant and Landlord that Proposition 13 was adopted by the
voters of the State of California in the June 1978 election ("PROPOSITION 13")
and that assessments, taxes, fees, levies and charges may be imposed by
governmental agencies for such services as fire protection, street, sidewalk and
road maintenance, refuse removal and for other governmental services formerly
provided without charge to property owners or occupants. It is the intention of
Tenant and Landlord that all such new and increased assessments, taxes, fees,
levies, and charges and all similar assessments, taxes, fees, levies and charges
be included within the definition of Tax Expenses for purposes of this Lease;
(iii) Any assessment, tax, fee, levy, or charge allocable
to or measured by the area of the Premises or the rent payable hereunder,
including, without limitation, any gross income tax upon or with respect to the
possession, leasing, operating, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises, or any portion thereof;
(iv) Any assessment, tax, fee, levy or charge, upon this
transaction or any document to which Tenant is a party, creating or transferring
an interest or an estate in the Premises; and
(v) Any reasonable expenses incurred by Landlord in
attempting to protest, reduce or minimize Tax Expenses.
4.2.7.2 In no event shall Tax Expenses for any Expense Year be
less than the component of Tax Expenses comprising a portion of the Base Year.
4.2.7.3 Notwithstanding anything to the contrary contained in
this Section 4.2.7, there shall be excluded from Tax Expenses (i) all excess
profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and
succession taxes, estate taxes, federal and state net income taxes, and other
taxes to the extent applicable to Landlord's net income (as opposed to rents,
receipts or income attributable to operations at the Building or Real Property),
(ii) any items included as Operating Expenses, and (iii) any items paid by
Tenant under Section 4.4 of this Lease.
4.2.8 "TENANT'S SHARE" shall mean the percentage set forth in
Section 9.2 of the Summary. Tenant's Share was calculated by multiplying the
number of rentable square feet of the Premises by 100 and dividing the product
by the total rentable square feet in the Building (i.e., 88,215 rentable square
feet).
4.3 Calculation and Payment of Additional Rent.
------------------------------------------
4.3.1 Calculation of Excess. If for any Expense Year ending or
---------------------
commencing within the Lease Term, Tenant's Share of Direct Expenses for such
Expense Year exceeds Tenant's Share of Direct Expenses for the Base Year, then
Tenant shall pay to Landlord, in the manner set forth in Section 4.3.2, below,
and as Additional Rent, an amount equal to the excess (the "EXCESS"). For any
Expense Year comprised of less than twelve full calendar months occurring during
the Lease Term, the amount of any Excess payable by Tenant applicable to such
year shall be prorated on the ratio that the number of days of such Expense Year
that occur during the Lease Term bears to 365.
4.3.2 Statement of Actual Direct Expenses and Payment by Tenant.
---------------------------------------------------------
Landlord shall give to Tenant on or before the first day of July following the
end of each Expense Year, a statement (the "STATEMENT") which shall state the
Direct Expenses incurred or accrued for such preceding Expense Year, and which
shall indicate the amount, if any, of any Excess. Upon receipt of the Statement
for each Expense Year ending during the Lease Term, if an Excess is present,
Tenant shall pay, with its next installment of Base Rent due, the full amount of
the Excess for such Expense Year, less the amounts, if any, paid during such
Expense Year as "Estimated Excess," as that term is defined in Section 4.3.3 of
this Lease. The failure of Landlord to timely furnish the Statement for any
Expense Year shall not prejudice Landlord from enforcing its rights under this
Article 4. Even though the Lease Term has expired and Tenant has vacated the
Premises, when the final determination is made of Tenant's Share of the Direct
Expenses for the Expense Year in which this Lease terminates, if an Excess is
present, Tenant shall, within thirty (30) days following receipt of the
Statement, pay to Landlord an amount as calculated pursuant to the provisions of
Section 4.3.1 of this Lease. In the event that a Statement shall indicate that
Tenant has overpaid for Tenant's Share of Direct Expenses for a particular
Expense Year, then Landlord shall, at Tenant's option, either provide Tenant
with a Rent credit or refund such overpayment to Tenant. In the absence of
Tenant notifying Landlord otherwise, Tenant shall be deemed to have elected to
receive a Rent credit for any such overcharge, except in the event this Lease
has expired or been terminated, in which event Tenant shall be deemed to have
elected to receive a refund for such overcharge. Any Rent credit owing pursuant
to the preceding sentence shall be applied by Landlord without notice or demand
against the next Rent next due under this Lease and any refund due Tenant
pursuant to the preceding sentence shall be paid to Tenant within thirty (30)
days following the final determination that Tenant has made an overpayment with
respect to the Direct Expenses. The provisions of this Section 4.3.2 shall
survive the expiration or earlier termination of the Lease Term.
4.3.3 Statement of Estimated Direct Expenses. In addition, Landlord
--------------------------------------
shall give Tenant a yearly expense estimate statement (the "ESTIMATE STATEMENT")
which shall set forth Landlord's reasonable estimate (the "ESTIMATE") of what
the total amount of Direct Expenses for the then-current Expense Year shall be
(which shall not exceed by more than 10 percent Landlord's actual Direct
Expenses for the prior Expense Year) and the estimated Excess (the "ESTIMATED
EXCESS") as calculated by comparing Tenant's Share of Direct Expenses, which
shall be based upon the Estimate, to Tenant's Share of Direct Expenses for the
Base Year. The failure of Landlord to timely furnish the Estimate Statement for
any Expense Year shall not preclude Landlord from enforcing its rights to
collect any Estimated Excess under this Article 4. If pursuant to the Estimate
Statement an Estimated Excess is calculated for the then-current Expense Year,
Tenant shall pay, with its next installment of Base Rent due, a fraction of the
Estimated Excess for the then-current Expense Year (reduced by any amounts paid
pursuant to the last sentence of this Section 4.3.3). Such fraction shall have
as its numerator the number of months which have elapsed in such current Expense
Year to the month of such payment, both months inclusive, and shall have twelve
(12) as its denominator. Until a new Estimate Statement is furnished, Tenant
shall pay monthly, with the monthly Base Rent installments, an amount equal to
one-twelfth (1/12) of the total Estimated Excess set forth in the previous
Estimate Statement delivered by Landlord to Tenant.
4.4 Taxes and Other Charges for Which Tenant Is Directly Responsible.
----------------------------------------------------------------
Tenant shall reimburse Landlord upon demand for any and all taxes or assessments
required to be paid by Landlord (except to the extent included in Tax Expenses
by Landlord), excluding state, local and federal personal or corporate income
taxes measured by the net income of Landlord from all sources and estate and
inheritance taxes, whether or not now customary or within the contemplation of
the parties hereto, when:
<PAGE>
4.4.1 Said taxes are measured by or reasonably attributable to the
cost or value of Tenant's equipment, furniture, fixtures and other personal
property located in the Premises, or by the cost or value of any leasehold
improvements made in or to the Premises by or for Tenant, to the extent the cost
or value of such leasehold improvements exceeds the greater of (i) $25.00 per
usable square foot, and (ii) cost or value of a building standard build-out as
reasonably determined by Landlord, regardless of whether title to such
improvements shall be vested in Tenant or Landlord;
4.4.2 Said taxes are assessed upon or with respect to the possession,
leasing, operation, management, maintenance, alteration, repair, use or
occupancy by Tenant of the Premises or any portion of the Real Property
(including the Building Parking Facility); or
4.4.3 Said taxes are assessed upon this transaction or any document
to which Tenant is a party creating or transferring an interest or an estate in
the Premises.
4.5 Late Charges. If any installment of Rent or any other sum due from
------------
Tenant shall not be received by Landlord or Landlord's designee by the due date
therefor, then upon demand by Landlord, Tenant shall pay to Landlord a late
charge equal to three percent (3%) of the amount due, provided that the
foregoing late charge shall not be due the first time in any Lease Year that
Tenant fails to pay the Rent or other charge prior to the date due so long as
such amount is paid within five (5) days following the date due. The late charge
shall be deemed Additional Rent and the right to require it shall be in addition
to all of Landlord's other rights and remedies hereunder, at law and/or in
equity and shall not be construed as liquidated damages or as limiting
Landlord's remedies in any manner. In addition to the late charge described
above, any Rent or other amounts owing hereunder which are not paid by the date
that they are due shall bear interest from the date due until the date paid at a
rate (the "INTEREST RATE") equal to the lesser of (i) the "Prime Rate" or
"Reference Rate" announced from time to time by the Bank of America (or such
reasonable comparable national banking institution as selected by Landlord in
the event Bank of America ceases to exist or publish a Prime Rate or Reference
Rate), plus two percent (2%), or (ii) the highest rate permitted by applicable
law, provided that the foregoing interest charges shall not be due the first
time in any Lease Year that Tenant fails to pay the Rent or other charge prior
to the date due so long as the amount due is paid within five (5) days following
the date due.
4.6 Landlord's Books and Records. Landlord shall maintain commercially
----------------------------
reasonable records relating to the calculation of Direct Expenses for a period
of not less than two (2) years following the expiration of the Expense Year to
which such records relate. Within two (2) years after receipt of a Statement by
Tenant (the "REVIEW PERIOD"), if Tenant disputes the amount of Additional Rent
set forth in the Statement, an independent certified public accountant (which
accountant is a member of a nationally recognized accounting firm and is working
on a noncontingency fee basis), 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 is not then in monetary default under this Lease. In connection with such
inspection, Tenant, Tenant's agents, Tenant's employees and such accountant
shall be required to agree in advance to follow Landlord's reasonable rules and
procedures regarding inspections of Landlord's records, and shall execute a
commercially reasonable confidentiality agreement regarding such inspection.
Tenant's failure to dispute the amount of Additional Rent set forth in any
Statement within two (2) years following Tenant's receipt of a 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.
If after such inspection, Tenant still disputes such Additional Rent and
notifies Landlord in writing of such dispute prior to the expiration of the
Review Period, a determination as to the proper amount shall be made, at
Tenant's expense, by a big six accounting firm which has no existing or prior
affiliation with Landlord or its principals or affiliates, and which is working
on a noncontingency fee basis (the "ACCOUNTANT"). The Accountant shall be
selected by Landlord, subject to Tenant's reasonable approval. If the
determination by the Accountant proves that Direct Expenses in such Statement
were overstated by more than five percent (5%), then the cost of the Accountant
shall be paid for by Landlord (provided that in no event shall Landlord be
responsible for paying such Accountant an amount in excess of the overcharge to
Tenant). In addition, any amounts determined by the Accountant to be owing
either party shall (i) in the case of amounts owed by Tenant to Landlord, be
paid within thirty (30) days following Accountant's determination, and (ii) in
the case of amounts owed by Landlord to Tenant, be credited against the next
Rent due under this Lease or, at Tenant's option, refunded to Tenant. Landlord
and Tenant agree that this Section 4.6 shall be the sole method to be used by
Tenant and Landlord to resolve any such dispute concerning the amount of any
Direct Expenses payable or not payable by Tenant pursuant to the terms of this
Lease, and Tenant and Landlord hereby waive any other rights of law or in equity
relating thereto.
ARTICLE 5
---------
USE OF PREMISES
---------------
Tenant shall use the Premises solely for general office purposes and,
subject to Tenant's receipt of all governmental approvals, including, without
limitation, the Governmental Approvals, as an educational institution consistent
with the character of the Building as a first-class building, except that,
subject to applicable laws, following the Expansion Premises Commencement Date,
Tenant may utilize the Expansion Premises as a cafeteria to service Tenant's
employees and guests (the "CAFETERIA"). Tenant shall not use or permit the
Premises to be used for any other purpose or purposes whatsoever. Tenant hereby
agrees that (i) the Cafeteria shall in no event be open to the public, and (ii)
Tenant shall operate the Cafeteria in a clean and sanitary manner. Tenant
further covenants and agrees that it shall not use, or suffer or permit any
person or persons to use, the Premises or any part thereof for any use or
purpose contrary to the provisions of Exhibit D, attached hereto, or in
violation of the laws of the United States of America, the state in which the
Building is located, or the ordinances, regulations or requirements of the local
municipal or county governing body or other lawful authorities having
jurisdiction over the Building. Tenant shall comply with all recorded covenants,
conditions, and restrictions, and the provisions of all ground or underlying
leases, affecting the Real Property and recorded as of the date of this Lease.
Tenant shall not use or allow another person or entity to use any part of the
Premises for the storage, use, treatment, manufacture or sale of "Hazardous
Material," as that term is defined below. Landlord acknowledges, however, that
Tenant will maintain products in the Premises which are incidental to the
operation of its offices, such as art supplies, photocopy supplies, secretarial
supplies and limited janitorial supplies, which products contain chemicals which
are categorized as Hazardous Materials. Landlord agrees that the use of such
products in the Premises in the manner in which such products are designed to be
used and in compliance with applicable laws shall not be a violation by Tenant
of this Article 5. As used herein, the term "HAZARDOUS MATERIAL" means any
hazardous or toxic substance, material or waste which is or becomes regulated by
any local governmental authority, the state in which the Building is located or
the United States Government.
<PAGE>
ARTICLE 6
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SERVICES AND UTILITIES
----------------------
6.1 Standard Tenant Services. Landlord shall provide the following
------------------------
services twenty-four (24) hours a day on all days during the Lease Term, unless
otherwise stated below.
6.1.1 Landlord shall provide heating and air conditioning so as
to maintain temperatures within the Premises that are consistent with the design
capacity of the heating and air conditioning system serving the Premises.
6.1.2 Landlord shall provide hot and cold city water from the
regular Building outlets for drinking, lavatory and toilet purposes as well as
for use in the Cafeteria.
6.1.3 Landlord shall provide janitorial services five (5) days
per week, except the date of observation of New Year's Day, Presidents' Day,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day,
in and about the Premises and window washing services in a manner consistent
with the Comparable Buildings but in no event to a standard which is less than
that set forth on the specifications set forth on Exhibit F attached to this
Lease. In the event that (i) the Real Property is not owned nor operated by
Landlord or any affiliate of Landlord, and (ii) Landlord shall fail to satisfy
its obligations to provide janitorial services in accordance with the terms of
this Lease following sixty (60) days notice from Tenant, then Tenant shall have
the right, at Tenant's sole cost and expense, to supply its own janitorial
services to the Premises, provided that the provider of such janitorial services
shall be approved by Landlord, in Landlord's reasonable discretion. In the event
that Tenant shall elect to supply its own janitorial services to the Premises
pursuant to the preceding sentence, Landlord shall thereafter exclude from
Operating Expenses for the Base Year the amount initially included therein for
janitorial services to the Premises.
6.1.4 Landlord shall provide nonexclusive automatic passenger
elevator service at all times.
6.1.5 The replacement of lamps, starters and ballasts as needed.
6.1.6 Grounds care, including the sweeping of walks and parking
areas and the maintenance of landscaping in a reasonably attractive manner.
6.1.7 General management, including supervision, inspections and
management functions at levels similar to Comparable Buildings.
6.1.8 Landlord shall provide a card key access control system for
the Building. Notwithstanding the foregoing, Landlord shall in no case be liable
for personal injury or property damage for any error with regard to the
admission to or exclusion from the Building or Real Property of any person.
Tenant hereby acknowledges that no guard service shall be provided by Landlord.
6.1.9 Electricity to operate the Building and Real Property, and
to operate the Premises during all hours by providing electric current in
reasonable amounts necessary for normal office uses, lighting and heating,
ventilating and air conditioning. Landlord agrees that it shall endeavor in good
faith to obtain such electricity (as well as all other utility services charged
to Tenant, either directly or through the Operating Expenses) at a reasonable
cost. Within five (5) business days following receipt of applicable invoices
from Landlord, Tenant shall pay Tenant's Share of the cost of all electricity
consumed on the Real Property.
6.2 Overstandard Tenant Use. In the event that Tenant shall use, or
-----------------------
desire to use, electricity, water, heating and air conditioning or any other
utilities supplied to the Real Property (collectively, the "UTILITY SERVICES")
in quantities that exceed the capacity of the equipment supplying the same to
the Real Property, then, subject to applicable law, Landlord shall install such
supplemental equipment as may be reasonably required to provide such excess
capacity, provided that Tenant shall pay to Landlord, not less than ten (10)
days prior to Landlord's installation of such equipment, the cost of such
equipment and the installation thereof. In addition, within ten (10) days after
billing, Tenant shall pay to Landlord the cost of the operation and maintenance
of any such equipment installed by Landlord. Furthermore, in the event that
Tenant shall utilize one or more Utility Services in a quantity or during hours
which exceed that utilized by a typical general office user, then Tenant shall
pay to Landlord, within ten (10) days after billing, the cost of increased wear
and tear on, and/or to the extent required the cost of replacement of, existing
equipment caused by such excess consumption.
6.3 Interruption of Use. Tenant agrees that Landlord shall not be
-------------------
liable for damages, by abatement of Rent (except as specifically set forth in
Section 6.5, below) or otherwise, for failure to furnish or delay in furnishing
any service (including telephone and telecommunication services), or for any
diminution in the quality or quantity thereof, when such failure or delay or
diminution is occasioned, in whole or in part, by repairs, replacements, or
improvements, by any strike, lockout or other labor trouble, by inability to
secure electricity, gas, water, or other fuel at the Building after reasonable
effort to do so, by any accident or casualty whatsoever, by act or default of
Tenant or other parties, or by any other cause beyond Landlord's reasonable
control; and such failures or delays or diminution shall never be deemed to
constitute an eviction or disturbance of Tenant's use and possession of the
Premises or relieve Tenant from paying Rent (except as specifically set forth in
Section 6.5, below) or performing any of its obligations under this Lease.
Furthermore, Landlord shall not be liable under any circumstances for a loss of,
or injury to, property or for injury to, or interference with, Tenant's
business, including, without limitation, loss of profits, however occurring,
through or in connection with or incidental to a failure to furnish any of the
services or utilities as set forth in this Article 6.
6.4 Additional Services. With Tenant's approval, which may be granted
-------------------
or withheld in Tenant's sole discretion, Landlord shall be permitted, but shall
have no obligation, to provide any additional services which may be required by
Tenant, including, without limitation, locksmithing, additional janitorial
service, and additional repairs and maintenance, provided that Tenant shall pay
to Landlord upon billing, the sum of all reasonable costs to Landlord of such
additional services plus a reasonable administration fee. Charges for any
utilities or service for which Tenant is required to pay from time to time
hereunder, shall be deemed Additional Rent hereunder and shall be billed on a
monthly basis.
6.5 Abatement. Notwithstanding anything in Section 6.3 above to the
---------
contrary, in the event that an "Abatement Event," as that term is defined,
below, shall occur for a continuous period in excess of three (3) business days
after Landlord receives written notice from Tenant of such Abatement Event which
is within Landlord's reasonable control, or in excess of ten (10) business days
after Landlord receives written notice from Tenant of an Abatement Event not
arising from matters within Landlord's reasonable control (in either event, the
"ELIGIBILITY PERIOD"), and such Abatement Event 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, the Rent payable by Tenant shall be abated or reduced, as the
case may be, after expiration of the Eligibility Period, for such time that
Tenant continues to be so prevented from using, and does not use, the Premises
or a portion thereof, in the proportion that the rentable area of the portion of
the Premises that Tenant is prevented from using, and does not use, bears to the
total rentable area of the
<PAGE>
Premises. Notwithstanding anything contained herein to the contrary, no
abatement of Rent shall be allowed (i) if the Abatement Event 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 deminimus
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). For purposes of this Section 6.5, an
"ABATEMENT EVENT" shall mean (i) Landlord's failure to provide services to
Tenant or to make any repair as required by this Lease, or (ii) Landlord's
undertaking of any repair at the Building pursuant to the terms of this Lease.
ARTICLE 7
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REPAIRS
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7.1 Tenant's Repairs. Subject to Landlord's repair obligations in
----------------
Sections 7.2, 11.1 and 12.3 below, Tenant shall, at Tenant's own expense, keep
the Premises, including all improvements, fixtures and furnishings therein, in
good order, repair and condition at all times during the Lease Term, which
repair obligations shall include, without limitation, the obligation to promptly
and adequately repair all damage to the Premises and replace or repair all
damaged or broken fixtures and appurtenances; provided however, that, at
Landlord's option, or if Tenant fails to make such repairs, Landlord may, but
need not, make such repairs and replacements, and Tenant shall pay Landlord the
cost thereof, including a percentage of the cost thereof (to be uniformly
established for the Building but not to exceed ten percent (10%)) sufficient to
reimburse Landlord for all overhead, general conditions, fees and other costs or
expenses arising from Landlord's involvement with such repairs and replacements
within thirty (30) days following being billed for same.
7.2 Landlord's Repairs. Anything contained in Section 7.1 above to the
------------------
contrary notwithstanding, and subject to Articles 11 and 12 of this Lease,
Landlord shall repair and maintain (i) the structural portions of the Building,
including, without limitation, the roof, core restrooms, exterior walls and
exterior glass, (ii) the Base Building Systems, and (iii) the portion of the
Real Property located outside of the Building including, without limitation, the
Building Parking Facility (provided that Tenant shall be responsible, at
Tenant's sole cost and expense, for any attendants required or desired by Tenant
in the Building Parking Facility); provided, however, if such maintenance and
repairs are caused in part or in whole by the act, neglect, fault of or omission
of any duty by Tenant, its agents, servants, employees or invitees, Tenant shall
pay to Landlord as additional rent, the reasonable cost of such maintenance and
repairs. Landlord shall not be liable for any failure to make any such repairs,
or to perform any maintenance unless such failure shall persist for an
unreasonable time after written notice of the need of such repairs or
maintenance is given to Landlord by Tenant. There shall be no abatement of rent
(except as specifically set forth in Section 6.5 of this Lease) and no liability
of Landlord by reason of any injury to or interference with Tenant's business
arising from the making of any repairs, alterations or improvements in or to any
portion of the Building or the Premises or in or to fixtures, appurtenances and
equipment therein. Except as specifically set forth in Section 7.3, below,
Tenant hereby waives and releases its right to make repairs at Landlord's
expense under Sections 1941 and 1942 of the California Civil Code; or under any
similar law, statute, or ordinance now or hereafter in effect.
7.3 Tenant's Right to Make Repairs. Notwithstanding the provisions of
------------------------------
Sections 6.1 and 7.2 of this Lease to the contrary, if Tenant provides notice to
Landlord of an event or circumstance which requires the action of Landlord with
respect to repair and/or maintenance as set forth in Sections 6.1 or 7.2, above,
and Landlord fails to provide such action within a reasonable period of time,
given the circumstances, after the receipt of such notice, but in any event not
later than twenty-one (21) days after receipt of such notice, then Tenant may
proceed to take the required action upon delivery of an additional ten (10)
business days notice to Landlord specifying that Tenant is taking such required
action, and if such action was required under the terms of this Lease to be
taken by Landlord, then Tenant shall be entitled to reimbursement by Landlord of
Tenant's reasonable costs and expenses in taking such action in accordance with
the terms of this Section 7.3. In the event Tenant takes such action, and such
work will affect the Building Systems and Equipment, or the structural integrity
of the Building or the exterior appearance of the Building, Tenant shall use
only those contractors used by Landlord in the Building for work on the
Building's Systems and Equipment, structure or exterior, as the case may be,
unless such contractors are unwilling or unable to perform such work, in which
event Tenant may utilize the services of any other qualified contractor which
normally and regularly performs similar work in the Comparable Buildings.
Further, if Landlord does not deliver a detailed written objection to Tenant,
within thirty (30) days after receipt of an invoice by Tenant of its costs of
taking action which Tenant claims should have been taken by Landlord, and if
such invoice from Tenant sets forth a reasonably particularized breakdown of its
costs and expenses in connection with taking such action on behalf of Landlord,
then Tenant shall be entitled to deduct from Rent payable by Tenant under this
Lease, the amount set forth in such invoice. If, however, Landlord delivers to
Tenant within thirty (30) days after receipt of Tenant's invoice, a written
objection to the payment of such invoice, setting forth with reasonable
particularity Landlord's reasons for its claim that such action did not have to
be taken by Landlord pursuant to the terms of this Lease or that the charges are
excessive (in which case Landlord shall pay the amount it contends would not
have been excessive), then Tenant shall not be entitled to such deduction from
Rent, but Tenant may proceed to claim a default by Landlord under this Lease. In
the event that Tenant shall obtain a final, nonappealable judgment for amounts
expended by Tenant and disputed by Landlord in accordance with the terms of this
Section 7.3, Tenant shall thereafter have the right to offset the amount of such
judgment, plus interest at the Interest Rate, against the Rent next due under
this Lease.
ARTICLE 8
---------
ADDITIONS AND ALTERATIONS
-------------------------
8.1 Landlord's Consent to Alterations. Except for cosmetic and
---------------------------------
non-structural alterations which are not visible from the exterior of the
Premises and do not affect the Building's Systems and Equipment, such as
recarpeting, repainting, construction and relocation of interior non-loadbearing
walls and the installation of built-in fixtures and furniture (all of which can
be performed upon notice to Landlord but without the necessity of obtaining
Landlord's consent (individually and collectively a "PREAPPROVED ALTERATION"),
Tenant will not make any improvements, alterations, additions, changes or
improvements to the Premises (collectively, the "ALTERATIONS") without first
procuring the prior written consent of Landlord to such Alterations, which
consent shall not be unreasonably withheld, conditioned or delayed by Landlord
unless the applicable Alteration may adversely affect the structural integrity
of the Building, the Systems and Equipment, or the exterior appearance of the
Building, in which event Landlord's consent may be withheld or conditioned in
Landlord's sole discretion. The construction of the initial improvements to the
Premises shall be
<PAGE>
governed by the terms of the Tenant Work Letter and not the terms of this
Article 8.
8.2 Manner of Construction. Landlord may impose, as a condition of its
----------------------
consent to all Alterations (other than Preapproved Alterations), such
requirements as Landlord in its reasonable discretion may deem desirable,
including, but not limited to, the requirement that Tenant utilize for such
purposes only contractors, materials, mechanics and materialmen approved by
Landlord in Landlord's reasonable discretion; provided, however, Landlord may
impose such requirements as Landlord may determine, in its sole and absolute
discretion, with respect to any work affecting the structural components of the
Building or Systems and Equipment (including designating specific contractors to
perform such work, provided that such contractors are reasonably competitively
priced). Tenant shall construct such Alterations and perform such repairs in
conformance with any and all applicable rules and regulations of any federal,
state, county or municipal code or ordinance and pursuant to a valid building
permit, issued by the city in which the Building is located, and in conformance
with Landlord's construction rules and regulations. Landlord's approval of the
plans, specifications and working drawings for Tenant's Alterations shall create
no responsibility or liability on the part of Landlord for their completeness,
design sufficiency, or compliance with all laws, rules and regulations of
governmental agencies or authorities. All work with respect to any Alterations
must be done in a good and workmanlike manner and diligently prosecuted to
completion to the end that the Premises shall at all times be a complete unit
except during the period of work. In performing the work of any such
Alterations, Tenant shall have the work performed in such manner as not to
obstruct access to the Building or the common areas for any other tenant of the
Building, and as not to obstruct the business of Landlord or other tenants in
the Building, or interfere with the labor force working in the Building. If
Tenant makes any Alterations, Tenant agrees to carry "Builder's All Risk"
insurance in an amount reasonably approved by Landlord covering the construction
of such Alteration, and such other insurance as Landlord may require, it being
understood and agreed that all of such Alterations shall be insured by Tenant
pursuant to Article 10 of this Lease immediately upon completion thereof. In
addition, Landlord may, in its discretion, require Tenant to obtain a lien and
completion bond or some alternate form of security satisfactory to Landlord in
an amount sufficient to ensure the lien-free completion of such Alterations and
naming Landlord as a co-obligee. Upon completion of any Alterations, Tenant
shall (i) cause a Notice of Completion to be recorded in the office of the
Recorder of the county in which the Building is located in accordance with
Section 3093 of the Civil Code of the State of California or any successor
statute, (ii) deliver to the Building management office a reproducible copy of
the "as built" drawings of the Alterations, and (iii) deliver to Landlord
evidence of payment, contractors' affidavits and full and final waivers of all
liens for labor, services or materials.
8.3 Landlord's Property. All Alterations of a permanent nature made or
-------------------
installed by Tenant in the Premises shall become the property of Landlord at the
expiration or earlier termination of this Lease. With respect to any Alteration
(including any Preapproved Alterations) which is not comparable to a general
office improvement or any Alteration (including any Preapproved Alteration)
which is comparable to a general office improvement but which requires
significant expense to remove (including, without limitation, any stairwell
installed in the Premises), Landlord reserves the right to require Tenant to
remove the same upon the expiration or earlier termination of this Lease and to
repair and restore the Premises to their condition prior to such Alteration,
reasonable wear and tear, unrepaired casualty, and condemnation excepted, but
only if Landlord has stated in writing, at or prior to the time Tenant requests
the right to make such Alteration, that such item must be removed by Tenant at
the expiration or earlier termination of the Lease Term. Except as set forth
above in this Section 8.3, Tenant shall have no obligation to remove any
Alterations at the expiration or earlier termination of this Lease. If Tenant
fails to complete any removal and/or to repair any damage caused by the removal
as required in this Section 8.3, Landlord may do so and may charge the cost
thereof to Tenant.
8.3 Payment for Improvements. If Tenant orders any work directly from
------------------------
Landlord, Tenant shall pay to Landlord a percentage of the cost of such work
sufficient to compensate Landlord for all overhead, general conditions, fees and
other costs and expenses arising from Landlord's involvement with such work. If
Tenant does not order any work directly from Landlord, Tenant shall reimburse
Landlord for Landlord's reasonable, actual, out-of-pocket costs and expenses
actually incurred in connection with Landlord's review of such work.
ARTICLE 9
---------
COVENANT AGAINST LIENS
----------------------
Tenant has no authority or power to cause or permit any lien or
encumbrance of any kind whatsoever, whether created by act of Tenant, operation
of law or otherwise, to attach to or be placed upon the Real Property, Building
or Premises, and any and all liens and encumbrances created by Tenant shall
attach to Tenant's interest only. Landlord shall have the right at all times to
post and keep posted on the Premises any notice which it deems necessary for
protection from such liens. Tenant covenants and agrees not to suffer or permit
any lien of mechanics or materialmen or others to be placed against the Real
Property, the Building or the Premises with respect to work or services claimed
to have been performed for or materials claimed to have been furnished to Tenant
or the Premises during the Lease Term, and any other period Tenant occupies the
Premises, and, in case of any such lien attaching or notice of any lien, Tenant
covenants and agrees to cause it to be immediately released and removed of
record. Notwithstanding anything to the contrary set forth in this Lease, if any
such lien is not released and removed on or before the date which is fifteen
(15) days following the date notice of such lien is delivered by Landlord to
Tenant, Landlord, at its sole option, may immediately take all action necessary
to release and remove such lien, without any duty to investigate the validity
thereof, and all sums, costs and expenses, including reasonable attorneys' fees
and costs, actually incurred by Landlord in connection with such lien shall be
deemed Additional Rent under this Lease and shall immediately be due and payable
by Tenant.
ARTICLE 10
----------
INDEMNIFICATION AND INSURANCE
-----------------------------
10.1 Indemnification and Waiver. Tenant hereby assumes all risk of
--------------------------
damage to property and injury to persons, in, on, or about the Premises from any
cause whatsoever and agrees that Landlord, and its partners and subpartners, and
their respective officers, agents, property managers, servants, employees, and
independent contractors (collectively, "LANDLORD PARTIES") shall not be liable
for, and are hereby released from any responsibility for, any damage to property
or injury to persons or resulting from the loss of use thereof, which damage or
injury is sustained by Tenant or by other persons claiming through Tenant.
Tenant shall indemnify, defend, protect, and hold harmless the Landlord Parties
from any and all loss, cost, damage, expense and liability (including without
limitation court costs and reasonable attorneys' fees) incurred in connection
with or arising from any cause in, on or about the
<PAGE>
Premises (including, without limitation, Tenant's installation, placement and
removal of Alterations, improvements, fixtures and/or equipment in, on or about
the Premises), and any acts, omissions or negligence of Tenant or of any person
claiming by, through or under Tenant, or of the contractors, agents, servants,
employees, licensees or invitees of Tenant or any such person, in, on or about
the Premises, Building and Real Property. Notwithstanding anything in this
Section 10.1 to the contrary, the foregoing release and indemnity shall not
apply to claims to the extent (i) resulting from the negligence or willful
misconduct of Landlord or its agents, contractors, employees or representatives,
(ii) not covered by Tenant's insurance (and which would not have been covered by
Tenant's insurance had Tenant carried the insurance required pursuant to the
terms of this Lease), (iii) not self-insured by Tenant pursuant to the terms of
this Lease and (iv) resulting from Landlord's breach of this Lease (the
"EXCLUDED CLAIMS"), and Landlord shall indemnify, protect, defend and hold
harmless Tenant and its affiliates and their respective partners, sub-partners,
officers, agents, employees, contractors and representatives (collectively,
"TENANT PARTIES") from and against any and all loss, cost, damage, expense and
liability (including without limitation court costs and reasonable attorneys'
fees) to the extent incurred in connection with or arising from Excluded Claims
but only to the extent Landlord's liability is not waived pursuant to the terms
of Section 10.4 of this Lease (provided that Landlord's indemnity shall not
extend to loss of profits, loss of business or other similar consequential
damages incurred by Tenant or the Tenant Parties). Notwithstanding anything to
the contrary contained in this Lease, nothing in this Lease shall impose any
obligations on Tenant or Landlord to be responsible or liable for, and each
hereby releases the other from all liability for, consequential damages other
than those consequential damages (i) incurred by Landlord in connection with a
holdover of the Premises by Tenant after the expiration or earlier termination
of this Lease, subject to the terms of Article 16 of this Lease, or (ii) to
which Landlord may be entitled pursuant to the terms of California Civil Code
Section 1951.2 (excluding Section 1951.2(a)(4)). The provisions of this Section
10.1 shall survive the expiration or sooner termination of this Lease.
10.2 Landlord's Liability and Fire and Casualty Insurance. Landlord
----------------------------------------------------
shall carry commercial general liability insurance with respect to the Building
during the Lease Term, and shall further insure the Building (except, at
Landlord's option, with respect to items required to be insured by Tenant
pursuant to Section 10.3.2 of this Lease) during the Lease Term against loss or
damage due to fire and other casualties covered within the classification of
fire and extended coverage, vandalism coverage and malicious mischief, sprinkler
leakage, water damage and special extended coverage. Such coverage shall be in
such amounts, from such companies, and on such other terms and conditions, as
Landlord may from time to time reasonably determine. Additionally, at the option
of Landlord, such insurance coverage may include the risks of earthquakes and/or
flood damage and additional hazards, a rental loss endorsement and one or more
loss payee endorsements in favor of the holders of any mortgages or deeds of
trust encumbering the interest of Landlord in the Building or the ground or
underlying lessors of the Building, or any portion thereof. Notwithstanding the
foregoing provisions of this Section 10.2, the coverage and amounts of insurance
carried by Landlord in connection with the Building shall, at a minimum, be
comparable to the coverage and amounts of insurance which are carried by
reasonably prudent landlords of Comparable Buildings. Notwithstanding anything
in this Section 4.2.5 to the contrary, in the event that, following the Base
Year, Landlord shall reduce the deductible and/or increase the coverage ratio
with respect to the earthquake insurance carried by Landlord, then from and
after the date upon which Landlord obtains such revised earthquake insurance
coverage and continuing throughout the period during which Landlord maintains
such revised earthquake insurance coverage, Operating Expenses for the Base Year
shall be deemed increased by the amount of the earthquake insurance premium
Landlord would have incurred had Landlord maintained such revised insurance for
the same period of time during the Base Year as such revised insurance in
maintained by Landlord during the applicable Expense Year. In no event shall
Landlord increase the earthquake insurance deductible and/or reduce the
earthquake insurance coverage ratio from that carried during the Base Year,
unless the earthquake insurance deductible and coverage ratio carried during the
Base Year is not available. Tenant shall, at Tenant's expense, comply as to the
Premises with all insurance company requirements pertaining to the use of the
Premises. If Tenant's conduct or use of the Premises causes any increase in the
premium for such insurance policies, then Tenant shall reimburse Landlord for
any such increase. Tenant, at Tenant's expense, shall comply with all rules,
orders, regulations or requirements of the American Insurance Association
(formerly the National Board of Fire Underwriters) and with any similar body.
10.3 Tenant's Insurance. Tenant shall maintain the following
------------------
coverages in the following amounts.
10.3.1 Commercial General Liability Insurance covering the
insured against claims of bodily injury, personal injury and property damage
arising out of Tenant's operations, assumed liabilities or use of the Premises,
including a Broad Form Commercial General Liability endorsement covering the
insuring provisions of this Lease and the performance by Tenant of the indemnity
agreements set forth in Section 10.1 of this Lease, for limits of liability not
less than:
Bodily Injury and $3,000,000 each occurrence
Property Damage Liability $3,000,000 annual aggregate
Personal Injury Liability $3,000,000 each occurrence
$3,000,000 annual aggregate
0% Insured's participation
10.3.2 Physical Damage and Earthquake Insurance covering (i) all
office furniture, trade fixtures, office equipment, merchandise and all other
items of Tenant's property on the Premises installed by, for, or at the expense
of Tenant, (ii) the Tenant Improvements, including any Tenant Improvements which
Landlord permits to be installed above the ceiling of the Premises or below the
floor of the Premises, and (iii) all other improvements, alterations and
additions to the Premises, including any improvements, alterations or additions
installed at Tenant's request above the ceiling of the Premises or below the
floor of the Premises. Such insurance shall be written on an "all risks" of
physical loss or damage basis, for the full replacement cost value new without
deduction for depreciation of the covered items and in amounts that meet any co-
insurance clauses of the policies of insurance and shall include a vandalism and
malicious mischief endorsement, sprinkler leakage coverage and earthquake
sprinkler leakage coverage.
10.3.3 Form of Policies. The minimum limits of policies of
----------------
insurance required of Tenant under this Lease shall in no event limit the
liability of Tenant under this Lease. Such insurance maintained by Tenant shall
(i) name Landlord, and any other party it so specifies that has an interest in
Real Property, Building or Premises, as an additional insured; (ii) specifically
cover the liability assumed by Tenant under this Lease, including, but not
limited to, Tenant's obligations under Section 10.1 of this Lease; (iii)
<PAGE>
be issued by an insurance company having a rating of not less than A-X in Best's
Insurance Guide or which is otherwise acceptable to Landlord and licensed to do
business in the state in which the Building is located; (iv) be primary
insurance as to all claims thereunder and provide that any insurance carried by
Landlord is excess and is non-contributing with any insurance requirement of
Tenant; (v) provide that said insurance shall not be canceled or coverage
changed unless thirty (30) days' prior written notice shall have been given to
Landlord and any mortgagee or ground or underlying lessor of Landlord; and (vi)
contain a cross-liability endorsement or severability of interest clause
acceptable to Landlord. Tenant shall deliver said policy or policies or
certificates thereof to Landlord on or before the Lease Commencement Date and at
least thirty (30) days before the expiration dates thereof. If Tenant shall fail
to procure such insurance, or to deliver such policies or certificate, within
such time periods, Landlord may, at its option, in addition to all of its other
rights and remedies under this Lease, and without regard to any notice and cure
periods set forth in Section 19.1, procure such policies for the account of
Tenant, and the cost thereof shall be paid to Landlord as Additional Rent within
ten (10) days after delivery of bills therefor.
10.3.4 Notwithstanding any provision in this Lease to the contrary,
Tenant may self-insure for the insurance requirement set forth in Section
10.3.2(i) of this Lease to the extent that it is not prohibited by law from
doing so. This provision will not be applicable, however, to any assignee or
subtenant that is not an "Affiliate," as that term is defined in Section 14 of
this Lease. Any self-insurance shall be deemed to contain all of the terms and
conditions applicable to such insurance as required in this Article 10,
including, without limitation, a full waiver of subrogation.
10.4 Subrogation. Landlord and Tenant agree to have their respective
-----------
insurance companies issuing property damage insurance waive any rights of
subrogation that such companies may have against Landlord or Tenant, as the case
may be, so long as the insurance carried by Landlord and Tenant, respectively,
is not invalidated thereby. Anything in this Lease to the contrary
notwithstanding, to the fullest extent permitted by law, Landlord and Tenant
hereby waive and release each other of and from any and all rights of recovery,
claim, action or cause of action, against each other, their partners, agents,
officers and employees, for any loss or damage that may occur to the Premises,
Building or Real Property, or personal property within the Building, regardless
of cause or origin, including the negligence of Landlord or Tenant and their
partners, agents, representatives, officers and employees, but only to the
extent such loss or damage is covered by, and proceeds are collectible under,
insurance in effect at the time of such loss or damage or would be covered by
the casualty insurance to be carried under Sections 10.2 and 10.3 above if such
insurance is self-insured or is otherwise not being carried in breach of said
obligations. Landlord and Tenant agree to give immediately to their respective
insurance companies, which have issued policies of insurance covering any risk
of direct physical loss, written notice of the terms of the mutual waivers
contained in this Section 10.4, and to have the insurance policies properly
endorsed, if necessary. Landlord and Tenant acknowledge that the waivers and
releases set forth in this Section 10.4 are intended to result in any loss or
damage which is covered by casualty insurance being borne by the insurance
carrier of Landlord or Tenant, as the case may be, or by the party having the
insurable interest if such loss is not covered by such insurance or is being
self-insured and this Lease required such party to maintain insurance to cover
such loss. Landlord and Tenant agree that such waivers and releases were freely
bargained for and willingly and voluntarily agreed to by Landlord and Tenant and
do not constitute a violation of public policy.
10.5 Additional Insurance Obligations. Tenant shall carry and maintain
--------------------------------
during the entire Lease Term, at Tenant's sole cost and expense, increased
amounts of the insurance required to be carried by Tenant pursuant to this
Article 10, and such other reasonable types of insurance coverage and in such
reasonable amounts covering the Premises and Tenant's operations therein, as may
be reasonably requested by Landlord; provided that such insurance coverages and
limits are customarily required by landlords at Comparable Buildings and further
provided that no such additional coverage or limits may be required in the first
sixty (60) months of the Lease Term, and required insurance limits may not be
changed more often than once every sixty (60) months.
ARTICLE 11
-----------
DAMAGE AND DESTRUCTION
----------------------
11.1 Repair of Damage to Premises by Landlord. Tenant shall promptly
----------------------------------------
notify Landlord of any damage to the Premises resulting from fire or any other
casualty, unless it is reasonable to assume that Landlord is aware of the same,
and provided, however, that Tenant's failure to provide prompt notice shall not
give rise to any liability on the part of Tenant. If the Premises, Building
Parking Facility, or any other common areas of the Building or Real Property
serving or providing access to the Premises shall be damaged by fire or other
casualty, Landlord shall promptly and diligently, subject to reasonable delays
for insurance adjustment or other matters beyond Landlord's reasonable control,
and subject to all other terms of this Article 11, restore the base, shell, and
core of the Premises, the Building Parking Facility and such common areas to
substantially the condition thereof as existed prior to the casualty, except for
modifications required by zoning and building codes and other laws, or any other
modifications to the common areas deemed desirable by Landlord in its reasonable
discretion, provided use of and access to the Premises and any common restrooms
serving the Premises shall not be materially impaired. Notwithstanding any other
provision of this Lease, upon the occurrence of any damage to the Premises,
Tenant shall assign to Landlord (or to any party designated by Landlord) all
insurance proceeds payable to Tenant under Tenant's insurance required under
Section 10.3 of this Lease, and Landlord shall repair any injury or damage to
the tenant improvements and alterations installed in the Premises (using first
the proceeds available to Landlord under Tenant's casualty policy and
secondarily using the proceeds available under the Landlord's insurance policy)
and shall return such tenant improvements and alterations to their original
condition; provided that if the cost of such repair by Landlord exceeds the
amount of insurance proceeds received by Landlord from Tenant's insurance
carrier, as assigned by Tenant, and Landlord's insurance carrier, the cost of
such repairs shall be paid by Tenant to Landlord prior to Landlord's repair of
the damage. In connection with such repairs and replacements, Tenant shall,
prior to the commencement of construction, submit to Landlord, for Landlord's
review and approval (which approval shall not be unreasonably withheld,
conditioned or delayed), all plans, specifications and working drawings relating
thereto, and Landlord shall, in its reasonable discretion, select the
contractors to perform such improvement work. Landlord shall not be liable for
any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's
business resulting in any way from such damage or the repair thereof; provided
however, that if such fire or other casualty shall have damaged the Premises,
the Building Parking Facility or other or common areas necessary to Tenant's
occupancy, Landlord shall allow Tenant a proportionate abatement of Base Rent
and Tenant's Share of Direct Expenses, provided that if the damage is the result
of the negligence or wilful misconduct or Tenant or its employees or
contractors, Landlord shall only allow Tenant a proportionate abatement of Base
Rent and Tenant's Share of Direct Expenses to the extent Landlord is reimbursed
from the proceeds of rental interruption insurance purchased by Landlord as part
of Operating Expenses.
<PAGE>
Any abatement of Rent permitted pursuant to the terms of this Section 11.1 shall
continue during the time and to the extent the Premises are unfit for occupancy
for the purposes permitted under this Lease, and not occupied by Tenant for the
purpose of conducting its business in the ordinary course as a result thereof.
11.2 Landlord's Option to Repair. Notwithstanding the terms of Section
---------------------------
11.1 of this Lease, Landlord may elect not to rebuild and/or restore the
Premises and/or Building and instead terminate this Lease by notifying Tenant in
writing of such termination within sixty (60) days after the date of damage,
such notice to include a termination date giving Tenant ninety (90) days to
vacate the Premises, but Landlord may so elect only if the Building shall be
damaged by fire or other casualty or cause, whether or not the Premises are
affected, and one or more of the following conditions is present: (i) repairs
cannot reasonably be completed within three hundred sixty-five (365) days of the
date of damage (when such repairs are made without the payment of overtime or
other premiums); or (ii) the damage is not fully covered, except for deductible
amounts, by Landlord's insurance policies. In addition, if the Premises or the
Building is destroyed or damaged to any substantial extent during the last
twelve (12) months of the Lease Term and Tenant has not elected to renew this
Lease pursuant to Section 2.3 above, then notwithstanding anything contained in
this Article 11, Landlord shall have the option to terminate this Lease by
giving written notice to Tenant of the exercise of such option within thirty
(30) days after such damage or destruction, in which event this Lease shall
cease and terminate as of the date of such notice. Upon any such termination of
this Lease pursuant to this Section 11.2, Tenant shall pay the Base Rent and
Additional Rent, properly apportioned up to such date of termination, and both
parties hereto shall thereafter be freed and discharged of all further
obligations hereunder, except as provided for in provisions of this Lease which
by their terms survive the expiration or earlier termination of the Lease Term.
11.3 Tenant's Termination Rights. In the event that this Lease is not
---------------------------
terminated pursuant to the terms of Section 11.2, above, upon request by Tenant
not less than thirty (30) days following the casualty, Landlord shall deliver
notice (the "REPAIR Notice") to Tenant of Landlord's reasonable estimate of the
time required to substantially complete such repair or restoration (the
"ESTIMATED REPAIR TIME"). If the Estimated Repair Time exceeds three hundred
sixty five (365) days from the date of the casualty and the damage caused by the
casualty materially interferes with Tenant's use of or access to the Premises or
the Building Parking Facility, then Tenant shall have the right to terminate
this Lease upon notice (the "CASUALTY TERMINATION NOTICE") to Landlord, which
Casualty Termination Notice shall be delivered by Tenant to Landlord not later
than thirty (30) days after the date of Tenant's receipt of the Repair Notice.
If the Estimated Repair Time is less than three hundred sixty five (365) days,
or if Tenant fails to exercise its said right to terminate this Lease, this
Lease shall remain in force and effect. Notwithstanding any provision of this
Lease to the contrary, Tenant may, at its option, terminate this Lease, if
Landlord elects or is otherwise required to repair or restore as provided in
this Article 11, and such repair or restoration is not completed within the
Estimated Repair Time, plus sixty (60) days, plus the number of days of delay,
if any, attributable to events of "Force Majeure," as that term is defined in
Section 24.17 hereof (provided that the total number of days of delay
attributable to an event of Force Majeure may not exceed ninety (90)), plus the
number of days of delay, if any, as are attributable to the acts or omissions of
Tenant.
11.4 Waiver of Statutory Provisions. The provisions of this Lease,
------------------------------
including this Article 11, constitute an express agreement between Landlord and
Tenant with respect to any and all damage to, or destruction of, all or any part
of the Premises, the Building or any other portion of the Real Property, and any
statute or regulation of the state in which the Building is located, including,
without limitation, Sections 1932(2) and 1933(4) of the California Civil Code,
with respect to any rights or obligations concerning damage or destruction in
the absence of an express agreement between the parties, and any other statute
or regulation, now or hereafter in effect, shall have no application to this
Lease or any damage or destruction to all or any part of the Premises, the
Building or any other portion of the Real Property.
ARTICLE 12
----------
CONDEMNATION
------------
12.1 Permanent Taking. If the whole or any material part of the
----------------
Premises, Building or Building Parking Facility shall be taken by power of
eminent domain or condemned by any competent authority for any public or
quasi-public use or purpose, or if any adjacent property or street shall be so
taken or condemned, or reconfigured or vacated by such authority in such manner
as to require the use, reconstruction or remodeling of any part of the Premises
or Building, or if Landlord shall grant a deed or other instrument in lieu of
such taking by eminent domain or condemnation, Landlord shall have the option to
terminate this Lease upon ninety (90) days' notice, provided such notice is
given no later than two hundred ten (210) days after the date of such taking,
condemnation, reconfiguration, vacation, deed or other instrument. If more than
twenty-five percent (25%) of the rentable square feet of the Premises is taken,
or if in excess of twenty-five percent (25%) of Tenant's available parking
spaces are taken, or if access to the Premises is substantially impaired, Tenant
shall have the option to terminate this Lease upon ninety (90) days' notice,
provided such notice is given no later than two hundred ten (210) days after the
date of such taking. Landlord shall be entitled to receive the entire award or
payment in connection therewith, except that (i) Tenant shall have the right to
file any separate claim available to Tenant for any taking of Tenant's personal
property and fixtures belonging to Tenant and removable by Tenant upon
expiration of the Lease Term pursuant to the terms of this Lease, and for moving
expenses, so long as such claim does not diminish the award available to
Landlord, its ground lessor with respect to the Real Property or its mortgagee,
and such claim is payable separately to Tenant and (ii) Landlord and Tenant
shall each be entitled to receive fifty percent (50%) of the "bonus value" of
the leasehold estate in connection therewith, which bonus value shall be equal
to the difference between the Rent payable under this Lease and the sum
established by the condemning authority as the award for compensation for the
leasehold estate. All Rent shall be apportioned as of the date of such
termination, or the date of such taking, whichever shall first occur. If any
part of the Premises shall be taken, and this Lease shall not be so terminated,
the Rent shall be proportionately abated. Tenant hereby waives any and all
rights it might otherwise have pursuant to Section 1265.130 of The California
Code of Civil Procedure.
12.2 Temporary Taking. Notwithstanding anything to the contrary
----------------
contained in this Article 12, in the event of a temporary taking of all or any
portion of the Premises for a period of one hundred and eighty (180) days or
less, then this Lease shall not terminate but the Base Rent and the Additional
Rent shall be abated for the period of such taking in proportion to the ratio
that the amount of rentable square feet of the Premises taken bears to the total
rentable square feet of the Premises. Landlord shall be entitled to receive the
entire award made in connection with any such temporary taking, except that
Tenant may file and retain a claim for its business related losses so long as
such claim does not diminish the award available to Landlord, its ground lessor
with respect to the Real Property or its mortgagee, and such claim is payable
separately to Tenant.
12.3 Restoration. In the event that this Lease is not terminated
-----------
pursuant to this Article 12, Landlord shall, at its sole cost
<PAGE>
and expense, promptly restore the Real Property, Building or Premises, as the
case may be, to a reasonable condition, given the nature and extent of the
taking.
ARTICLE 13
----------
COVENANT OF QUIET ENJOYMENT
---------------------------
Landlord covenants that Tenant, on paying the Rent, charges for
services and other payments herein reserved and on keeping, observing and
performing all the other terms, covenants, conditions, provisions and agreements
herein contained on the part of Tenant to be kept, observed and performed,
shall, during the Lease Term, peaceably and quietly have, hold and enjoy the
Premises subject to the terms, covenants, conditions, provisions and agreements
hereof without interference by Landlord or any persons claiming by or through
Landlord. The foregoing covenant is in lieu of any other covenant express or
implied.
ARTICLE 14
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ASSIGNMENT AND SUBLETTING
-------------------------
14.1 Transfers. Tenant shall not, without the prior written consent of
---------
Landlord, assign, mortgage, pledge, hypothecate, encumber, or permit any lien to
attach to, or otherwise transfer, this Lease or any interest hereunder, permit
any assignment or other such foregoing transfer of this Lease or any interest
hereunder by operation of law, sublet the Premises or any part thereof, or
permit the use of the Premises by any persons other than Tenant and its
employees (all of the foregoing are hereinafter sometimes referred to
collectively as "TRANSFERS" and any person to whom any Transfer is made or
sought to be made is hereinafter sometimes referred to as a "TRANSFEREE"). If
Tenant shall desire Landlord's consent to any Transfer, Tenant shall notify
Landlord in writing, which notice (the "TRANSFER NOTICE") shall include (i) the
proposed effective date of the Transfer, which shall not be less than thirty
(30) days nor more than one hundred eighty (180) days after the date of delivery
of the Transfer Notice, (ii) a description of the portion of the Premises to be
transferred (the "SUBJECT SPACE"), (iii) all of the terms of the proposed
Transfer, the name and address of the proposed Transferee, and a copy of all
existing and/or proposed documentation pertaining to the proposed Transfer,
including all existing operative documents to be executed to evidence such
Transfer or the agreements incidental or related to such Transfer, (iv) current
financial statements of the proposed Transferee certified by an officer, partner
or owner thereof,, and (v) such other information as Landlord may reasonably
require. Any Transfer made without Landlord's prior written consent shall, at
Landlord's option, be null, void and of no effect, and shall, at Landlord's
option, constitute a default by Tenant under this Lease. Whether or not Landlord
shall grant consent, Tenant shall pay Landlord's reasonable legal fees incurred
by Landlord (not to exceed $750.00 in connection with any particular request for
approval), within thirty (30) days after written request by Landlord.
14.2 Landlord's Consent. Landlord shall not unreasonably withhold,
------------------
condition, or delay its consent to any proposed Transfer of the Subject Space to
the Transferee on the terms specified in the Transfer Notice. In the event that
(i) Landlord shall fail to grant or deny its consent to a proposed Transfer
within ten (10) business days after request by Tenant, (ii) Tenant shall,
following the expiration of such 10-business day period, deliver a second
request for approval of the applicable Transfer, and (iii) Landlord shall fail
to grant or deny its consent to the proposed Transfer within three (3) business
days following such second request, then Landlord's consent to the applicable
Transfer shall be deemed granted. The parties hereby agree that it shall be
reasonable under this Lease and under any applicable law for Landlord to
withhold consent to any proposed Transfer where one or more of the following
apply, without limitation as to other reasonable grounds for withholding
consent:
14.2.1 The Transferee is of a character or reputation or engaged
in a business which is not consistent with the quality of the Building;
14.2.2 The Transferee intends to use the Subject Space for
purposes which are not permitted under this Lease;
14.2.3 The Transferee is either a governmental agency or
instrumentality thereof;
14.2.4 The Transfer will result in more than a reasonable and
safe number of occupants per floor within the Subject Space;
14.2.5 The Transferee is not a party of reasonable financial
worth and/or financial stability in light of the responsibilities involved under
the Lease as to the Subject Space on the date consent is requested; or
14.2.6 The proposed Transfer would cause Landlord to be in
violation of another lease or agreement to which Landlord is a party, or would
give an occupant of the Building a right to cancel its lease.
If Landlord consents to any Transfer pursuant to the terms of this
Section 14.2 (and does not exercise any recapture rights Landlord may have under
Section 14.4 of this Lease), Tenant may within six (6) months after Landlord's
consent, but not later than the expiration of said six-month period, enter into
such Transfer of the Premises or portion thereof, upon substantially the same
terms and conditions as are set forth in the Transfer Notice furnished by Tenant
to Landlord pursuant to Section 14.1 of this Lease, provided that if there are
any material changes in the terms and conditions from those specified in the
Transfer Notice (i) such that Landlord would initially have been entitled to
refuse its consent to such Transfer under this Section 14.2, or (ii) which would
cause the proposed Transfer to be materially more favorable to the Transferee
than the terms set forth in Tenant's original Transfer Notice, Tenant shall
again submit the Transfer to Landlord for its approval and other action under
this Article 14 (including Landlord's right of recapture, if any, under Section
14.4 of this Lease).
14.3 Transfer Premium. If Landlord consents to a Transfer, as a
----------------
condition thereto which the parties hereby agree is reasonable, Tenant shall pay
to Landlord fifty percent (50%) of any "Transfer Premium," as that term is
defined in this Section 14.3, received by Tenant from such Transferee, provided
that no Transfer Premium shall be payable to Landlord in connection with a
"Permitted Assignment," as that term is defined in Section 14.7, below.
"TRANSFER PREMIUM" shall mean all rent, additional rent or other consideration
payable by such Transferee in excess of the Rent and Additional Rent payable by
Tenant under this Lease on a per rentable square foot basis if less than all of
the Premises is transferred, after deducting the reasonable expenses incurred by
Tenant for (i) any changes, alterations and improvements to the Premises in
connection with the Transfer, (ii) commercially reasonable marketing and
advertising costs, (iii) out-of-pocket monetary concessions, and (iv) any
brokerage commissions in connection with the Transfer (collectively, the
"SUBLEASING COSTS"). "Transfer Premium" shall also include, but not be limited
to, key money and bonus money paid by Transferee to Tenant in connection with
such transfer, and any payment in excess of fair market value for services
rendered by Tenant to Transferee or for assets, fixtures, inventory, equipment,
or furniture transferred by Tenant to Transferee in
<PAGE>
connection with such Transfer.
14.4 Landlord's Option as to Subject Space. Notwithstanding anything to
-------------------------------------
the contrary contained in this Article 14, in the event Tenant contemplates a
Transfer (other than a Permitted Assignment) that, when aggregated with all
prior Transfers (other than with respect to Permitted Assignments), results in
40,000 of more rentable square feet of the Premises having been Transferred
(other than with respect to Permitted Assignments), Tenant shall give Landlord
notice (the "INTENTION TO TRANSFER NOTICE") of such contemplated Transfer
(whether or not the contemplated Transferee or the terms of such contemplated
Transfer have been determined). The Intention to Transfer Notice shall specify
the portion of and amount of rentable square feet of the Premises which Tenant
intends to Transfer (the "CONTEMPLATED TRANSFER SPACE"), the contemplated date
of commencement of the contemplated Transfer (the "CONTEMPLATED EFFECTIVE
DATE"), and the contemplated length of the term of such contemplated Transfer,
and shall specify that such Intention to Transfer Notice is delivered to
Landlord pursuant to this Section 14.4 in order to allow Landlord to elect to
recapture the Contemplated Transfer Space for the term set forth in the
Intention to Transfer Notice. Thereafter, Landlord shall have the option, by
giving written notice to Tenant within ten (10) business days after receipt of
any Intention to Transfer Notice, to recapture the Contemplated Transfer Space.
Such recapture shall cancel and terminate this Lease with respect to such
Contemplated Transfer Space as of the Contemplated Effective Date until the last
day of the term of the contemplated Transfer as set forth in the Intention to
Transfer Notice. In the event of a recapture by Landlord, if this Lease shall be
canceled with respect to less than the entire Premises, the Rent reserved herein
shall be prorated on the basis of the number of rentable square feet retained by
Tenant in proportion to the number of rentable square feet contained in the
Premises, and this Lease as so amended shall continue thereafter in full force
and effect, and upon request of either party, the parties shall execute written
confirmation of the same. If Landlord declines, or fails to elect in a timely
manner, to recapture such Contemplated Transfer Space under this Section 14.4,
then, subject to the other terms of this Article 14, for a period of six (6)
months (the "SIX MONTH PERIOD") commencing on the last day of such ten (10)
business day period, Landlord shall not have any right to recapture the
Contemplated Transfer Space with respect to any Transfer made during the Six
Month Period, provided that any such Transfer is substantially on the terms set
forth in the Intention to Transfer Notice; provided however, that any such
Transfer shall be subject to the remaining terms of this Article 14. If such a
Transfer is not so consummated within the Six Month Period (or if a Transfer is
so consummated, then upon the expiration of the term of any Transfer of such
Contemplated Transfer Space consummated within such Six Month Period), Tenant
shall again be required to submit a new Intention to Transfer Notice to Landlord
with respect any contemplated Transfer, as provided above in this Section 14.4.
14.5 Effect of Transfer. If Landlord consents to a Transfer, (i) the
------------------
terms and conditions of this Lease shall in no way be deemed to have been waived
or modified, (ii) such consent shall not be deemed consent to any further
Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to
Landlord, promptly after execution, an original executed copy of all
documentation pertaining to the Transfer in form reasonably acceptable to
Landlord, and (iv) no Transfer relating to this Lease or agreement entered into
with respect thereto, whether with or without Landlord's consent, shall relieve
Tenant or any guarantor of the Lease from liability under this Lease. Landlord
or its authorized representatives shall have the right at all reasonable times
to audit the books, records and papers of Tenant relating to any Transfer, and
shall have the right to make copies thereof. If the Transfer Premium respecting
any Transfer shall be found understated, Tenant shall, within thirty (30) days
after demand, pay the deficiency and, if the deficiency shall be by more than
five percent (5%), then Tenant shall also pay Landlord's costs of such audit;
provided, however, that in no event shall Tenant be responsible for paying such
audit expenses in an amount in excess of the deficiency owed by Tenant.
14.6 Additional Transfers. Subject to the terms of Section 14.7, below,
--------------------
for purposes of this Lease, the term "Transfer" shall also include (i) if Tenant
is a partnership, the withdrawal or change, voluntary, involuntary or by
operation of law, of fifty percent (50%) or more of the partners, or transfer of
twenty-five percent or more of partnership interests, within a twelve (12)-month
period, or the dissolution of the partnership without immediate reconstitution
thereof, and (ii) if Tenant is a closely held corporation (i.e., whose stock is
not publicly held and not traded through an exchange or over the counter), (A)
the dissolution, merger, consolidation or other reorganization of Tenant, (B)
the sale or other transfer of more than an aggregate of fifty percent (50%) of
the voting shares of Tenant (other than to immediate family members by reason of
gift or death), within a twelve (12)-month period, or (C) the sale, mortgage,
hypothecation or pledge of more than an aggregate of fifty percent (50%) of the
value of the unencumbered assets of Tenant within a twelve (12) month period.
14.7 Permitted Assignments. Notwithstanding any provision of this
---------------------
Article 14 to the contrary, Tenant, without the necessity of obtaining
Landlord's consent, shall have the right to sublease all or a portion of the
Premises or to assign this Lease (any such assignment or sublease to be referred
to as a "PERMITTED ASSIGNMENT") to (i) any corporation or entity that directly,
or indirectly through one or more intermediaries is in control of, controlled by
or under common control with Tenant (an "AFFILIATE"), with "control" meaning the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of the specified corporation or entity, whether
through the ownership of voting securities, by contract or otherwise, or (ii)
any corporation or entity into which or with which Tenant merges or consolidates
or effects a similar reorganization transaction or which acquires all or
substantially all of Tenant's stock or assets, provided that (a) Tenant notifies
Landlord of any such assignment or sublease and promptly supplies Landlord with
any documents or information requested by Landlord regarding such assignment or
sublease or such Affiliate, (b) such assignment or sublease is not a subterfuge
by Tenant to avoid its obligations under this Lease, and (c) such transferee or
affiliate shall have a net worth (not including goodwill as an asset), computed
in accordance with generally accepted accounting principles, reasonably
sufficient to meet the obligations of Tenant under this Lease with respect to
the Subject Space. Tenant shall remain fully liable under this Lease in the case
of any such Permitted Assignment.
ARTICLE 15
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SURRENDER; OWNERSHIP
--------------------
AND REMOVAL OF TRADE FIXTURES
-----------------------------
15.1 Surrender of Premises. No act or thing done by Landlord or any
---------------------
agent or employee of Landlord during the Lease Term shall be deemed to
constitute an acceptance by Landlord of a surrender of the Premises unless such
intent is specifically acknowledged in a writing signed by Landlord. The
delivery of keys to the Premises to Landlord or any agent or employee of
Landlord shall not constitute a surrender of the Premises or effect a
termination of this Lease, whether or not the keys are thereafter retained by
Landlord, and notwithstanding such delivery Tenant shall be entitled to the
return of such keys at any reasonable time upon request until this Lease shall
have been properly terminated. The voluntary or other surrender of this Lease by
Tenant, whether accepted by
<PAGE>
Landlord or not, or a mutual termination hereof, shall not work a merger, and at
the option of Landlord shall operate as an assignment to Landlord of all
subleases or subtenancies affecting the Premises.
15.2 Removal of Tenant Property by Tenant. Upon the expiration of the
------------------------------------
Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject
to the provisions of this Article 15, quit and surrender possession of the
Premises to Landlord in as good order and condition as when Tenant took
possession and as thereafter improved by Landlord and/or Tenant, reasonable wear
and tear and repairs which are specifically made the responsibility of Landlord
hereunder excepted; provided, however, that Tenant shall, at its sole cost and
expense, cause the "Stairwells," as that term is defined in Section 3.2 of the
Tenant Work Letter, to be removed in accordance with the terms of Section 3.2 of
the Tenant Work Letter. Upon such expiration or termination, Tenant shall,
without expense to Landlord, remove or cause to be removed from the Premises all
debris and rubbish, and such items of furniture, equipment, free-standing
cabinet work, and other articles of personal property owned by Tenant or
installed or placed by Tenant at its expense in the Premises, and such similar
articles of any other persons claiming under Tenant, and Tenant shall repair at
its own expense all damage to the Premises and Building resulting from such
removal.
ARTICLE 16
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HOLDING OVER
------------
If Tenant holds over after the expiration of the Lease Term hereof,
with or without the express or implied consent of Landlord, such tenancy shall
be from month-to-month only, and shall not constitute a renewal hereof or an
extension for any further term, and in such case Base Rent shall be payable at a
monthly rate equal to one hundred fifty percent (150%) of Base Rent applicable
during the last rental period of the Lease Term under this Lease. Such
month-to-month tenancy shall be subject to every other term, covenant and
agreement contained herein. Landlord hereby expressly reserves the right to
require Tenant to surrender possession of the Premises to Landlord as provided
in this Lease upon the expiration or other termination of this Lease. The
provisions of this Article 16 shall not be deemed to limit or constitute a
waiver of any other rights or remedies of Landlord provided herein or at law. If
Tenant fails to surrender the Premises upon the termination or expiration of
this Lease, in addition to any other liabilities to Landlord accruing therefrom,
Tenant shall protect, defend, indemnify and hold Landlord harmless from all
loss, costs (including reasonable attorneys' fees) and liability resulting from
such failure, including, without limiting the generality of the foregoing, any
claims made by any succeeding tenant founded upon such failure to surrender, and
any lost profits to Landlord resulting therefrom.
ARTICLE 17
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ESTOPPEL CERTIFICATES
---------------------
Within ten (10) business days following a request in writing by
Landlord, Tenant shall execute and deliver to Landlord an estoppel certificate,
which, as submitted by Landlord, shall be substantially in the form of Exhibit
E, attached hereto, (or such other form as may be required by any prospective
mortgagee or purchaser of the Real Property, or any portion thereof), indicating
therein any exceptions thereto that may exist at that time, and shall also
contain any other information reasonably requested by Landlord or Landlord's
mortgagee or prospective mortgagee. Tenant shall execute and deliver whatever
other instruments may be reasonably required for such purposes. Failure of
Tenant to timely execute and deliver such estoppel certificate or other
instruments shall constitute an acceptance of the Premises and an acknowledgment
by Tenant that statements included in the estoppel certificate are true and
correct, without exception. Within ten (10) business days following a request in
writing by Tenant, which shall be made only in connection with a proposed
assignment or sublease, Landlord shall execute and deliver to Tenant an estoppel
certificate, which, as submitted by Tenant, shall be comparable to the form of
estoppel certificate attached hereto as Exhibit E (or such other form as may be
reasonably required by a prospective assignee or subtenant of Tenant),
indicating therein any exceptions thereto that may exist at that time, and shall
also contain any other information reasonably requested by Tenant's actual or
prospective assignee or subtenant. Landlord shall execute and deliver whatever
other instruments may be reasonably required for such purposes. Failure of
Landlord to timely execute and deliver such estoppel certificate or other
instruments five (5) business days following a second request by Tenant shall
constitute an acknowledgment by Landlord that statements included in the
estoppel certificate are true and correct, without exception.
ARTICLE 18
----------
SUBORDINATION
-------------
18.1 Subordination. Subject to the terms of Section 18.2, below, this
-------------
Lease is subject and subordinate to all present and future ground or underlying
leases of the Real Property and to the lien of any mortgages or trust deeds, now
or hereafter in force against the Real Property and the Building, if any, and to
all renewals, extensions, modifications, consolidations and replacements
thereof, and to all advances made or hereafter to be made upon the security of
such mortgages or trust deeds, unless the holders of such mortgages or trust
deeds, or the lessors under such ground lease or underlying leases, require in
writing that this Lease be superior thereto. Subject to Section 18.2, below,
Tenant covenants and agrees in the event any proceedings are brought for the
foreclosure of any such mortgage, or if any ground or underlying lease is
terminated, to attorn, to the purchaser upon any such foreclosure sale, or to
the lessor of such ground or underlying lease, as the case may be, if so
requested to do so by such purchaser or lessor, and to recognize such purchaser
or lessor as the lessor under this Lease. Tenant shall, within five (5) days of
request by Landlord, execute such further instruments or assurances as Landlord
may reasonably deem necessary to evidence or confirm the subordination or
superiority of this Lease to any such mortgages, trust deeds, ground leases or
underlying leases.
18.2 SNDA. As soon as reasonably practicable following the full
----
execution and delivery of this Lease, but subject to the remaining terms of this
Section 18.2, Landlord shall obtain a subordination, non-disturbance and
attornment agreement in the form attached hereto as Exhibit G (the "SNDA ") from
each holder of a ground or underlying lease, mortgage, or deed of trust, which
encumbers the Premises, Building or Real Property and which has priority over
this Lease. If (i) Landlord shall fail to obtain such SNDA within ninety (90)
days following the date of the full execution and delivery of this Lease, (ii)
following the expiration of such ninety (90)-day period, Tenant delivers notice
to Landlord requesting the SNDA, and (iii) Landlord fails to deliver the SNDA
within
<PAGE>
thirty (30) days following receipt of Tenant's notice, then, as Tenant's
sole and exclusive remedy at law or in equity, Tenant may elect to terminate
this Lease by written notice to Landlord delivered at any time prior to
Landlord's obtaining such SNDA. Concurrently with Tenant's execution of this
Lease, Tenant shall execute and deliver to Landlord the SNDA. Notwithstanding
anything contained in this Lease (including Section 18.1) to the contrary,
Tenant's agreement to attorn to a successor in title to the Premises, or to
subordinate this Lease to the interest of any subsequent lienholder, is
conditioned upon Tenant's prior receipt of a commercially reasonable
subordination, non-disturbance and attornment agreement.
ARTICLE 19
----------
TENANT'S DEFAULTS; LANDLORD'S REMEDIES
--------------------------------------
19.1 Events of Default by Tenant. All covenants and agreements to be
---------------------------
kept or performed by Tenant under this Lease shall be performed by Tenant at
Tenant's sole cost and expense and without any reduction of Rent. The occurrence
of any of the following shall constitute a default of this Lease by Tenant:
19.1.1 Any failure by Tenant to pay any Rent or any other charge
required to be paid under this Lease, or any part thereof, within five (5)
business days following notice from Landlord that the same was not paid when
due; or
19.1.2 Any failure by Tenant to observe or perform any other
provision, covenant or condition of this Lease to be observed or performed by
Tenant where such failure continues for thirty (30) days after written notice
thereof from Landlord to Tenant; provided however, that any such notice shall be
in lieu of, and not in addition to, any notice required under California Code of
Civil Procedure Section 1161 or any similar or successor law; and provided
further that if the nature of such default is such that the same cannot
reasonably be cured within a thirty (30)-day period, Tenant shall not be deemed
to be in default if it diligently commences such cure within such period and
thereafter diligently proceeds to rectify and cure said default as soon as
possible; or
19.1.3 Abandonment of the Premises by Tenant. Abandonment is
herein defined to include, but is not limited to, any absence by Tenant from the
Premises for five (5) or more consecutive business days while in monetary
default of this Lease; it being acknowledged by Landlord that Tenant shall have
no obligation to occupy all or any portion of the Premises.
19.2 Landlord's Remedies Upon Default. Upon the occurrence of any such
--------------------------------
default by Tenant, Landlord shall have, in addition to any other remedies
available to Landlord at law or in equity, subject to applicable law, the option
to pursue any one or more of the following remedies, each and all of which shall
be cumulative and nonexclusive.
19.2.1 Terminate this Lease, in which event Tenant shall
immediately surrender the Premises to Landlord, and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which it may have for
possession or arrearages in rent, enter upon and take possession of the Premises
and expel or remove Tenant and any other person who may be occupying the
Premises or any part thereof, without being liable for prosecution or any claim
or damages therefor; and Landlord may recover from Tenant the following:
(i) The worth at the time of award of any unpaid rent
which has been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by which
the unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(iii) The worth at the time of award of the amount by which
the unpaid rent for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
(iv) Any other amount necessary to compensate Landlord for
all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, specifically including but not limited to, brokerage
commissions and advertising expenses incurred, expenses of remodeling the
Premises or any portion thereof for a new tenant, whether for the same or a
different use, and any special concessions made to obtain a new tenant; and
(v) At Landlord's election, such other amounts in
addition to or in lieu of the foregoing as may be permitted from time to time by
applicable law.
The term "rent" as used in this Section 19.2 shall be deemed to be and to mean
all sums of every nature required to be paid by Tenant pursuant to the terms of
this Lease, whether to Landlord or to others. As used in Paragraphs 19.2.1(i)
and (ii), above, the "worth at the time of award" shall be computed by allowing
interest at the Interest Rate set forth in Section 4.5 of this Lease. As used in
Paragraph 19.2.1(iii) above, the "worth at the time of award" shall be computed
by discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award plus one percent (1%).
19.2.2 Landlord shall have the remedy described in California
Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's
breach and abandonment and recover rent as it becomes due, if lessee has the
right to sublet or assign, subject only to reasonable limitations). Accordingly,
if Landlord does not elect to terminate this Lease on account of any default by
Tenant, Landlord may, from time to time, without terminating this Lease, enforce
all of its rights and remedies under this Lease, including the right to recover
all rent as it becomes due.
19.2.3 Landlord may, but shall not be obligated to, make any
such payment or perform or otherwise cure any such obligation, provision,
covenant or condition on Tenant's part to be observed or performed (and may
enter the Premises for such purposes). In the event of Tenant's failure to
perform any of its obligations or covenants under this Lease, and such failure
to perform poses a material risk of injury or harm to persons or damage to or
loss of property, then Landlord shall have the right to cure or otherwise
perform such covenant or obligation at any time after such failure to perform by
Tenant, whether or not any such notice or cure period set forth in Section 19.1
above has expired. Any such actions undertaken by Landlord pursuant to the
foregoing provisions of this Section 19.2.3 shall not be deemed a waiver of
Landlord's rights and remedies as a result of Tenant's failure to perform and
shall not release Tenant from any of its obligations under this Lease.
19.3 Payment by Tenant. Tenant shall pay to Landlord, within fifteen
-----------------
(15) days after delivery by Landlord to Tenant of statements therefor: (i) sums
equal to expenditures reasonably made and obligations incurred by Landlord in
connection with Landlord's performance or cure of any of Tenant's obligations
pursuant to the provisions of Section 19.2.3 above; and (ii) sums equal to all
expenditures made and obligations incurred by Landlord in collecting or
attempting to collect the Rent or in enforcing or attempting to enforce any
rights of Landlord under this Lease or pursuant to law, including, without
limitation, all legal fees and other
<PAGE>
amounts so expended. Tenant's obligations under this Section 19.3 shall survive
the expiration or sooner termination of the Lease Term.
19.4 Sublessees of Tenant. Whether or not Landlord elects to terminate
--------------------
this Lease on account of any default by Tenant, as set forth in this Article 19,
Landlord shall have the right to terminate any and all subleases, licenses,
concessions or other consensual arrangements for possession entered into by
Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed
to Tenant's interest in such subleases, licenses, concessions or arrangements.
In the event of Landlord's election to succeed to Tenant's interest in any such
subleases, licenses, concessions or arrangements, Tenant shall, as of the date
of notice by Landlord of such election, have no further right to or interest in
the rent or other consideration receivable thereunder.
19.5 Waiver of Default. No waiver by Landlord or Tenant of any
-----------------
violation or breach by the other party of any of the terms, provisions and
covenants herein contained shall be deemed or construed to constitute a waiver
of any other or later violation or breach by such party of the same or any other
of the terms, provisions, and covenants herein contained. Forbearance by
Landlord or Tenant in enforcement of one or more of the remedies herein provided
upon a default by the other party shall not be deemed or construed to constitute
a waiver of such default. The acceptance of any Rent hereunder by Landlord
following the occurrence of any default, whether or not known to Landlord, shall
not be deemed a waiver of any such default, except only a default in the payment
of the Rent so accepted. Likewise, the payment of any Rent hereunder by Tenant
following the occurrence of any default, whether or not known to Tenant, shall
not be deemed a waiver of any such default.
19.6 Efforts to Relet. For the purposes of this Article 19, Tenant's
----------------
right to possession shall not be deemed to have been terminated by efforts of
Landlord to relet the Premises, by its acts of maintenance or preservation with
respect to the Premises, or by appointment of a receiver to protect Landlord's
interests hereunder. The foregoing enumeration is not exhaustive, but merely
illustrative of acts which may be performed by Landlord without terminating
Tenant's right to possession.
19.7 Landlord Default.
----------------
19.7.1 In General. Notwithstanding anything to the contrary
----------
set forth in this Lease, Landlord shall not be in default in the performance of
any obligation required to be performed by Landlord pursuant to this Lease
unless (i) in the event such default is with respect to the payment of money,
Landlord fails to pay such unpaid amounts within ten (10) days of written notice
from Tenant that the same was not paid when due, or (ii) in the event such
default is other than the obligation to pay money, Landlord fails to perform
such obligation within thirty (30) days after the receipt of notice from Tenant
specifying in detail Landlord's failure to perform; provided, however, if the
nature of Landlord's obligation is such that more than thirty (30) days are
required for its performance, then Landlord shall not be in default under this
Lease if it shall commence such performance within such thirty (30) day period
and thereafter diligently pursue the same to completion. Upon any such default
by Landlord under this Lease, Tenant may, except as otherwise specifically
provided in this Lease to the contrary, exercise any of its rights provided at
law or in equity.
19.7.2 Cure by Landlord's Mortgagees. 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 having an
interest in the Building 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 following terms and conditions:
19.7.2.1 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. Such notice shall be
given to Tenant by virtue of (A) any subordination, non-disturbance and
attornment agreement to which Tenant is a party, or (B) any other written notice
of such mortgagee or ground lessor given by Landlord to Tenant in accordance
with the notice provisions specified herein. Such notice by Landlord 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;
19.7.2.2 Tenant shall deliver to all such mortgagees 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;
19.7.2.3 The mortgagee or ground lessor in question shall
have the amount of time from the date of default that Landlord has plus an
additional thirty (30) days to cure any default on the part of Landlord under
this Lease; and
19.7.2.4 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.
ARTICLE 20
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SECURITY DEPOSIT/LETTER OF CREDIT
---------------------------------
Concurrent with Tenant's execution of this Lease, Tenant shall either
(i) deposit with Landlord a security deposit (the "SECURITY DEPOSIT") in the
amount set forth in Section 10 of the Summary upon the terms and conditions set
forth in Section 20.1, below, or (ii) deliver to Landlord a letter of credit in
the amount set forth in Section 10 of the Summary, upon the terms and conditions
set forth in Section 20.2, below.
20.1 Security Deposit. In the event that Tenant shall elect to deliver
----------------
for Security Deposit, the terms of this Section 20.1 shall be applicable. The
Security Deposit shall be held by Landlord as security for the faithful
performance by Tenant of all the terms, covenants, and conditions of this Lease
to be kept and performed by Tenant during the Lease Term. If Tenant defaults
with respect to any provisions of this Lease, including, but not limited to, the
provisions relating to the payment of Rent, Landlord may, but shall not be
required to, use, apply or retain all or any part of the Security Deposit for
the payment of any Rent or any other sum in default, or for the payment of any
amount that Landlord may spend or become obligated to spend by reason of
Tenant's default, or to compensate Landlord for any other loss or damage that
Landlord may suffer by reason of Tenant's default. If any portion of the
Security Deposit is so used or applied, Tenant shall, within five (5) days after
written demand therefor, deposit cash with Landlord in an amount sufficient to
restore the Security Deposit to its original amount, and Tenant's failure to do
so shall be a default under this Lease. If Tenant shall fully and faithfully
perform every provision of this Lease to be performed by it, the Security
Deposit, or any balance thereof, shall be returned to Tenant, or, at Landlord's
option, to the last assignee of Tenant's interest hereunder, within sixty (60)
days following the expiration of the Lease Term. Tenant shall not be entitled to
any interest on the Security Deposit. Tenant hereby waives the provisions of
Section 1950.7 of the California Civil Code, or any successor statute.
20.2 Additional Collateral for Performance of Lease Obligations. In the
----------------------------------------------------------
event that Tenant elects to provide a letter of
<PAGE>
credit, the terms of this Section 20.2 shall be applicable. Tenant shall deliver
to Landlord, as collateral for the full and faithful performance by Tenant of
all of its obligations under this Lease and for all losses and damages Landlord
may suffer as a result of any default by Tenant under this Lease, an irrevocable
and unconditional negotiable letter of credit (the "LETTER OF CREDIT"), in the
form and containing the terms required herein, payable in the County of Los
Angeles, California, running in favor of Landlord issued by a solvent bank under
the supervision of the Superintendent of Banks of the State of California, or a
National Banking Association, in the amount set forth in Section 10 of the
Summary (the "LETTER OF CREDIT AMOUNT"); provided, however, that in the event
that Tenant is not in default under this Lease as of the last day of the second
(2nd) Lease Year, the Letter of Credit Amount shall thereafter be reduced by an
amount equal to $250,000.00. The Letter of Credit shall be (a) at sight and
irrevocable, (b) subject to the terms of this Section 20.2, maintained in
effect, whether through replacement, renewal or extension, for the entire Lease
Term (the "LETTER OF CREDIT EXPIRATION DATE") and Tenant shall deliver a new
Letter of Credit or certificate of renewal or extension to Landlord at least
thirty (30) days prior to the expiration of the Letter of Credit, without any
action whatsoever on the part of Landlord, (c) subject to the Uniform Customs
and Practices for Documentary Credits (1993-Rev) International Chamber of
Commerce Publication #400, and (d) fully assignable by Landlord in connection
with a transfer of Landlord's interest in this Lease and permit partial draws.
In addition to the foregoing, the form and terms of the Letter of Credit (and
the bank issuing the same) shall be acceptable to Landlord, in Landlord's
reasonable discretion, and shall provide, among other things, in effect that:
(1) Landlord, or its then managing agent, shall have the right to draw down an
amount up to the face amount of the Letter of Credit upon the presentation to
the issuing bank of Landlord's (or Landlord's then managing agent's) of a
written affidavit that such amount is due to Landlord under the terms and
conditions of this Lease, it being understood that if Landlord or its managing
agent be a corporation, partnership or other entity, then such affidavit shall
be signed by an officer (if a corporation), a general partner (if a
partnership), or any authorized party (if another entity); (2) the Letter of
Credit will be honored by the issuing bank without inquiry as to the accuracy
thereof and regardless of whether the Tenant disputes the content of such
affidavit; and (3) in the event of a transfer of Landlord's interest in the
Building, Landlord shall transfer the Letter of Credit, in whole or in part (or
cause a substitute letter of credit to be delivered, as applicable) to the
transferee and thereupon the Landlord shall, without any further agreement
between the parties, be released by Tenant from all liability therefor, and it
is agreed that the provisions hereof shall apply to every transfer or assignment
of the whole or any portion of said Letter of Credit to a new Landlord. If, as
result of any application or use by Landlord of all or any part of the Letter of
Credit (or any "Cash Collateral," as that term is defined, below), the amount of
the Letter of Credit and Cash Collateral shall collectively be less than the
Letter of Credit Amount, Tenant shall within five (5) days thereafter provide
Landlord with either (i) cash (the "CASH COLLATERAL") to be held and applied by
Landlord as collateral in the same manner as if Landlord held such amount as
part of the Letter of Credit, or (ii) additional letter(s) of credit in an
amount equal to the deficiency (or a replacement letter of credit in the total
amount of the Letter of Credit Amount and any such additional (or replacement)
letter of credit shall comply with all of the provisions of this Section 20.2,
and if Tenant fails to comply with the foregoing, the same shall constitute an
uncurable default by Tenant. Tenant further covenants and warrants that it will
neither assign nor encumber the Letter of Credit or Cash Collateral, as the case
may be, or any part thereof and that neither Landlord nor its successors or
assigns will be bound by any such assignment, encumbrance, attempted assignment
or attempted encumbrance. Without limiting the generality of the foregoing, if
the Letter of Credit expires earlier than the Letter of Credit Expiration Date,
Landlord will accept Cash Collateral, a renewal letter of credit or substitute
letter of credit (such renewal or substitute letter of credit or Cash Collateral
to be in effect and delivered to Landlord, as applicable, not later than thirty
(30) days prior to the expiration of the Letter of Credit), which with respect
to any letter of credit shall be irrevocable and automatically renewable as
above provided through the Letter of Credit Expiration Date upon the same terms
as the expiring Letter of Credit or such other terms as may be acceptable to
Landlord in its reasonable discretion. However, if Cash Collateral is not timely
delivered or the Letter of Credit is not timely renewed or a substitute Letter
of Credit is not timely received, or if Tenant fails to maintain the Letter of
Credit and/or the Cash Collateral in the amount and in accordance with the terms
set forth in this Section 20.2, Landlord shall have the right to present the
Letter of Credit to the bank in accordance with the terms of this Section 20.2,
and the entire sum evidenced thereby shall be paid to and held by Landlord as
Cash Collateral for performance of all of Tenant's obligations under this Lease
and for all losses and damages Landlord may suffer as a result of any default by
Tenant under this Lease. If there shall occur a default under this Lease as set
forth in Article 19 of this Lease, Landlord may, but without obligation to do
so, draw upon the Letter of Credit and/or utilize the Cash Collateral, in part
or in whole, to cure any default of Tenant and/or to compensate Landlord for any
and all damages of any kind or nature sustained or which may be sustained by
Landlord resulting from Tenant's default. Tenant agrees not to interfere in any
way with payment to Landlord of the proceeds of the Letter of Credit, either
prior to or following a "draw" by Landlord of any portion of the Letter of
Credit, regardless of whether any dispute exists between Tenant and Landlord as
to Landlord's right to draw from the Letter of Credit, provided that the
foregoing shall not impair or reduce Tenant's rights pursuant to applicable law
in the event that it is determined that Landlord's draw of the Letter of Credit
or the use of any proceeds thereof or Cash Collateral was not permitted pursuant
to the terms of this Lease. No condition or term of this Lease shall be deemed
to render the Letter of Credit conditional to justify the issuer of the Letter
of Credit in failing to honor a drawing upon such Letter of Credit in a timely
manner. Landlord and Tenant acknowledge and agree that in no event or
circumstance shall the Letter of Credit or any renewal thereof or substitute
therefor or Cash Collateral be (i) deemed to be or treated as a "security
deposit" within the meaning of California Civil Code Section 1950.7, (ii)
subject to the terms of such Section 1950.7, or (iii) intended to serve as a
"security deposit" within the meaning of such Section 1950.7. The parties hereto
(x) recite that the Letter of Credit and/or Cash Collateral, as the case may be,
is not intended to serve as a security deposit and such Section 1950.7 and any
and all other laws, rules and regulations applicable to security deposits in the
commercial context ("SECURITY DEPOSIT LAWS") shall have no applicability or
relevancy thereto and (y) waive any and all rights, duties and obligations
either party may now or, in the future, will have relating to or arising from
the Security Deposit Laws.
ARTICLE 21
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COMPLIANCE WITH LAW
-------------------
Tenant shall not do anything or suffer anything to be done in or about
the Premises which will in any way conflict with any law, statute, ordinance or
other governmental rule, regulation or requirement now in force or which may
hereafter be enacted or promulgated ("APPLICABLE LAWS"). At its sole cost and
expense, Tenant shall promptly comply with all Applicable Laws relating to the
Premises (including the restrooms, except as specifically otherwise set forth in
Section 1 of the Tenant Work Letter), other than the making of structural
changes or changes to the Building Parking Facility, Common Areas, and the Base
Building Systems
<PAGE>
(collectively the "EXCLUDED CHANGES") except to the extent such Excluded Changes
are required due to Tenant's alterations to the Premises or Tenant's use of the
Premises for other than general office purposes. In addition, Tenant shall fully
comply with all present or future programs intended to manage parking,
transportation or traffic in and around the Building, and in connection
therewith, Tenant shall take responsible action for the transportation planning
and management of all employees located at the Premises by working directly with
Landlord, any governmental transportation management organization or any other
transportation-related committees or entities. The judgment of any court of
competent jurisdiction or the admission of Tenant in any judicial action,
regardless of whether Landlord is a party thereto, that Tenant has violated any
of said governmental measures, shall be conclusive of that fact as between
Landlord and Tenant. Landlord shall comply with all Applicable Laws relating to
the Building's structure, the Base Building Systems, the Building Parking Garage
and the Common Areas, provided that (i) compliance with such Applicable Laws is
not the responsibility of Tenant under this Lease, and (ii) Landlord's failure
to comply with such Applicable Laws would (a) prohibit Tenant from obtaining or
maintaining a certificate of occupancy for the Premises or prohibit Tenant from
utilizing the Premises for the use permitted pursuant to the terms of this Lease
in the ordinary course of Tenant's business, (b) adversely affect the safety of
Tenant's employees, (c) create a significant health hazard for Tenant's
employees, (d) materially and adversely affect Tenant's accreditation or ability
to participate in significant grant or loan programs, or (e) otherwise
materially and adversely affect Tenant's use of the Premises. Landlord shall be
permitted to include in Operating Expenses any costs or expenses incurred by
Landlord under this Article 24 to the extent consistent with the terms of
Section 4.2.5 above.
ARTICLE 22
----------
ENTRY BY LANDLORD
-----------------
Landlord reserves the right at all reasonable times and upon reasonable
notice to Tenant to enter the Premises to (i) inspect them; (ii) show the
Premises to prospective purchasers, mortgagees or, during the last nine (9)
months of the Lease Term, tenants, or to the ground or underlying lessors; (iii)
to post notices of nonresponsibility; or (iv) alter, improve or repair the
Premises or the Building if necessary to comply with current building codes or
other applicable laws, or for structural alterations, repairs or improvements to
the Building, or as Landlord may otherwise reasonably desire or deem necessary.
Notwithstanding anything to the contrary contained in this Article 22, Landlord
may enter the Premises at any time, without notice to Tenant, to perform
janitorial or other services required of Landlord pursuant to this Lease. Any
such entries shall be without the abatement of Rent and shall include the right
to take such reasonable steps as required to accomplish the stated purposes,
provided that Landlord shall use commercially reasonable efforts to minimize
inconvenience with respect to Tenant's use of or access to the Premises and the
Building Parking Facility resulting from Landlord's entry into the Premises
pursuant to the terms of this Article 22. Tenant hereby waives any claims for
damages or for any injuries or inconvenience to or interference with Tenant's
business, lost profits, any loss of occupancy or quiet enjoyment of the
Premises, and any other loss occasioned thereby. For each of the above purposes,
Landlord shall at all times have a key with which to unlock all the doors in the
Premises, excluding Tenant's vaults, safes and special security areas designated
in advance by Tenant. In an emergency, Landlord shall have the right to use any
means that Landlord may deem proper to open the doors in and to the Premises,
provided Landlord shall take reasonable precautions under the circumstances to
secure the Premises. Any entry into the Premises in the manner hereinbefore
described shall not be deemed to be a forcible or unlawful entry into, or a
detainer of, the Premises, or an actual or constructive eviction of Tenant from
any portion of the Premises. Except in the event of an emergency, Landlord shall
consult with Tenant regarding the scheduling of any repair work required in or
about the Premises and shall comply with Tenant's reasonable scheduling
requests; provided, however, Landlord shall not be required to perform any such
work at times other than ordinary business hours, unless Tenant pays Landlord
for the overtime and other additional expenses incurred in performing such work
after ordinary business hours.
ARTICLE 23
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TENANT PARKING
--------------
Tenant shall have the right to use up to the number of undesignated,
unreserved parking spaces set forth in Section 11 of the Summary for parking in
the Building Parking Facility. Tenant shall abide, and cause its employees and
visitors who utilize the Building Parking Facility to abide, by all parking
rules and regulations for parking in the Building Parking Facility, as may be
adopted and/or modified by Landlord and/or Landlord's parking operator from time
to time. Tenant hereby acknowledges and agrees that Tenant shall use its best
efforts to cause its employees and visitors to park in the Building Parking
Facility and not on the streets adjacent to the Real Property. During the
initial Lease Term, Tenant's right to use the number of parking spaces permitted
to be utilized by Tenant pursuant to the terms of this Lease shall be free of
charge. During the Option Term, if applicable, Tenant shall pay to Landlord the
prevailing rate charged for parking by landlords of the Comparable Buildings in
connection with comparable parking facilities. Notwithstanding anything in this
Lease to the contrary, Tenant hereby acknowledges and agrees that (i) pursuant
to that certain document entitled Covenant and Agreement to Provide Parking
Attendant, Landlord may be required to provide a parking attendant at the
Building Parking Facility (an "ATTENDANT"), and (ii) Landlord shall be entitled
to include in Operating Expenses any and all costs incurred by Landlord in
connection with any such Attendant ("ATTENDANT COSTS"), provided that (a) in no
event shall Attendant Costs be included in Operating Expenses for the Base Year,
and (b) in the event that Landlord shall incur Attendant Costs during the Base
Year, Tenant shall pay to Landlord any and all of such costs.
ARTICLE 24
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MISCELLANEOUS PROVISIONS
------------------------
24.1 Terms; Captions. The necessary grammatical changes required to
---------------
make the provisions hereof apply either to corporations or partnerships or
individuals, men or women, as the case may require, shall in all cases be
assumed as though in each case fully expressed. The captions of Articles and
Sections are for convenience only and shall not be deemed to limit, construe,
affect or alter the meaning of such Articles and Sections.
24.2 Binding Effect. Each of the provisions of this Lease shall extend
--------------
to and shall, as the case may require, bind or inure
<PAGE>
to the benefit not only of Landlord and of Tenant, but also of their respective
successors or assigns, provided this clause shall not permit any assignment by
Tenant contrary to the provisions of Article 14 of this Lease.
24.3 No Waiver. No waiver of any provision of this Lease shall be
---------
implied by any failure of a party 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 a party 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. No receipt of monies by Landlord from Tenant after
the termination of this Lease shall in any way alter the length of the Lease
Term or of Tenant's right of possession hereunder or after the giving of any
notice shall reinstate, continue or extend the Lease Term or affect any notice
given Tenant prior to the receipt of such monies, it being agreed that after the
service of notice or the commencement of a suit or after final judgment for
possession of the Premises, Landlord may receive and collect any Rent due, and
the payment of said Rent shall not waive or affect said notice, suit or
judgment.
24.4 Modification of Lease. Should any current or prospective mortgagee
---------------------
or ground lessor for the Building require a modification or modifications of
this Lease, which modification or modifications will not cause an increased cost
or expense to Tenant or in any other way materially and adversely change the
rights and obligations of Tenant hereunder, then and in such event, Tenant
agrees that this Lease may be so modified and agrees to execute whatever
documents are required therefor and deliver the same to Landlord within ten (10)
days following the request therefor. Should Landlord or Tenant or any such
current or prospective mortgagee or ground lessor require execution of a short
form of Lease for recording, containing, among other customary provisions, the
names of the parties, a description of the Premises and the Lease Term, Landlord
or Tenant, as the case may be, agrees to execute such short form of Lease and to
deliver the same to other party within ten (10) days following the request
therefor. Any documentary transfer taxes, recording or similar fees in
connection with the recordation of a short form of Lease shall be borne by the
party requesting such document. In the event that Tenant shall request the
recordation of a short form of Lease pursuant to this Section 24.4, then
concurrently with Tenant's execution thereof, Tenant shall execute, acknowledge
and deliver to Lessor a commercially reasonable quitclaim relating thereto,
which Landlord shall only be entitled to record following the expiration or
earlier termination of this Lease.
24.5 Transfer of Landlord's Interest. Tenant acknowledges that Landlord
-------------------------------
has the right to transfer all or any portion of its interest in the Real
Property and Building and in this Lease, and Tenant agrees that in the event of
any such transfer, Landlord shall automatically be released from all liability
under this Lease and Tenant agrees to look solely to such transferee for the
performance of Landlord's obligations hereunder after the date of transfer. The
liability of any transferee of Landlord shall be limited to the interest of such
transferee in the Real Property and Building (including related rental, sales
and insurance proceeds) and such transferee shall be without personal liability
under this Lease, and Tenant hereby expressly waives and releases such personal
liability on behalf of itself and all persons claiming by, through or under
Tenant. Tenant further acknowledges that Landlord may assign its interest in
this Lease to a mortgage lender as additional security and agrees that such an
assignment shall not release Landlord from its obligations hereunder and that
Tenant shall continue to look to Landlord for the performance of its obligations
hereunder.
24.6 Prohibition Against Recording. Except as provided in Section 24.4
-----------------------------
of this Lease, neither this Lease, nor any memorandum, affidavit or other
writing with respect thereto, shall be recorded by Tenant or by anyone acting
through, under or on behalf of Tenant, and the recording thereof in violation of
this provision shall make this Lease null and void at Landlord's election.
24.7 Landlord's Title. Landlord's title is and always shall be
----------------
paramount to the title of Tenant. Nothing herein contained shall empower Tenant
to do any act which can, shall or may encumber the title of Landlord.
24.8 Tenant's Signs.
--------------
24.8.1 Interior Signs. Tenant shall be entitled, at its sole
--------------
cost and expense, to interior signs which are not readily visible from the
exterior of the Building, which interior signage (except any signage located in
the lobby of the Building) shall not be subject to Landlord's prior written
approval. Prior to the Expansion Premises Commencement Date, any signage located
in the lobby of the Building which is not readily visible from the exterior of
the Building shall be subject to the approval of Landlord, which approval shall
not be unreasonably withheld. Upon the expiration or earlier termination of this
Lease, Tenant shall be responsible, at its sole cost and expense, for the
removal of such signage and the repair of all damage to the Building caused by
such removal. Except for such identification signs, and except as set forth in
Section 24.8.2, below, Tenant may not install any signs on the exterior or roof
of the Building or the common areas of the Building or the Real Property. Any
signs, window coverings, or blinds (even if the same are located behind the
Landlord approved window coverings for the Building), or other items visible
from the exterior of the Premises or Building are subject to the prior approval
of Landlord, in its reasonable discretion.
24.8.2 Building Top Sign. Tenant shall have the exclusive right to
-----------------
(a) two (2) signs at the top of the Building, (b) one (1) monument sign in the
front of the Building, and (c) one (1) sign above the entrance to the Building
Parking Facility (collectively, "TENANT'S SIGNAGE"); provided, however, that (i)
the location of Tenant's Signage shall be subject to Landlord's approval, which
approval shall not be unreasonably withheld, conditioned or delayed (ii) the
size, materials and design of the Tenant's Signage shall be subject to
Landlord's prior written consent, which consent may be withheld in Landlord's
reasonable discretion; (iii) the Tenant's Signage shall comply with all
applicable governmental rules and regulations; and (iv) the right to Tenant's
Signage shall be personal to the Original Tenant or a Permitted Assignee, and
may only be utilized by the Original Tenant or a Permitted Assignee and may not
be exercised or used by, or assigned to, any assignee or sublessee or any other
person or entity, provided that any such Permitted Assignee shall only have the
right to utilize the Tenant's Signage to the extent such Permitted Assignee does
not have a name which relates to an entity which is of a character or
reputation, or is associated with a political faction or orientation, which is
inconsistent with the quality of the Real Property, or which would otherwise
reasonably offend a landlord of the Comparable Buildings. In addition, Tenant's
rights to retain Tenant's Signage is subject to and conditioned upon the
Original Tenant occupying the entire Premises during the Lease Term. Tenant
shall be permitted to place the name "American Intercontinental University" or
"AIU" on Tenant's Signage, but no other markings. Landlord shall have no
obligation or liability to Tenant as a result of any failure of any applicable
governmental agency to approve Tenant's Signage. Tenant shall be responsible for
all costs incurred by Tenant in connection with the design, construction,
installation, maintenance and repair of Tenant's Signage; such obligations of
Tenant shall be subject to such rules and regulations as Landlord may reasonably
establish from time to time, including, without limitation, any maintenance
program as may be adopted by Landlord from time to time, and shall be performed
by contractors, subcontractors and other applicable persons and/or entities
selected by Tenant (and pursuant to contracts) subject to Landlord's approval,
which approval shall not be unreasonably withheld, conditioned or delayed. Upon
the expiration or earlier termination of Tenant's rights to Tenant's Signage or
upon the expiration or earlier termination of this Lease, Tenant shall, at its
sole cost and expense, remove Tenant's Signage
<PAGE>
and repair any and all damage to the Building caused by such removal. In the
event Tenant fails to comply with the terms of the preceding sentence, Landlord
shall have the right, at Tenant's sole cost and expense, to remove Tenant's
Signage and to repair any and all damage to the Building caused by such removal.
24.9 Relationship of Parties. Nothing contained in this Lease shall be
-----------------------
deemed or construed by the parties hereto or by any third party to create the
relationship of principal and agent, partnership, joint venturer or any
association between Landlord and Tenant, it being expressly understood and
agreed that neither the method of computation of Rent nor any act of the parties
hereto shall be deemed to create any relationship between Landlord and Tenant
other than the relationship of landlord and tenant.
24.10 Application of Payments. In the absence of Tenant's specific
-----------------------
designation for its payments, Landlord shall have the right to apply payments
received from Tenant pursuant to this Lease, to satisfy any obligations of
Tenant hereunder, in such order and amounts as Landlord, in its sole discretion,
may elect.
24.11 Time of Essence. Time is of the essence of this Lease and each
---------------
of its provisions.
24.12 Partial Invalidity. If any term, provision or condition contained
------------------
in this Lease shall, to any extent, be invalid or unenforceable, the remainder
of this Lease, or the application of such term, provision or condition to
persons or circumstances other than those with respect to which it is invalid or
unenforceable, shall not be affected thereby, and each and every other term,
provision and condition of this Lease shall be valid and enforceable to the
fullest extent possible permitted by law.
24.13 No Warranty. In executing and delivering this Lease, Tenant has
-----------
not relied on any representation, including, but not limited to, any
representation whatsoever as to the amount of any item comprising Additional
Rent or the amount of the Additional Rent in the aggregate or that Landlord is
furnishing the same services to other tenants, at all, on the same level or on
the same basis, or any warranty or any statement of Landlord which is not set
forth herein or in one or more of the Exhibits attached hereto.
24.14 Landlord Exculpation. It is expressly understood and agreed that
--------------------
notwithstanding anything in this Lease to the contrary, and notwithstanding any
applicable law to the contrary, the liability of Landlord and the Landlord
Parties hereunder (including any successor landlord) and any recourse by Tenant
against Landlord or the Landlord Parties shall be limited solely and exclusively
to an amount which is equal to the interest of Landlord in the Real Property and
Building (including related rental, sales and insurance proceeds), and neither
Landlord, nor any of the Landlord Parties shall have any personal liability
therefor, and Tenant hereby expressly waives and releases such personal
liability on behalf of itself and all persons claiming by, through or under
Tenant. Notwithstanding any of the foregoing or anything else contained in this
Lease to the contrary, neither Landlord nor any of the Landlord Parties shall be
exculpated from any liability relating to the misapplication of any security
deposit, insurance proceeds, rents or other proceeds provided by Tenant or
insurance companies.
24.15 Entire Agreement. It is understood and acknowledged that there
----------------
are no oral agreements between the parties hereto affecting this Lease and this
Lease supersedes and cancels any and all previous negotiations, arrangements,
brochures, agreements and understandings, if any, between the parties hereto or
displayed by Landlord to Tenant with respect to the subject matter thereof, and
none thereof shall be used to interpret or construe this Lease. This Lease and
any side letter or separate agreement executed by Landlord and Tenant in
connection with this Lease and dated of even date herewith contain all of the
terms, covenants, conditions, warranties and agreements of the parties relating
in any manner to the rental, use and occupancy of the Premises, shall be
considered to be the only agreement between the parties hereto and their
representatives and agents, and none of the terms, covenants, conditions or
provisions of this Lease can be modified, deleted or added to except in writing
signed by the parties hereto. All negotiations and oral agreements acceptable to
both parties have been merged into and are included herein. There are no other
representations or warranties between the parties, and all reliance with respect
to representations is based totally upon the representations and agreements
contained in this Lease.
24.16 Right to Lease. Landlord reserves the absolute right to effect
--------------
such other tenancies in the Building as Landlord in the exercise of its sole
business judgment shall determine to best promote the interests of the Building.
Tenant does not rely on the fact, nor does Landlord represent, that any specific
tenant or type or number of tenants shall, during the Lease Term, occupy any
space in the Building.
24.17 Force Majeure. Any prevention, delay or stoppage due to strikes,
-------------
lockouts, labor disputes, acts of God, inability to obtain services, labor, or
materials or reasonable substitutes therefor, governmental actions, civil
commotions, fire or other casualty, and other causes beyond the reasonable
control of the party obligated to perform, except with respect to the
obligations imposed with regard to Rent and other charges to be paid by Tenant
pursuant to this Lease and further except for matters arising from the financial
condition of the party so affected, including the inability to raise capital or
borrow funds (collectively, the "FORCE MAJEURE"), notwithstanding anything to
the contrary contained in this Lease, shall excuse the performance of such party
for a period equal to any such prevention, delay or stoppage and, therefore, if
this Lease specifies a time period for performance of an obligation of either
party, that time period shall be extended by the period of any delay in such
party's performance caused by a Force Majeure.
24.18 Notices. All notices, demands, statements or communications
-------
(collectively, "NOTICES") given or required to be given by either party to the
other hereunder shall be in writing, shall be sent by United States certified or
registered mail, postage prepaid, return receipt requested, or delivered
personally, or delivered by a nationally recognized overnight courier service
such as UPS or Federal Express (i) to Tenant at the appropriate address set
forth in Section 5 of the Summary, or to such other place as Tenant may from
time to time designate in a Notice to Landlord; or (ii) to Landlord at the
addresses of Landlord's agent set forth in Section 3 of the Summary, or to such
other firm or to such other place as Landlord may from time to time designate in
a Notice to Tenant. Any Notice will be deemed given on the date it is mailed as
provided in this Section 24.19 or upon the date personal delivery is made or
upon the date overnight courier delivery is made. If Tenant is notified of the
identity and address of Landlord's mortgagee or ground or underlying lessor,
Tenant shall give to such mortgagee or ground or underlying lessor written
notice of any default by Landlord under the terms of this Lease by registered or
certified mail, and such mortgagee or ground or underlying lessor shall be given
a reasonable opportunity to cure such default prior to Tenant's exercising any
remedy available to Tenant.
24.19 Joint and Several. If there is more than one Tenant, the
-----------------
obligations imposed upon Tenant under this Lease shall be joint and several.
24.20 Authority. If Tenant is a corporation or partnership, each
---------
individual executing this Lease on behalf of Tenant hereby represents and
warrants that Tenant is a duly formed and existing entity qualified to do
business in the state in which the Building is located and that Tenant has full
right and authority to execute and deliver this Lease and that each person
signing on behalf of Tenant is authorized to do so.
24.21 Jury Trial; Attorneys' Fees. IF EITHER PARTY COMMENCES LITIGATION
---------------------------
AGAINST THE OTHER FOR THE
<PAGE>
SPECIFIC PERFORMANCE OF THIS LEASE, FOR DAMAGES FOR THE BREACH HEREOF OR
OTHERWISE FOR ENFORCEMENT OF ANY REMEDY HEREUNDER, THE PARTIES HERETO AGREE TO
AND HEREBY DO WAIVE ANY RIGHT TO A TRIAL BY JURY. In the event of any such
commencement of litigation, the prevailing party shall be entitled to recover
from the other party such costs and reasonable attorneys' fees as may have been
incurred, including any and all costs incurred in enforcing, perfecting and
executing such judgment.
24.22 Governing Law. This Lease shall be construed and enforced in
-------------
accordance with the laws of the state in which the Building is located.
24.23 Submission of Lease. Submission of this instrument for
-------------------
examination or signature by Tenant does not constitute a reservation of or an
option for lease, and it is not effective as a lease or otherwise until
execution and delivery by both Landlord and Tenant.
24.24 Brokers. Landlord and Tenant hereby warrant to each other that
-------
they have had no dealings with any real estate broker or agent in connection
with the negotiation of this Lease, excepting only the real estate brokers or
agents specified in Section 12 of the Summary (the "BROKERS"), and that they
know of no other real estate broker or agent who is entitled to a commission in
connection with this Lease. Each party agrees to indemnify and defend the other
party against and hold the other party harmless from any and all claims,
demands, losses, liabilities, lawsuits, judgments, and costs and expenses
(including without limitation reasonable attorneys' fees) with respect to any
leasing commission or equivalent compensation alleged to be owing on account of
the indemnifying party's dealings with any real estate broker or agent other
than the Brokers.
24.25 Independent Covenants. This Lease shall be construed as though
---------------------
the covenants herein between Landlord and Tenant are independent and not
dependent and Tenant hereby expressly waives the benefit of any statute to the
contrary and agrees that if Landlord fails to perform its obligations set forth
herein, Tenant shall not be entitled to make any repairs or perform any acts
hereunder at Landlord's expense or to any setoff of the Rent or other amounts
owing hereunder against Landlord; provided, however, that the foregoing shall in
no way impair the right of Tenant to commence a separate action against Landlord
for any violation by Landlord of the provisions hereof so long as notice is
first given to Landlord and any holder of a mortgage or deed of trust covering
the Building, Real Property or any portion thereof, of whose address Tenant has
theretofore been notified, and an opportunity is granted to Landlord and such
holder to correct such violations as provided above.
24.26 Building Name and Signage. Landlord shall have no right (except
-------------------------
to the extent required be applicable law) to install, affix and maintain any
signs on the exterior of the Building which in Tenant's sole judgment detract
from the appearance of the Building or identify any business entity other than
that of Tenant. Tenant shall not use the name of the Building or use pictures or
illustrations of the Building in advertising or other publicity in a derogatory
or offensive manner. If Landlord should change the name or address of the
Building, then Landlord shall provide Tenant with not less than ninety (90) days
prior written notice, and shall reimburse Tenant for its reasonable
out-of-pocket costs incurred for reasonable quantities of incorrect stationary,
business cards, brochures or similar items, and for the cost of printing and
mailing change of address announcements.
24.27 Building Directory. Tenant shall be entitled to reasonable use of
------------------
the Building directory to display the name and location of Tenant and its
employees in the Building.
24.28 Satellite Dish.
--------------
24.28.1 Landlord hereby agrees that Tenant shall have the
nonexclusive right at Tenant's sole cost and expense and subject to the
provisions of this Section 24.28, to install up to six (6) satellite dishes,
each of which shall not exceed eighteen (18) inches in diameter (individually
and collectively, a "SATELLITE DISH") on the roof of the Building in a location
reasonably designated by Landlord. Notwithstanding the foregoing, in no event
shall Tenant's Satellite Dishes occupy in excess of fifty percent (50%) of the
available space upon the roof of the Building. All of Tenant's Satellite Dishes
shall be reasonably adjacent to the other Satellite Dishes installed by Tenant
pursuant to the terms of this Section 24.28. In addition, Tenant shall have the
right, subject to available capacity of the Building, to install such connection
equipment, such as conduits, cables, risers, feeders and materials
(collectively, the "CONNECTING EQUIPMENT") in the shafts, ducts, conduits,
chases, utility closets and other facilities of the Building as is reasonably
necessary to connect the Satellite Dish to Tenant's other machinery and
equipment in the Premises, subject however, to the provisions of Section
24.28.2, below, and subject to the availability of vertical riser and feeder
excess capacity. Tenant shall also have the right of access, consistent with
Section 24.28.4, below, to the areas where any such Connecting Equipment is
located for the purposes of maintaining, repairing, testing and replacing the
same. In connection with the rights granted to Tenant pursuant to the terms of
this Section 24.28, Tenant shall pay to Landlord, as Additional Rent, a monthly
amount equal to the product of (i) $1,000.00, and (ii) the number of Satellite
Dishes in excess of two (2) Satellite Dishes installed by Tenant upon the roof
of the Building (the "SATELLITE RENT"). The Satellite Rent shall be due at the
same time and in the same manner as Base Rent.
24.28.2 The installation of the Satellite Dish and related
Connecting Equipment (hereby referred to together and/or separately as the
"SATELLITE EQUIPMENT") shall be performed in accordance with and subject to the
provisions of Article 8 of this Lease, and the Satellite Equipment shall be
treated for all purposes of this Lease as if the same were Tenant's property.
For the purposes of determining Tenant's obligations with respect to its use of
the roof of the Building herein provided, the portion of the roof of the
Building affected by the Satellite Equipment shall be deemed to be a portion of
Tenant's Premises; consequently, all of the provisions of this Lease with
respect to Tenant's obligations hereunder shall apply to the installation, use
and maintenance of the Satellite Equipment, including without limitation,
provisions relating to compliance with requirements as to insurance, indemnity,
repairs and maintenance, and compliance with laws. Landlord shall have no
obligation with regard to the affected portion of the roof or the Satellite
Equipment except as provided in this Section 24.28.
24.28.3 It is expressly understood that Landlord retains the
right to grant third parties the right to utilize any portion of the roof not
utilized by Tenant and to use the portion of the roof on which the Satellite
Equipment is located for any purpose whatsoever, provided in each event that
Tenant shall have reasonable access to, and Landlord shall not unduly interfere
with the use of, the Satellite Equipment.
24.28.4 Tenant shall install, use, maintain and repair the
Satellite Equipment so as not to damage or interfere with the operation of the
Building or the Systems and Equipment or any other communications or similar
equipment located on the roof of the Building; and Tenant hereby agrees to
indemnify, defend and hold Landlord harmless from and against any and all
claims, costs, damages, expenses and liabilities (including attorney's fees)
arising out of Tenant's failure to comply with the provisions of this Section
24.28.4.
24.28.5 Landlord shall not have any obligations with respect
to the Satellite Equipment or compliance with any
<PAGE>
requirements relating thereto nor shall Landlord be responsible for any damage
that may be caused to the Satellite Equipment except to the extent caused by the
gross negligence or willful misconduct of Landlord. Landlord makes no
representation that the Satellite Equipment will be able to receive or transmit
communication signals without interference or disturbance and Tenant agrees that
Landlord shall not be liable to Tenant therefor.
24.28.6 Tenant, at Tenant's sole cost and expense, shall paint
the Satellite Equipment in such color(s) as Landlord shall reasonably determine
and shall maintain such equipment and install such fencing and other protective
equipment on or about the Satellite Equipment as Landlord may reasonably
determine.
24.28.7 Tenant shall (i) be solely responsible for any damage
caused as a result of the Satellite Equipment, (ii) promptly pay any tax,
license or permit fees charged pursuant to any requirements in connection with
the installation, maintenance or use of the Satellite Equipment and comply with
all precautions and safeguards recommended by all governmental authorities, and
(iii) make necessary repairs, replacements to or maintenance of the Satellite
Equipment.
24.28.8 If any of the conditions set forth in this Section
24.28 are not complied with by Tenant, then without limiting Landlord's rights
and remedies it may otherwise have under this Lease, Tenant shall, upon written
notice from Landlord, have the option either to (i) immediately discontinue its
use of the Satellite Equipment, remove the same, and make such repairs and
restoration as required under Section 24.28.9 below, (ii) reposition the
Satellite Equipment to a location designated by Landlord if Landlord elects to
permit such repositioning, and make such repairs and restorations as required
under Section 24.28.9 below, or (iii) correct such noncompliance within thirty
(30) days after receipt of notice. If Tenant fails to correct noncompliance
within thirty (30) days after receipt of notice, then Tenant shall immediately
discontinue its use of the Satellite Equipment and remove the same.
24.28.9 Upon the expiration of the Lease Term or upon any
earlier termination of this Lease, Tenant shall, subject to the control of and
direction from Landlord, remove the Satellite Equipment, repair and damage
caused thereby, and restore the roof and other facilities of the Building to
their condition existing prior to the installation of the Satellite Equipment.
24.28.10 Tenant's rights under this Section 24.28 shall be
personal to the Original Tenant or a Permitted Assignee or any subtenant
approved or otherwise permitted pursuant to the term of Article 14 of this
Lease, and may only be utilized by the such entities (and may not be exercised
or utilized by any other assignee, sublessee or other transferee of the Original
Tenant's interest in this Lease or the Premises); provided that nothing in this
Section 24.28.10 shall prohibit such entities from utilizing the Satellite Dish
for the transmission of any information such entities deem desirable.
24.29 Consent and Approvals. Except (i) for matters for which there
---------------------
is a standard of consent or discretion specifically set forth in this Lease,
(ii) matters which could have an adverse effect on the Systems and Equipment, or
which could affect the exterior appearance of the Building, or (iii) matters
covered by Article 19 (Defaults; Remedies) of this Lease (collectively, the
"EXCEPTED MATTERS"), any time the consent of Landlord or Tenant is required
under this Lease, such consent shall not be unreasonably withheld or delayed,
and, except with regard to the Excepted Matters, whenever this Lease grants
Landlord or Tenant the right to take action, exercise discretion, establish
rules and regulations or make an allocation or other determination, Landlord and
Tenant shall act reasonably and in good faith. With respect to the Excepted
Matters, Landlord shall be entitled to grant its consent or exercise its
discretion in its sole and absolute discretion.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be
executed the day and date first above written.
"Landlord":
W9/WLA REAL ESTATE LIMITED PARTNERSHIP,
a Delaware limited partnership
By: LPC MS, Inc.,
as agent and manager for Landlord
By: ______________________________________
D. Allen Palmer, Senior Vice President
"Tenant":
EDUTREK INTERNATIONAL, INC.,
a Georgia corporation,
By: _____________________________________
Name:_____________________________________
Its: _____________________________________
By: _____________________________________
Name:_____________________________________
Its: _____________________________________
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<PAGE>
EXHIBIT A
---------
OUTLINE OF FLOOR PLAN OF PREMISES
---------------------------------
[TO BE PROVIDED]
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[INTENTIONALLY LEFT BLANK]
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[INTENTIONALLY LEFT BLANK]
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[INTENTIONALLY LEFT BLANK]
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[INTENTIONALLY LEFT BLANK]
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EXHIBIT A-1
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OUTLINE OF EXPANSION PREMISES
-----------------------------
[TO BE PROVIDED]
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<PAGE>
EXHIBIT B
---------
TENANT WORK LETTER
------------------
This Tenant Work Letter shall set forth the terms and conditions
relating to the construction of the Premises. This Tenant Work Letter is
essentially organized chronologically and addresses the issues of the
construction of the Premises, in sequence, as such issues will arise during the
actual construction of the Premises. All references in this Tenant Work Letter
to Articles or Sections of "this Lease" shall mean the relevant portions of
Articles 1 through 24 of the Office Lease to which this Tenant Work Letter is
- ---------------------
attached as Exhibit B, and all references in this Tenant Work Letter to Sections
---------
of "this Tenant Work Letter" shall mean the relevant portions of Sections 1
----------
through 5 of this Tenant Work Letter.
- ---------
SECTION 1
---------
DELIVERY OF THE PREMISES AND BUILDING
-------------------------------------
Following the earlier to occur of (I) the date Tenant obtains final,
nonappealable Governmental Approvals, and (II) the date Tenant's termination
right set forth in Section 2.2.2 of the Lease expires, is waived, or otherwise
has no further applicability, Landlord shall deliver the Premises (which shall
include the raised floors and HVAC equipment located on the second floor of the
Building) and Building to Tenant, and Tenant shall accept the Premises
(including the raised floors and HVAC equipment located on the second floor of
the Building) and Building from Landlord in their presently existing, "as-is"
condition, provided that (i) the Base Building Systems servicing the Building
shall be in good working order, (ii) any modifications to the portion of the
Base Building Systems comprised of the main life-safety panel which are required
in order for Tenant to install strobes as required by Applicable Law, shall be
performed by Landlord, at Landlord's sole cost and expense, on or before July
31, 1998, and (iii) any modifications to the core restrooms (as configured as of
the date of this Lease) required by Applicable Law as of the date of this Lease,
shall by performed by Landlord, at Landlord's sole cost and expense. In
connection with the foregoing, Landlord and Tenant hereby acknowledge and agree
that (a) as set forth on the "Supplemental Plans," as that term is defined in
Section 3.2 of this Tenant Work Letter, which have not been approved by Landlord
as of the date hereof (except with respect to the fire exit stairwells), Tenant
intends to expand the core restrooms, and (b) to the extent the Supplemental
Plans are approved by Landlord or to the extent Landlord otherwise approves
modifications to the core restrooms in the "Construction Drawings," as that term
is defined in Section 3.1 of this Tenant Work Letter, all costs associated with
such modifications to the core restrooms (including costs incurred to comply
with Applicable Laws as a result of such modifications) shall be the sole
responsibility of Tenant.
SECTION 2
---------
TENANT IMPROVEMENTS
-------------------
2.1 Tenant Improvement Allowance. Tenant shall be entitled to a
----------------------------
one-time tenant improvement allowance (the "Tenant Improvement Allowance") in
the amount up to but not exceeding Twenty-Five Dollars ($25.00) per usable
square foot of the Premises for the costs relating to the initial design and
construction of Tenant's improvements, which are permanently affixed to the
Premises (the "Tenant Improvements"). In no event shall Landlord be obligated to
make disbursements pursuant to this Tenant Work Letter in a total amount which
exceeds the Tenant Improvement Allowance. In the event that Tenant shall fail to
utilize all or a portion of the Tenant Improvement Allowance for Tenant
Improvements on or before the date which is twenty-four (24) months following
the Lease Commencement Date, such unused amounts shall revert to Landlord and
Tenant shall have no further rights with respect thereto.
2.2 Disbursement of the Tenant Improvement Allowance.
------------------------------------------------
2.2.1 Tenant Improvement Allowance Items. Except as otherwise
----------------------------------
set forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be
disbursed by Landlord only for the following items and costs (collectively the
"Tenant Improvement Allowance Items"):
2.2.1.1 Payment of the fees of the "Architect" and the
"Engineers," as those terms are defined in Section 3.1 of this Tenant Work
-----------
Letter;
2.2.1.2 The payment of plan check, permit and license fees
relating to construction of the Tenant Improvements;
2.2.1.3 The cost of construction of the Tenant Improvements,
including, without limitation, testing and inspection costs, trash removal
costs, and contractors' fees and general conditions, provided that parking for
Tenant's contractor shall be provided free of charge;
2.2.1.4 The cost of any changes in any portion of the
Building when such changes are required by the Construction Drawings (including
if such changes are due to the fact that such work is prepared on an unoccupied
basis), such cost to include all direct architectural and/or engineering fees
and expenses incurred in connection therewith;
2.2.1.5 The cost of any changes to the Construction Drawings
or Tenant Improvements required by all applicable building codes (the "Code");
2.2.1.6 Telephone and data cabling;
2.2.1.7 The cost of the "Coordination Fee," as that term is
defined in Section 4.2.2.1 of this Tenant Work Letter;
---------------
2.2.1.8 Sales and use taxes and Title 24 fees; and
2.2.1.9 All other costs to be expended by Landlord in
connection with the construction of the Tenant Improvements.
2.2.2 Disbursement of Tenant Improvement Allowance. During the
--------------------------------------------
construction of the Tenant Improvements, Landlord shall make monthly
disbursements of the Tenant Improvement Allowance for Tenant Improvement
Allowance Items for the benefit of Tenant and shall authorize the release of
monies for the benefit of Tenant as follows.
2.2.2.1 Monthly Disbursements. Subject to the terms of
---------------------
Section 2.2.4 of this Lease, on or before the 1st day of each calendar month, as
determined by Landlord, during the construction of the Tenant Improvements (or
such other date as Landlord may designate), Tenant shall deliver to Landlord:
(i) a request for payment of the "Contractor," as that term is defined in
Section 4.1 of this Tenant Work Letter, approved by Tenant, in a form to be
- -----------
provided by Landlord (such form to be subject to Tenant's reasonable approval),
showing the schedule, by trade, of percentage of completion of the Tenant
Improvements in the Premises, detailing the portion of the work completed and
the portion not completed; (ii) invoices from all of "Tenant's Agents," as that
term is defined in Section 4.1.2 of this Tenant Work Letter, for labor rendered
-------------
and materials delivered to the Premises; (iii) executed
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<PAGE>
mechanic's lien releases from all of Tenant's Agents which shall comply with the
appropriate provisions, as reasonably determined by Landlord, of California
Civil Code Section 3262(d); and (iv) all other information reasonably requested
by Landlord (collectively, "Disbursement Documentation"). Tenant's request for
payment shall be deemed Tenant's acceptance and approval of the work furnished
and/or the materials supplied as set forth in Tenant's payment request vis-a-vis
Landlord. Thereafter, Landlord shall deliver a check to Tenant made jointly
payable to Contractor and Tenant in payment of the lesser of: (A) the amounts so
requested by Tenant, as set forth in this Section 2.2.2.1, above, less a ten
percent (10%) retention (the aggregate amount of such retentions to be known as
the "Final Retention"), and (B) the balance of any remaining available portion
of the Tenant Improvement Allowance (not including the Final Retention),
provided that Landlord does not dispute any request for payment based on
material non-compliance of any work with the "Approved Working Drawings," as
that term is defined in Section 3.4 below, or due to any substandard work, or
-----------
for any other reasonable reason. Landlord's payment of such amounts shall not be
deemed Landlord's approval or acceptance of the work furnished or materials
supplied as set forth in Tenant's payment request.
2.2.2.2 Final Retention. Subject to the provisions of this
----------------
Tenant Work Letter, a check for the Final Retention payable jointly to Tenant
and Contractor shall be delivered by Landlord to Tenant following the completion
of construction of the Premises, provided that (i) Tenant delivers to Landlord
properly executed mechanics lien releases in compliance with both California
Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section
3262(d)(4) ("Final Releases"), (ii) Landlord has determined that no substandard
work exists which adversely affects the mechanical, electrical, plumbing,
heating, ventilating and air conditioning, life-safety or other systems of the
Building, the curtain wall of the Building, the structure or exterior appearance
of the Building, or any other tenant's use of such other tenant's leased
premises in the Building and (iii) Architect delivers to Landlord a certificate,
in a form reasonably acceptable to Landlord, certifying that the construction of
the Tenant Improvements in the Premises has been substantially completed.
2.2.2.3 Other Terms. Landlord shall only be obligated to make
-----------
disbursements from the Tenant Improvement Allowance to the extent costs are
incurred by Tenant for Tenant Improvement Allowance Items. All Tenant
Improvement Allowance Items for which the Tenant Improvement Allowance has been
made available shall be deemed Landlord's property under the terms of this
Lease, except for intellectual property rights that may pertain to the
Construction Drawings.
2.3 Standard Tenant Improvement Package. Landlord has established
-----------------------------------
specifications (the "Specifications") for the Building standard components to be
used in the construction of the Tenant Improvements in the Premises
(collectively, the "Standard Improvement Package"), which Specifications have
been supplied to Tenant by Landlord. The quality of Tenant Improvements shall be
equal to or of greater quality than the quality of the Specifications, provided
that the Tenant Improvements shall comply with those Specifications for which
substitutes are not allowed, as designated by Landlord in writing, prior to
Landlord's approval of the Construction Drawings. Landlord may make reasonable
changes to the Specifications for the Standard Improvement Package from time to
time; provided, however, that such changes do not increase Tenant's material or
construction costs and require materials with unusually long lead times, and
further provided that such changes shall not apply to any improvements that are
the subject of Construction Drawings that have been previously approved by
Landlord, and further provided, that such changes do not in Tenant's reasonable
opinion adversely affect its ability to construct subsequent improvements that
are consistent (both aesthetically and on a cost and availability basis) with
improvements that were the subject of previously approved Construction Drawings.
2.4 Failure to Disburse Tenant Improvement Allowance. In the event that
------------------------------------------------
(i) Landlord fails to fulfill its obligation to disburse the Tenant Improvement
Allowance in accordance with the terms of Section 2.2.2, above, within thirty
(30) days following notice from Tenant, (ii) Tenant shall, following the
expiration of such 30-day period, provide notice to Landlord of such failure,
and (iii) Landlord shall fail to fulfill its obligation to disburse the Tenant
Improvement Allowance within ten (10) business days following receipt of such
second notice, Tenant shall have the right to offset such due but unpaid portion
of the Tenant Improvement Allowance (plus interest at the Interest Rate from the
date Landlord should have disbursed such portion of the Tenant Improvement
Allowance pursuant to the terms of Section 2.2.2 of this Lease) against Tenant's
obligation for Rent next due under this Lease.
SECTION 3
---------
CONSTRUCTION DRAWINGS
---------------------
3.1 Selection of Architect/Construction Drawings. Tenant shall retain
--------------------------------------------
the architect/space planner approved by Landlord (the "Architect") to prepare
the "Construction Drawings," as that term is defined in this Section 3.1.
-----------
Landlord hereby approves Niles Bolton Associates to serve as the Architect.
Tenant shall retain HESM&A Consulting Engineers or another engineering
consultant approved by Landlord (the "Engineers") to prepare all plans and
engineering working drawings relating to the structural, mechanical, electrical,
plumbing, HVAC, lifesafety, and sprinkler work in the Premises, which work is
not part of the base building, provided that in the event that the Engineers
designated by Landlord are not price competitive, Tenant shall use such
Engineers as it may select, subject to Landlord's reasonable approval. The plans
and drawings to be prepared by Architect and the Engineers hereunder shall be
known collectively as the "Construction Drawings." All Construction Drawings
shall comply with the drawing format and specifications determined by Landlord
and communicated to Tenant, and shall be subject to Landlord's reasonable
approval. Tenant and Architect shall verify, in the field, the dimensions and
conditions as shown on the relevant portions of the base building plans, and
Tenant and Architect shall be solely responsible for the same, and Landlord
shall have no responsibility in connection therewith. Landlord's review of the
Construction Drawings as set forth in this Section 3, shall be for its sole
---------
purpose and shall not imply Landlord's review of the same, or obligate Landlord
to review the same, for quality, design, Code compliance or other like matters.
Accordingly, notwithstanding that any Construction Drawings are reviewed by
Landlord or its space planner, architect, engineers and consultants, and
notwithstanding any advice or assistance which may be rendered to Tenant by
Landlord or Landlord's space planner, architect, engineers, and consultants,
Landlord shall have no liability whatsoever in connection therewith and shall
not be responsible for any omissions or errors contained in the Construction
Drawings, and Tenant's waiver and indemnity set forth in this Lease shall
specifically apply to the Construction Drawings.
3.2 Final Space Plan. Landlord has approved (i) that certain final
----------------
space plan, dated June 1, 1998, prepared by Architect, sheets ID1.6, ID2.6,
ID3.6, ID4.6, ID5.6, and ID6.6, and (ii) the third fire exit stairwells for
floors one through six, as set forth in room numbers 115, 212, 335, 435A, 546A,
and 669 of those certain plans, prepared by Architect, dated June 5, 1998,
sheets ID 0.0 through ID 10.0 (the "Supplemental Plans"). In connection with the
foregoing, Tenant hereby acknowledges and agrees that prior to the expiration or
earlier termination of this Lease, Tenant shall, at its sole cost and expense,
remove such stairwells (the "Stairwells") and
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<PAGE>
return the affected areas of the Building to the condition which exists as of
the date of this Lease.
3.3 Final Working Drawings. Tenant shall supply the Engineers with a
----------------------
complete listing of standard and non-standard equipment and specifications,
including, without limitation, B.T.U. calculations, electrical requirements and
special electrical receptacle requirements for the Premises, to enable the
Engineers and the Architect to complete the "Final Working Drawings" (as that
term is defined below) in the manner as set forth below. In addition, Tenant
shall promptly cause the Architect and the Engineers to complete the
architectural and engineering drawings for the Premises, and Architect shall
compile a fully coordinated set of architectural, structural, mechanical,
electrical and plumbing working drawings in a form which is substantially
complete to allow subcontractors to bid on the work and to obtain all applicable
permits (collectively, the "Final Working Drawings") (but Tenant shall not
obtain such bids or permits prior to Landlord's approving such Final Working
Drawings) and shall submit the same to Landlord for Landlord's approval, which
approval shall not be unreasonably withheld, conditioned or delayed. Tenant
shall supply Landlord with four (4) copies signed by Tenant of such Final
Working Drawings. Landlord shall advise Tenant within five (5) business days
after Landlord's receipt of the Final Working Drawings for the Premises if the
same is unsatisfactory or incomplete in any respect. If Tenant is so advised,
Tenant shall immediately revise the Final Working Drawings in accordance with
such review and any disapproval of Landlord in connection therewith. In the
event that (i) Landlord shall fail to approve or disapprove of the proposed
Final Working Drawings (as the same may be revised from time to time in response
to Landlord's comments) within five (5) business days after Landlord's receipt
of the same, (ii) Tenant shall, following the expiration of such 5-business day
period, deliver a second request for Landlord's approval of the proposed Final
Working Drawings, and (iii) Landlord shall not approve or disapprove of the
proposed Final Working Drawings within three (3) business days following receipt
of Tenant's second request for approval, then Landlord's approval of the
proposed Final Working Drawings shall be deemed granted.
3.4 Approved Working Drawings. The Final Working Drawings shall be
-------------------------
approved by Landlord (which approval shall not be unreasonably withheld,
conditioned or delayed) (the "Approved Working Drawings") prior to the
commencement of construction of the Premises by Tenant. After approval by
Landlord of the Final Working Drawings, Tenant may submit the same to the
appropriate municipal authorities for all applicable building permits. Tenant
hereby agrees that neither Landlord nor Landlord's consultants shall be
responsible for obtaining any building permit or certificate of occupancy for
the Premises and that obtaining the same shall be Tenant's responsibility;
provided, however, that Landlord shall cooperate with Tenant in executing permit
applications and performing other ministerial acts reasonably necessary to
enable Tenant to obtain any such permit or certificate of occupancy. No material
changes, modifications or alterations in the Approved Working Drawings may be
made without the prior written consent of Landlord, which consent may not be
unreasonably withheld, conditioned or delayed.
SECTION 4
---------
CONSTRUCTION OF THE TENANT IMPROVEMENTS
---------------------------------------
4.1 Tenant's Selection of Contractors.
---------------------------------
4.1.1 The Contractor. A general contractor shall be retained by Tenant
--------------
to construct the Tenant Improvements. Such general contractor ("Contractor")
shall be selected by Tenant from the list of general contractors set forth on
Schedule 1 attached to this Tenant Work Letter, and Tenant shall deliver to
Landlord notice of its selection of the Contractor upon such selection.
4.1.2 Tenant's Agents. All subcontractors, laborers, materialmen, and
---------------
suppliers used by Tenant (such subcontractors, laborers, materialmen, and
suppliers, and the Contractor to be known collectively as "Tenant's Agents")
must be approved in writing by Landlord, which approval shall not be
unreasonably withheld, conditioned or delayed. If Landlord does not approve any
of Tenant's proposed subcontractors, laborers, materialmen or suppliers, Tenant
shall submit other proposed subcontractors, laborers, materialmen or suppliers
for Landlord's written approval. Landlord shall grant or deny its consent to
Tenant's Agents within two (2) business days following Tenant 's request. In the
event that (i) Landlord shall fail to approve or disapprove of any proposed
Tenant's Agents within such 2-business day period, (ii) Tenant shall, following
the expiration of such 2-business day period, deliver a second request for
Landlord's approval of the proposed Tenant's Agents, and (iii) Landlord shall
not approve or disapprove of the proposed Tenant's Agents within two (2)
business days following receipt of Tenant's second request for approval, then
Landlord's approval of the proposed Tenant's Agents shall be deemed granted.
4.2 Construction of Tenant Improvements by Tenant's Agents.
------------------------------------------------------
4.2.1 Construction Contract; Cost Budget. Prior to Tenant's execution
----------------------------------
of the construction contract and general conditions with Contractor (the
"Contract"), Tenant shall submit the Contract to Landlord for its approval,
which approval shall not be unreasonably withheld, conditioned or delayed. Prior
to the commencement of the construction of the Tenant Improvements, and after
Tenant has accepted all bids for the Tenant Improvements, Tenant shall provide
Landlord with a detailed breakdown, by trade, of the final costs to be incurred
or which have been incurred, as set forth more particularly in Sections 2.2.1.1
----------------
through 2.2.1.9, above, in connection with the design and construction of the
- ---------------
Tenant Improvements to be performed by or at the direction of Tenant or the
Contractor, which costs form a basis for the amount of the Contract (the "Final
Costs"). For purposes of this Section 4.2.1, the "Over-Allowance Amount" shall
be equal to the difference between the amount of the Final Costs and the amount
of the Tenant Improvement Allowance (less any portion thereof already disbursed
by Landlord, or in the process of being disbursed by Landlord, on or before the
commencement of construction of the Tenant Improvements). In the event that,
after the Final Costs have been delivered by Tenant to Landlord, the costs
relating to the design and construction of the Tenant Improvements shall change,
then any additional costs necessary to such design and construction in excess of
the Final Costs (the "Additional Costs") shall, to the extent that such
Additional Costs, when aggregated with the Final Costs, exceed the amount of the
Tenant Improvement Allowance, be an addition to the Over-Allowance Amount.
Within five (5) business days following notice from Landlord that Landlord has
received Disbursement Documentation with respect to all or substantially all of
the Tenant Improvement Allowance, Tenant shall, at Tenant's option, either (i)
deposit cash with Landlord in the amount of the Over-Allowance Amount, or (ii)
deliver to Landlord a letter of credit (the "TWL Letter of Credit") upon all of
the terms and conditions set forth in Section 20.2 of the Lease, provided that
(a) the "Letter of Credit Amount" shall be equal to the Over-Allowance Amount,
and (b) the TWL Letter of Credit shall serve as collateral for the full and
faithful performance of all of Tenant's obligations under this Tenant Work
Letter, including, without limitation, the completion of construction of the
Tenant Improvements, the payment of all costs thereof which exceed the Tenant
Improvement Allowance and the obtaining of Final Releases, all as set forth in
this Tenant Work Letter. In the event that Tenant shall elect to deliver the TWL
Letter of Credit to Landlord, then Tenant shall pay the Over-Allowance Amount
directly to Contractor pursuant to the same
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<PAGE>
disbursement procedure as is set forth in Section 2.2.2 of this Tenant Work
Letter. Tenant's obligation pursuant to the preceding sentence shall include,
without limitation, the obligation to continue to provide Landlord with
Disbursement Documentation and Final Releases. In the event that Tenant shall
elect to deliver to Landlord cash in the amount of the Over-Allowance Amount,
then such cash shall be disbursed by Landlord in the same manner as the Tenant
Improvement Allowance. Finally, in the event that, after Tenant's delivery to
Landlord of cash or the TWL Letter of Credit as set forth above in this Section
4.2.1, the cost of the design and/or construction of the Tenant Improvements
shall increase, then within five (5) business days following demand by Landlord,
Tenant shall either deliver to Landlord additional cash or an additional or
increased TWL Letter of Credit in the amount of such increased costs as if such
costs were initially part of the Over-Allowance Amount.
4.2.2 Tenant's Agents.
---------------
4.2.2.1 Landlord's General Conditions for Tenant's Agents and
-----------------------------------------------------
Tenant Improvement Work. Tenant's and Tenant's Agent's construction of the
- -----------------------
Tenant Improvements shall comply with the following: (i) the Tenant Improvements
shall be constructed in substantially accordance with the Approved Working
Drawings; (ii) Tenant's Agents shall submit schedules of all work relating to
the Tenant's Improvements to Contractor and Contractor shall, within five (5)
business days of receipt thereof, inform Tenant's Agents of any changes which
are necessary thereto, and Tenant's Agents shall adhere to such corrected
schedule; and (iii) Tenant shall abide by all reasonable rules made by
Landlord's Building manager with respect to the use of freight, loading dock and
service elevators, storage of materials, coordination of work with the
contractors of other tenants, and any other reasonable matter in connection with
this Tenant Work Letter, including, without limitation, the construction of the
Tenant Improvements. Tenant shall pay (as a deduction from the Tenant
Improvement Allowance) a logistical coordination fee (the "Coordination Fee") to
Landlord in an amount equal to Twenty-Five Thousand Dollars and No/100ths
($25,000.00), which Coordination Fee shall be for services relating to the
coordination of the construction of the Tenant Improvements, and to cover the
payment of any fees incurred by, and the cost of documents and materials
supplied by, Landlord and Landlord's consultants in connection with the
preparation and review of the Construction Drawings.
4.2.2.2 Indemnity. Tenant's indemnity of Landlord as set
---------
forth in this Lease shall also apply with respect to any and all costs, losses,
damages, injuries and liabilities related in any way to any act or omission of
Tenant or Tenant's Agents, or anyone directly or indirectly employed by any of
them, or in connection with Tenant's non-payment (for reasons other than the
Landlord's inability or wrongful refusal to advance the Tenant Improvement
Allowance) of any amount arising out of the Tenant Improvements and/or Tenant's
disapproval of all or any portion of any request for payment. Such indemnity by
Tenant, as set forth in this Lease, shall also apply with respect to any and all
costs, losses, damages, injuries and liabilities related in any way to
Landlord's performance of any ministerial acts taken by Landlord at the express
direction of Tenant (i) to permit Tenant to complete the Tenant Improvements,
and (ii) to enable Tenant to obtain any building permit or certificate of
occupancy for the Premises.
4.2.2.3 Requirements of Tenant's Agents. Each of Tenant's
-------------------------------
Agents shall guarantee to Tenant and for the benefit of Landlord that the
portion of the Tenant Improvements for which it is responsible shall be free
from any defects in workmanship and materials for a period of not less than one
(1) year from the date of completion thereof. Tenant shall endeavor to cause
each of Tenant's Agents shall be responsible for the replacement or repair,
without additional charge, of all work done or furnished in accordance with its
contract that shall become defective within one (1) year after the completion of
the work performed by such contractor or subcontractors. Tenant shall endeavor
to cause the correction of such work to include, without additional charge, all
additional expenses and damages incurred in connection with such removal or
replacement of all or any part of the Tenant Improvements, and/or the Building
and/or common areas that may be damaged or disturbed thereby. All such
warranties or guarantees as to materials or workmanship of or with respect to
the Tenant Improvements shall be contained in the Contract or subcontract and
shall be written such that such guarantees or warranties shall inure to the
benefit of both Landlord and Tenant, as their respective interests may appear,
and can be directly enforced by either. Tenant covenants to give to Landlord any
assignment or other assurances which may be necessary to effect such right of
direct enforcement.
4.2.2.4 Insurance Requirements.
----------------------
4.2.2.4.1 General Coverages. All of Tenant's Agents
-----------------
shall carry worker's compensation insurance covering all of their respective
employees, and shall also carry public liability insurance, including property
damage, all with limits, in form and with companies as are required to be
carried by Tenant as set forth in this Lease.
4.2.2.4.2 Special Coverages. Tenant shall carry
-----------------
"Builder's All Risk" insurance in an amount approved by Landlord covering the
construction of the Tenant Improvements, and such other insurance as Landlord
may require, it being understood and agreed that the Tenant Improvements shall
be insured by Tenant pursuant to this Lease immediately upon completion thereof.
Such insurance shall be in amounts and shall include such extended coverage
endorsements as may be reasonably required by Landlord including, but not
limited to, the requirement that all of Tenant's Agents shall carry excess
liability and Products and Completed Operation Coverage insurance, each in
amounts not less than $500,000 per incident, $1,000,000 in aggregate, and in
form and with companies as are required to be carried by Tenant as set forth in
this Lease.
4.2.2.4.3 General Terms. Certificates for all
-------------
insurance carried pursuant to this Section 4.2.2.4 shall be delivered to
---------------
Landlord before the commencement of construction of the Tenant Improvements and
before the Contractor's equipment is moved onto the site. All such policies of
insurance must contain a provision that the company writing said policy will
give Landlord fifteen (15) days prior written notice of any cancellation or
lapse of the effective date or any reduction in the amounts of such insurance.
In the event that the Tenant Improvements are damaged by any cause during the
course of the construction thereof, Tenant shall immediately repair the same at
Tenant's sole cost and expense. Tenant's Agents shall maintain all of the
foregoing insurance coverage in force until the Tenant Improvements are fully
completed and accepted by Landlord. All policies carried under this Section
-------
4.2.2.4 shall insure Landlord and Tenant, as their interests may appear, as well
- -------
as Contractor and Tenant's Agents. All insurance, except Workers' Compensation,
maintained by Tenant's Agents shall preclude subrogation claims by the insurer
against anyone insured thereunder. Such insurance shall provide that it is
primary insurance as respects the owner and that any other insurance maintained
by owner is excess and noncontributing with the insurance required hereunder.
The requirements for the foregoing insurance shall not derogate from the
provisions for indemnification of Landlord by Tenant under Section 4.2.2.2 of
---------------
this Tenant Work Letter. Landlord may, in its discretion, require Tenant to
obtain a lien and completion bond or some alternate form of security
satisfactory to Landlord in an amount sufficient to ensure the lien-free
completion of the Tenant Improvements and naming Landlord as a
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<PAGE>
co-obligee.
4.2.3 Governmental Compliance. The Tenant Improvements shall comply in
-----------------------
all respects with the following: (i) the Code and other state, federal, city or
quasi-governmental laws, codes, ordinances and regulations, as each may apply
according to the rulings of the controlling public official, agent or other
person; (ii) applicable standards of the American Insurance Association
(formerly, the National Board of Fire Underwriters) and the National Electrical
Code; and (iii) building material manufacturer's specifications.
4.2.4 Inspection by Landlord. Landlord shall have the right to inspect
----------------------
the Tenant Improvements at all times, provided however, that Landlord's failure
to inspect the Tenant Improvements shall in no event constitute a waiver of any
of Landlord's rights hereunder nor shall Landlord's inspection of the Tenant
Improvements constitute Landlord's approval of the same. Should Landlord
disapprove any portion of the Tenant Improvements, Landlord shall notify Tenant
in writing of such disapproval and shall specify the items disapproved. Any
defects or impermissible deviations in, and/or reasonable disapproval by
Landlord of, the Tenant Improvements shall be rectified by Tenant at no expense
to Landlord, provided however, that in the event Landlord determines that a
defect or impermissible deviation exists or reasonably disapproves of any matter
in connection with any portion of the Tenant Improvements and such defect,
deviation or matter might reasonably be expected to adversely affect the
mechanical, electrical, plumbing, heating, ventilating and air conditioning or
life-safety systems of the Building, the structure or exterior appearance of the
Building or any other tenant's use of such other tenant's leased premises,
Landlord may, take such action as Landlord reasonably deems necessary, at
Tenant's expense and without incurring any liability on Landlord's part, to
correct any such defect, deviation and/or matter, including, without limitation,
causing the cessation of performance of the construction of the Tenant
Improvements until such time as the defect, deviation and/or matter is corrected
to Landlord's reasonable satisfaction.
4.2.5 Meetings. Commencing upon the execution of this Lease, Tenant
--------
shall hold weekly meetings at a reasonable time, with the Architect and the
Contractor regarding the progress of the preparation of Construction Drawings
and the construction of the Tenant Improvements, which meetings shall be held at
the Building, and Landlord and/or its agents shall receive prior notice of, and
shall have the right to attend, all such meetings, and, upon Landlord's request,
certain of Tenant's Agents shall attend such meetings. In addition, minutes
shall be taken at all such meetings, a copy of which minutes shall be promptly
delivered to Landlord. One such meeting each month shall include the review of
Contractor's current request for payment.
4.3 Notice of Completion; Copy of Record Set of Plans. Within ten (10)
-------------------------------------------------
days after completion of construction of the Tenant Improvements, Tenant shall
cause a Notice of Completion to be recorded in the office of the Recorder of the
county in which the Building is located in accordance with Section 3093 of the
Civil Code of the State of California or any successor statute, and shall
furnish a copy thereof to Landlord upon such recordation, provided that Tenant
shall be entitled to record and deliver to Landlord earlier Notices of
Completion in accordance with the terms of this sentence with respect to
portions of the Tenant Improvements which have completed prior to the completion
of the entirety of the Tenant Improvements. If Tenant fails to do so five (5)
days following notice by Landlord (which notice shall not be delivered prior to
the expiration of such 10-day period), Landlord may execute and file the same on
behalf of Tenant as Tenant's agent for such purpose, at Tenant's sole cost and
expense. At the conclusion of construction, (i) Tenant shall cause the Architect
and Contractor (A) to update the Approved Working Drawings as necessary to
reflect all changes made to the Approved Working Drawings during the course of
construction, (B) to certify to the best of their knowledge that the "record-
set" of as-built drawings are true and correct in all material respects, which
certification shall survive the expiration or termination of this Lease, and (C)
to deliver to Landlord two (2) sets of copies of such record set of drawings
within ninety (90) days following issuance of a certificate of occupancy for the
Premises, and (ii) Tenant shall deliver to Landlord a copy of all warranties,
guaranties, and operating manuals and information relating to the improvements,
equipment, and systems in the Premises.
4.4 Construction Schedule. Tenant will endeavor to cause the Tenant
---------------------
Improvements to be constructed in three phases which will allow Tenant to
complete the Premises and commence its beneficial occupancy of the same in
accordance with the following schedule:
STAGES (IN RENTABLE SQUARE FEET)
--------------------------------
Phase I Phase II Phase III
Floors 10/15/98 1/1/99 6/1/99
------ -------- ------ ------
1 1,200 4,871 -
2 4,140 - -
3 - 19,994 -
4 - 19,408 -
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<PAGE>
5 - 5,450 13,920
6 6,400 - 12,832
- ----- ----- ------
TOTALS 11,740 49,723 26,752
Notwithstanding the foregoing, Landlord and Tenant hereby acknowledge and agree
that (i) nothing in this Section 4.4 shall alter or modify the Lease
Commencement Date, as set forth in Section 7.2 of the Summary, and (ii) Tenant
shall be obligated to commence the payment of Rent in accordance with the terms
of this Lease upon the Lease Commencement Date.
SECTION 5
---------
DELAY OF LEASE COMMENCEMENT DATE
--------------------------------
5.1 Landlord Caused Delays. The Lease Commencement Date shall occur as
----------------------
provided in Section 2.1 of this Lease, provided that the Lease Commencement Date
shall be delayed by the number of days of delay of the "substantial completion
of the Tenant Improvements," as that term is defined below in this Section 5, in
the Premises which is caused solely by a "Landlord Caused Delay." As used
herein, the term "Landlord Caused Delay" shall mean only an actual delay
resulting from the acts or omissions of Landlord including, but not limited to
(i) failure of Landlord to timely approve or disapprove any Construction
Drawings; (ii) unreasonable and material interference by Landlord, its agents or
contractors with the completion of the Tenant Improvements and which objectively
preclude construction of tenant improvements in the Building by any person,
which interference relates to access by Tenant, its agents and contractors to
the Building or any Building facilities (including loading docks and freight
elevators) or service (including temporary power and parking areas as provided
herein) during normal construction hours, or the use thereof during normal
construction hours; and (iii) delays due to the acts or failures to act of
Landlord, its agents or contractors with respect to payment of the Tenant
Improvement Allowance and/or any cessation of work upon the Tenant Improvements
as a result thereof.
5.2 Determination of Landlord Caused Delay. If Tenant contends that a
--------------------------------------
Landlord Caused Delay has occurred, Tenant shall notify Landlord in writing
within two (2) business days of each of (i) the date upon which such Landlord
Caused Delay becomes known to Tenant, Architect, or Contractor and (ii) the date
upon which such Landlord Caused Delay ends (the "Delay Termination Date").
Tenant's failure to deliver either or both of such notices to Landlord within
the required time period shall be deemed to be a waiver by Tenant of the
contended Landlord Caused Delay to which such notices would have related. If
such actions, inaction or circumstances described in the notice set forth in
clause (i), above (the "Delay Notice") qualify as a Landlord Caused Delay, then
a Landlord Caused Delay shall be deemed to have occurred commencing as of the
commencement of the Landlord Caused Delay and ending as of the Delay Termination
Date.
5.3 Definition of Substantial Completion of the Tenant Improvements.
---------------------------------------------------------------
For purposes of this Section 5, "substantial completion of the Tenant
Improvements" shall mean completion of construction of the Tenant Improvements
in the Premises pursuant to the Approved Working Drawings, with the exception of
any punch list items, any furniture, fixtures, work-stations, built-in furniture
or equipment (even if the same requires installation or electrification by
Tenant's Agents), and any tenant improvement finish items and materials which
are selected by Tenant but which are not available within a reasonable time
(given the date of the Lease Commencement Date).
SECTION 6
---------
MISCELLANEOUS
-------------
6.1 Tenant's Representative. Tenant has designated Ms. Stephanie
-----------------------
Kirkpatrick as its sole representative with respect to the matters set forth in
this Tenant Work Letter, who shall have full authority and responsibility to act
on behalf of the Tenant as required in this Tenant Work Letter.
6.2 Landlord's Representative. Landlord has designated Mr. Steve Lovett
-------------------------
as its sole representatives with respect to the matters set forth in this Tenant
Work Letter, who, until further notice to Tenant, shall have full authority and
responsibility to act on behalf of the Landlord as required in this Tenant Work
Letter.
6.3 Time of the Essence in This Tenant Work Letter. Unless otherwise
----------------------------------------------
indicated, all references herein to a "number of days" shall mean and refer to
calendar days. If any item requiring approval is timely disapproved by Landlord,
the procedure for preparation of the document and approval thereof shall be
repeated until the document is approved by Landlord.
6.4 Tenant's Lease Default. Notwithstanding any provision to the
----------------------
contrary contained in this Lease, if an event of default as described in the
Lease or this Tenant Work Letter has occurred at any time on or before the
Substantial Completion of the Premises, and if such default is a monetary
default or a material nonmonetary default, then (i) in addition to all other
rights and remedies granted to Landlord pursuant to this Lease, Landlord shall
have the right to withhold payment of all or any portion of the Tenant
Improvement Allowance and/or Landlord may cause Contractor to cease the
construction of the Premises (in which case, Tenant shall be responsible for any
delay in the substantial completion of the Premises caused by such work
stoppage), and (ii) all other obligations of Landlord under the terms of this
Tenant Work Letter shall be forgiven until such time as such default is cured
pursuant to the terms of this Lease (in which case, Tenant shall be responsible
for any delay in the substantial completion of the Premises caused by such
inaction by Landlord).
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<PAGE>
SCHEDULE 1
----------
APPROVED CONTRACTORS
--------------------
1. CANNON CONSTRUCTORS
2. CORPORATE CONTRACTORS, INC.
3. ILLIG CONSTRUCTION
4. TURELK, INC.
5. INNERSPACE CONSTRUCTION
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EXHIBIT C
---------
AMENDMENT TO LEASE
------------------
This AMENDMENT TO LEASE ("Amendment") is made and entered into
effective as of _________________, 19__, by and between W9/WLA REAL ESTATE
LIMITED PARTNERSHIP, a Delaware limited partnership ("Landlord"), and EDUTREK
INTERNATIONAL, INC., a Georgia corporation ("Tenant")
R E C I T A L S :
----------------
A. Landlord and Tenant entered into that certain Office Lease dated as
of _____________________ (the "Lease") pursuant to which Landlord leased to
Tenant and Tenant leased from Landlord certain "Premises", as described in the
Lease, located in the Building located at 12655 West Jefferson Boulevard, Los
Angeles, California 90066.
B. Except as otherwise set forth herein, all capitalized terms used in
this Amendment shall have the same meaning five such terms in the Lease.
C. Landlord and Tenant desire to amend the Lease to confirm the
commencement and expiration dates of the term, as hereinafter provided.
NOW, THEREFORE, in consideration of the foregoing Recitals and the
mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
1. Confirmation of Dates. The parties hereby confirm that (a) the term
---------------------
of the Lease commenced as of ____________________ (the "Lease Commencement
Date") for a term of _________________________ ending on _______________________
(unless sooner terminated as provided in the Lease and (b) in accordance with
the Lease, Rent commenced to accrue on _________________________________.
2. No Further Modification. Except as set forth in this Amendment, all
-----------------------
of the terms and provisions of the Lease shall remain unmodified and in full
force and effect.
IN WITNESS WHEREOF, this Amendment to Lease has been executed as of the
day and year first above written.
"Landlord":
W9/WLA REAL ESTATE LIMITED PARTNERSHIP,
a Delaware limited partnership
By: LPC MS, Inc., as agent and manager for Landlord
By: ___________________________________
Name:_________________________
Its: _________________________
"Tenant":
EDUTREK INTERNATIONAL, INC.,
a Georgia corporation
By:
Name:___________________________________
Its: _________________________
By: ___________________________________
Name:_______________________
Its:________________________
-43-
<PAGE>
EXHIBIT D
---------
RULES AND REGULATIONS
---------------------
Tenant shall faithfully observe and comply with the following Rules and
Regulations. In the event of any conflict between the Rules and Regulations and
the terms of the Lease (including the Tenant Work Letter), the terms of the
Lease shall control.
1. Tenant shall not alter any lock or install any new or additional
locks or bolts on any doors or windows of the Premises without obtaining
Landlord's prior written consent. Tenant shall bear the cost of any lock changes
or repairs required by Tenant. Two keys will be furnished by Landlord for the
Premises, and any additional keys required by Tenant must be obtained from
Landlord at a reasonable cost to be established by Landlord.
2. All doors opening to public corridors shall be kept closed at all
times except for normal ingress and egress to the Premises, unless electrical
hold backs have been installed.
3. Landlord reserves the right to close and keep locked all entrance
and exit doors of the Building during such hours as are customary for comparable
buildings in the vicinity of the Building. Tenant, its employees and agents must
be sure that the doors to the Building are securely closed and locked when
leaving the Premises if it is after the normal hours of business for the
Building. Any tenant, its employees, agents or any other persons entering or
leaving the Building at any time when it is so locked, or any time when it is
considered to be after normal business hours for the Building, may be required
to sign the Building register when so doing. Access to the Building may be
refused unless the person seeking access has proper identification or has a
previously arranged pass for access to the Building. The Landlord and its agents
shall in no case be liable for damages for any error with regard to the
admission to or exclusion from the Building of any person. In case of invasion,
mob, riot, public excitement, or other commotion, Landlord reserves the right to
prevent access to the Building during the continuance of same by any means it
deems appropriate for the safety and protection of life and property.
4. Landlord shall have the right to prescribe the weight, size and
position of all safes and other heavy property brought into the Building. Safes
and other heavy objects shall, if considered necessary by Landlord, stand on
supports of such thickness as is necessary to properly distribute the weight.
Landlord will not be responsible for loss of or damage to any such safe or
property in any case. All damage done to any part of the Building, its contents,
occupants or visitors by moving or maintaining any such safe or other property
shall be the sole responsibility of Tenant and any expense of said damage or
injury shall be borne by Tenant.
5. Landlord shall have the right to control and operate the public
portions of the Building, the public facilities, the heating and air
conditioning, and any other facilities furnished for the common use of tenants,
in such manner as is customary for comparable buildings in the vicinity of the
Building.
6. Employees of Landlord shall not perform any work or do anything
outside their regular duties unless under special instructions from Landlord.
7. Tenant shall not disturb, solicit, or canvass any occupant of the
Building and shall cooperate with Landlord or Landlord's agents to prevent same.
8. The toilet rooms, urinals, wash bowls and other apparatus shall not
be used for any purpose other than that for which they were constructed, and no
foreign substance of any kind whatsoever shall be thrown therein. The expense of
any breakage, stoppage or damage resulting from the violation of this rule shall
be borne by the tenant who, or whose employees or agents, shall have caused it.
9. Tenant shall not overload the floor of the Premises.
10. Except for vending machines intended for the sole use of Tenant's
employees and invitees, no vending machine or machines of any description other
than fractional horsepower office machines shall be installed, maintained or
operated upon the Premises without the written consent of Landlord.
11. Tenant shall not use any method of heating or air conditioning
other than that which may be supplied by Landlord, without the prior written
consent of Landlord.
12. Tenant shall not use or keep in or on the Premises or the Building
any kerosene, gasoline or other inflammable or combustible fluid or material.
Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas
or substance in or on the Premises, or permit or allow the Premises to be
occupied or used in a manner offensive or objectionable to Landlord or other
occupants of the Building by reason of noise, odors, or vibrations, or interfere
in any way with other Tenants or those having business therein.
13. Tenant shall not bring into or keep within the Building or the
Premises any animals, birds, bicycles or other vehicles.
14. No cooking shall be done or permitted by any tenant on the Premises
(except in the Cafeteria in compliance with all applicable laws), nor shall the
Premises be used for the storage of merchandise, for lodging or for any
improper, objectionable or immoral purposes. Notwithstanding the foregoing,
Underwriters' laboratory-approved equipment and microwave ovens may be used in
the Premises for heating food and brewing coffee, tea, hot chocolate and similar
beverages, provided that such use is in accordance with all applicable federal,
state and city laws, codes, ordinances, rules and regulations, and does not
cause odors which are objectionable to Landlord and other Tenants.
15. Landlord will approve where and how telephone and telegraph wires
are to be introduced to the Premises. No boring or cutting for wires shall be
allowed without the consent of Landlord. The location of telephone, call boxes
and other office equipment affixed to the Premises shall be subject to the
approval of Landlord.
16. Landlord reserves the right to exclude or expel from the Building
any person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs, or who shall in any manner do any act in violation
of any of these Rules and Regulations.
17. Tenant, its employees and agents shall not loiter in the entrances
or corridors, nor in any way obstruct the sidewalks, lobby, halls, stairways or
elevators, and shall use the same only as a means of ingress and egress for the
Premises.
18. Tenant shall store all its trash and garbage within the interior of
the Premises. No material shall be placed in the trash boxes or receptacles if
such material is of such nature that it may not be disposed of in the ordinary
and customary manner of removing and disposing of trash and garbage in the city
in which the Building is located without violation of any law or ordinance
governing such disposal. All trash, garbage and refuse disposal shall be made
only through entry-ways and elevators provided for such purposes at such times
as Landlord shall designate.
-44-
<PAGE>
19. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
20. Tenant shall assume any and all responsibility for protecting the
Premises from theft, robbery and pilferage, which includes keeping doors locked
and other means of entry to the Premises closed, when the Premises are not
occupied.
21. No awnings or other projection shall be attached to the outside
walls of the Building without the prior written consent of Landlord. No
curtains, blinds, shades or screens shall be attached to or hung in, or used in
connection with, any window or door of the Premises without the prior written
consent of Landlord. The sashes, sash doors, skylights, windows, and doors that
reflect or admit light and air into the halls, passageways or other public
places in the Building shall not be covered or obstructed by Tenant, nor shall
any bottles, parcels or other articles be placed on the windowsills. All
electrical ceiling fixtures hung in offices or spaces along the perimeter of the
Building must be fluorescent and/or of a quality, type, design and bulb color
approved by Landlord.
22. The washing and/or detailing of or, the installation of
windshields, radios, telephones in or general work on, automobiles shall not be
allowed on the Real Property to the extent the same is visible from outside the
Building.
23. Tenant must comply with requests by the Landlord concerning the
informing of their employees of items of importance to the Landlord.
24. Tenant shall comply with any non-smoking ordinance adopted by any
applicable governmental authority.
25. Landlord reserves the right at any time to reasonably change or
rescind any one or more of these Rules and Regulations, or to make such other
and further reasonable Rules and Regulations as in Landlord's reasonable
judgment may from time to time be necessary for the management, safety, care and
cleanliness of the Premises and Building, and for the preservation of good order
therein. Tenant shall be deemed to have read these Rules and Regulations and to
have agreed to abide by them.
-45-
<PAGE>
EXHIBIT E
---------
FORM OF TENANT'S ESTOPPEL CERTIFICATE
-------------------------------------
The undersigned, as Tenant under that certain Office Lease (the
"LEASE") made and entered into as of _________________, 19__ and between W9/WLA
REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership as Landlord, and
the undersigned as Tenant, for Premises on the ___________ floor(s) of the
Building located at 12655 West Jefferson Boulevard, Los Angeles, California
hereby certifies as follows:
1. Attached hereto as Exhibit A is a true and correct copy of the Lease
and all amendments and modifications thereto. The documents contained in Exhibit
-------
A represent the entire agreement between the parties as to the Premises.
- -
2. The undersigned has commenced occupancy of the Premises described in
the Lease, currently occupies the Premises, and the Lease Term commenced on
_________.
3. The Lease is in full force and effect and has not been modified,
supplemented or amended in any way except as provided in Exhibit A.
---------
4. Tenant has not transferred, assigned, or sublet any portion of the
Premises nor entered into any license or concession agreements with respect
thereto except as follows:
5. Tenant shall not modify the documents contained in Exhibit A or
prepay any amounts owing under the Lease to Landlord in excess of thirty (30)
days without the prior written consent of Landlord's mortgagee.
6. Base Rent became payable on _______________.
7. The Lease Term expires on _________________.
8. All conditions of the Lease to be performed by Landlord necessary to
the enforceability of the Lease have been satisfied and Landlord is not in
default thereunder.
9. No rental has been paid in advance and no security has been
deposited with Landlord except as provided in the Lease.
10. As of the date hereof, there are no existing defenses or offsets
that the undersigned has, which preclude enforcement of the Lease by Landlord.
11. All monthly installments of Base Rent, all Additional Rent and all
monthly installments of estimated Additional Rent have been paid when due
through _________________. The current monthly installment of Base Rent is
$__________.
12. The undersigned acknowledges that this Estoppel certificate may be
delivered to Landlord's prospective mortgagee, or a prospective purchaser, and
acknowledges that it recognizes that if same is done, said mortgagee,
prospective mortgagee, or prospective purchaser will be relying upon the
statements contained herein in making the loan or acquiring the property of
which the Premises are a part, and in accepting an assignment of the Lease as
collateral security, and that receipt by it of this certificate is a condition
of making of the loan or acquisition of such property.
13. If Tenant is a corporation or partnership, each individual
executing this Estoppel Certificate on behalf of Tenant hereby represents and
warrants that Tenant is a duly formed and existing entity qualified to do
business in the state in which the Building is located and that Tenant has full
right and authority to execute and deliver this Estoppel Certificate and that
each person signing on behalf of Tenant is authorized to do so.
Executed at __________________ on the _____ day of ______________,
19___.
"Tenant":
_______________________________,
a _____________________________
By: ___________________________
Name:__________________________
Its:______
By: _________________________
Name: _________________________
Its: _____
-46-
<PAGE>
EXHIBIT F
---------
JANITORIAL SPECIFICATIONS
-------------------------
-47-
<PAGE>
[Intentionally left blank]
-48-
<PAGE>
[Intentionally left blank]
-49-
<PAGE>
EXHIBIT G
---------
SNDA
----
Recording Requested By
and When Recorded Mail to:
Pacific Life Insurance Company
700 Newport Center Drive
Newport Beach, CA 92660
Attn: Real Estate Investments
Loan #: MCC 4025817
________________________________________________________________________________
________________________________________________________________________________
(Space above this line for Recorder's Use)
SUBORDINATION, NON-DISTURBANCE
------------------------------
AND ATTORNMENT AGREEMENT
------------------------
NOTICE TO TENANT: THE SUBORDINATION PROVIDED FOR IN THIS AGREEMENT
RESULTS IN YOUR LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF
LOWER PRIORITY THAN THE SECURITY INTEREST IN THE PROPERTY CREATED BY SOME OTHER
OR LATER INSTRUMENT.
THIS AGREEMENT, made as of this 19th day of June, 1998, by and between
W9/WLA REAL ESTATE LIMITED PARTNERSHIP, a Delaware limited partnership
("Landlord"), EDUTREK INTERNATIONAL, INC., a Georgia corporation, Tenant under
the hereinafter described lease ("Tenant"), and Credit Suisse First Boston
Mortgage Capital LLC, a Delaware Limited Liability Company ("Lender"), the
beneficiary under the Deed of Trust hereinafter described. Landlord, Tenant and
Lender are sometimes collectively referred to herein as the "Parties."
W I T N E S S E T H:
-------------------
WHEREAS, Lender is the present beneficiary of that certain Deed of
Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing,
dated November 25, 1997, and recorded in the Official Records of Los Angeles
County as Instrument No. 97-1890314 ("Deed of Trust), which Deed of Trust
secures payment of a promissory note made payable to Lender or to order. The
Deed of Trust encumbers certain real property (the "Property") located in the
City of Los Angeles, County of Los Angeles, State of California, more
particularly described in Exhibit A attached hereto.
---------
WHEREAS, Landlord and Tenant have entered in to a lease dated June 19,
1998 (the "Lease") covering space within a building located on the Property
(such space further described in the Lease and hereinafter referred to as the
"Premises"), for the term and upon the terms and conditions therein set forth;
and
WHEREAS, the Parties desire to expressly subordinate the Lease to the
lien of the Deed of Trust; and
WHEREAS, Tenant has request that Lender agree not to disturb the
peaceful and quiet possession or right of possession of the Premises by Tenant.
NOW THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereby agree as follows:
1. Landlord and Tenant declare and agree that each hereby
subordinates the priority and superiority of the Lease, the leasehold interest
and estates created thereby, and the rights, privileges and powers of the Tenant
and Landlord thereunder, in favor of the Deed of Trust, and that the Lease, the
leasehold interests and estates created thereby, and the rights, privileges and
powers of the Tenant and Landlord thereunder, be and the same are hereby, and
with full knowledge and understanding of the effect of such subordination,
unconditionally (subject only to the terms and conditions of this Agreement)
made subordinate to the lien and charge of the Deed of Trust, to all terms,
conditions and provisions of the Deed of Trust, to all advances made or to be
made thereunder, to any renewals, extensions, modifications or replacements of
the Deed of Trust, and to the rights, privileges and powers of the Lender
thereunder, and shall hereafter be junior and inferior to the lien and charge of
the Deed of Trust.
2. The Parties declare and agree that this Agreement shall
supersede, to the extent inconsistent herewith, the provisions of the Lease
relating to the subordination of the Lease and the leasehold interests and
estates created thereby to the lien or charge of the Deed of Trust.
3. In the event Lender, its successors or assigns or any other
purchaser at a foreclosure sale or sale under private power contained in the
Deed of Trust succeeds to the interest of Landlord under the Lease by reason of
any foreclosure of the Deed of Trust or the acceptance by Lender of a deed in
lieu of foreclosure, or by any other manner (the "Succession") then:
a. Lender agrees that it shall not disturb Tenant's peaceful
and quiet possession of the Premises, nor shall the Lease or its appurtenances
be extinguished, terminated or affected thereby, nor shall Lender join Tenant as
a party in any action or proceeding against Landlord; provided, the Tenant shall
not be in default under any of the terms, covenants or conditions of the Lease
or of this Agreement on Tenant's part to be observed or performed as would
entitle Landlord to terminate the Lease or would cause, without any further
action of Landlord, the termination of the Lease or would entitle Landlord to
dispossess tenant thereunder
b. Tenant shall be bound to Lender, its successors or assigns
or such other purchaser under all of the terms, covenants and conditions of the
Lease for the remaining balance of the term of the Lease, with the same force
and effect as if Lender, its successors or assigns or such other purchaser were
the Landlord under such Lease, and Lender, its successors or assigns or such
other purchaser, shall be bound to the Tenant under all of the provisions of the
Lease, and Tenant shall from and after the date Lender acquires the interest of
Landlord or comes into possession of or acquires title to the Premises, have the
same remedies against Lender for the breach of any agreement contained in the
Lease that the tenant might have had under the Lease against Landlord. Tenant
does hereby agree to attorn to Lender, its successors or assigns or such other
purchaser as its Landlord, such attornment to be effective and self-operative
without the execution of any further instruments on the part of any of the
Parties, immediately upon Lender, its successors or assigns or such other
purchaser succeeding to the interest of Landlord under the Lease; provided,
however, that Tenant agrees to execute and deliver to Lender, its successors or
assigns or such other purchaser any instrument reasonably requested by such
party to evidence such attornment.
-50-
<PAGE>
c. Tenant shall be under no obligation to pay rent to Lender
until Tenant receives written notice from Lender stating that Lender is entitled
to receive the rents under the Lease directly from Tenant. Landlord, by its
execution hereof, hereby authorizes Tenant to accept such direction from Lender
and to pay the rents directly to Lender and waives all claims against Tenant for
any sums so paid at Lender's direction. Landlord specifically agrees that Tenant
may conclusively rely upon any written notice Tenant receives from Lender
notwithstanding any claims by Landlord contesting the validity of any term or
condition of such notice, including any default claimed by Lender, and Tenant
shall have no duty to inquire into the validity or appropriateness of any such
notice.
d. Subject to the observance and performance by Tenant of all
of the terms, covenants and conditions of the Lease on the part of the Tenant to
be observed and performed, Lender, its successors or assigns or such other
purchaser shall recognize the leasehold estate of Tenant under all of the terms,
covenants and conditions of the Lease for the remaining balance of the term with
the same force and effect as if Lender, its successors or assigns or such other
purchaser were the landlord under the Lease; provided, however, that Lender, its
successors or assigns or such other purchaser shall not be (i) liable for any
act or omission of Landlord under the Lease, except to the extent that Lender
continues such action or omission after Lender succeeds to the interest of
Landlord, (ii) subject to any offsets or defenses which Tenant may be entitled
to assert against Landlord (except for Tenant's offset rights and defenses
expressly provided for in the Lease), (iii) bound by any payment of rent or
additional rent by Tenant to Landlord for more than thirty (30) days in advance
of the due date under the Lease, (iv) liable or responsible for or with respect
to the retention, application and/or return to Tenant of any security deposit
paid to Landlord, whether or not still held by Landlord, unless and until Lender
or such other purchaser has actually received for its own account as landlord
the full amount of such security deposit, (v) bound by any provision in the
Lease which obligates the landlord to erect or complete any building or to
perform any construction work or to make any improvements to the Premises or to
expand or rehabilitate any existing improvements or except as expressly provided
in the Lease to restore any improvement following any casualty or taking, except
for repair and maintenance obligations as provided in the Lease, (vi) bound by
any amendment or modification of the Lease made without the written consent of
Lender, its successors or assigns or such other purchaser, (vii) bound by any
notice of termination, cancellation or surrender not provided for in the Lease
without Lender's prior written consent thereto, (viii) bound by any assignment
of the Lease or sublet of the Premises other than an assignment or sublet made
in accordance with the provisions of the Lease, or (ix) personally liable under
the Lease, and Lender's liability under the Lease shall be limited to the
ownership interest of Lender in Premises.
4. The agreements contained herein shall run with the land and shall
be binding upon and inure to the benefit of the respective heirs,
administrators, executors, legal representatives, successors and assigns of the
Parties.
5. Tenant hereby agrees that, in the event Tenant notifies Landlord
of a default on the part of Landlord under the Lease, Tenant shall concurrently
send a copy of such notice to Lender, at the address set forth in Paragraph 6
below, certified or registered mail, postage prepaid, return receipt requested.
Tenant agrees that notwithstanding any other provision of the Lease, Tenant
shall not terminate the Lease by reason of any default by Landlord unless Lender
has received the foregoing notice and has failed to cure such default within
thirty (30) days of the date of receipt of such notice, or if the default cannot
reasonably be cured within such thirty (30) day period, within such longer
period of time as is reasonably necessary for Lender to obtain possession of the
Property and to cure such default.
6. The address of Lender for all purposes hereunder, unless changed
by Lender giving written notice to Tenant, shall be as follows:
Pacific Life Insurance Company
700 Newport Center Drive
Newport Beach, California 92660
Attention: Vice President, Real Estate Investments
7. The address of Tenant for all purposes hereunder, unless changed
by Tenant giving written notice to Lender, shall be as follows:
Edutrek International
3340 Peachtree Road Northeast
Suite 2000
Atlanta, Georgia 30326
Attention: Ms. Stephanie Kirkpatrick
with a copy to:
Smith, Gambrell & Russell, LLP
1230 Peachtree Street, N.E.
Suite 3100, Promenade 11
Atlanta, Georgia 30309-3595
Attention: Arthur Jay Schwartz, Esq.
IN WITNESS OF THE ABOVE, the undersigned Parties have executed this
instrument as of the day and year first above written.
NOTICE: THE SUBORDINATION PROVIDED FOR IN THIS AGREEMENT RESULTS IN
YOUR LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER PRIORITY
THAN THE SECURITY INTEREST IN THE PROPERTY CREATED BY SOME OTHER OR LATER
INSTRUMENT.
"LANDLORD"
W9/WLA REAL ESTATE LIMITED PARTNERSHIP,
a Delaware limited partnership
By: LPC MS, Inc.,
as agent and manager for Landlord
By: __________________________________
-51-
<PAGE>
D. Allen Palmer, Senior Vice President
"TENANT"
EDUTREK INTERNATIONAL, INC.,
a Georgia corporation,
By: ___________________________________
Name:___________________________________
Its:____
By: ___________________________________
Name:___________________________________
Its:____
"LENDER"
By: CREDIT SUISSE FIRST BOSTON MORTGAGE
CAPITAL LLC,
a Delaware Limited Liability Company
By: ___________________________________
Its:____
By: ___________________________________
Its:____
-52-
<PAGE>
STATE OF_______________)
) ss.
COUNTY OF______________)
On ________________________, before me, ________________________, a
Notary Public in and for said state, personally appeared __________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument, the person, or the entity upon
behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
_______________________________________
Notary Public in and for said State
STATE OF_______________)
) ss.
COUNTY OF______________)
On ________________________, before me, ________________________, a
Notary Public in and for said state, personally appeared _________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument, the person, or the entity upon
behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
_______________________________________
Notary Public in and for said State
STATE OF ______________)
) ss.
COUNTY OF _____________)
On ________________________, before me, ________________________, a
Notary Public in and for said state, personally appeared _________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument, the person, or the entity upon
behalf of which the person acted, executed the instrument .
WITNESS my hand and official seal.
_______________________________________
Notary Public in and for said State
-53-
<PAGE>
STATE OF_______________)
) ss.
COUNTY OF______________)
On ________________________, before me, ________________________, a
Notary Public in and for said state, personally appeared _________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument, the person, or the entity upon
behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
_______________________________________
Notary Public in and for said State
STATE OF_______________)
) ss.
COUNTY OF______________)
On ________________________, before me, ________________________, a
Notary Public in and for said state, personally appeared _________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument, the person, or the entity upon
behalf of which the person acted, executed the instrument .
WITNESS my hand and official seal.
_______________________________________
Notary Public in and for said State
-54-
<PAGE>
EXHIBIT A
---------
LEGAL DESCRIPTION OF PROPERTY
-----------------------------
[TO BE SUPPLIED]
----------------
Page 55
<PAGE>
OFFICE LEASE
------------
1265 WEST JEFFERSON BOULEVARD
LOS ANGELES, CALIFORNIA
W9/WLA REAL ESTATE LIMITED PARTNERSHIP,
A DELAWARE LIMITED PARTNERSHIP,
as Landlord,
and
EDUTREK INTERNATIONAL, INC.,
a Georgia corporation,
as Tenant.
Page 56
<PAGE>
12655 WEST JEFFERSON BOULEVARD
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
ARTICLE PAGE
- ------- ----
<S> <C>
ARTICLE 1 REAL PROPERTY, BUILDING AND PREMISES; EXPANSION PREMISES............................................... 4
ARTICLE 2 INITIAL LEASE TERM; GOVERNMENTAL APPROVALS; TENANT
TERMINATION RIGHT; OPTION TERMS........................................................................ 5
ARTICLE 3 BASE RENT.............................................................................................. 7
ARTICLE 4 ADDITIONAL RENT........................................................................................ 7
ARTICLE 5 USE OF PREMISES........................................................................................ 11
ARTICLE 6 SERVICES AND UTILITIES................................................................................. 11
ARTICLE 7 REPAIRS................................................................................................ 13
ARTICLE 8 ADDITIONS AND ALTERATIONS.............................................................................. 13
ARTICLE 9 COVENANT AGAINST LIENS................................................................................. 14
ARTICLE 10 INDEMNIFICATION AND INSURANCE.......................................................................... 15
ARTICLE 11 DAMAGE AND DESTRUCTION................................................................................. 16
ARTICLE 12 CONDEMNATION........................................................................................... 17
ARTICLE 13 COVENANT OF QUIET ENJOYMENT............................................................................ 18
ARTICLE 14 ASSIGNMENT AND SUBLETTING.............................................................................. 18
ARTICLE 15 SURRENDER; OWNERSHIP AND REMOVAL OF TRADE FIXTURES..................................................... 20
ARTICLE 16 HOLDING OVER........................................................................................... 20
ARTICLE 17 ESTOPPEL CERTIFICATES.................................................................................. 21
ARTICLE 18 SUBORDINATION.......................................................................................... 21
ARTICLE 19 TENANT'S DEFAULTS; LANDLORD'S REMEDIES................................................................. 21
ARTICLE 20 SECURITY DEPOSIT/LETTER OF CREDIT...................................................................... 23
ARTICLE 21 COMPLIANCE WITH LAW.................................................................................... 24
ARTICLE 22 ENTRY BY LANDLORD...................................................................................... 25
ARTICLE 23 TENANT PARKING......................................................................................... 25
ARTICLE 24 MISCELLANEOUS PROVISIONS............................................................................... 25
</TABLE>
EXHIBITS
A OUTLINE OF PREMISES
A-1 EXPANSION PREMISES
B TENANT WORK LETTER
C AMENDMENT TO LEASE
D RULES AND REGULATIONS
E FORM OF TENANT'S ESTOPPEL CERTIFICATE
F JANITORIAL SPECIFICATIONS
G SNDA
Page 57
<PAGE>
EXHIBIT 10.6.1
FIRST AMENDMENT TO OFFICE LEASE
-------------------------------
W9/WLA REAL ESTATE LIMITED PARTNERSHIP
c/o Legacy Partners Commercial, Inc.
4041 MacArthur Boulevard, Suite 175
Newport Beach, California 92660
Date: September 4, 1998
Edutrek International, Inc.
3340 Peachtree Road Northeast
Suite 2000
Atlanta, Georgia 30326
Re: That certain Office Lease (the "LEASE"), dated June 19, 1998,
between W9/WLA Real Estate Limited Partnership, a Delaware
limited partnership ("LANDLORD"), and Edutrek International,
Inc., a Delaware corporation ("TENANT"), for certain space
(the "PREMISES") located in the building located at 12655 West
Jefferson Boulevard, Los Angeles, California (the "BUILDING").
Ladies and Gentlemen:
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Landlord and Tenant hereby agree as follows.
1. DEFINED TERMS. Except as explicitly set forth in this First
-------------
Amendment to Office Lease (this "FIRST AMENDMENT"), each initially capitalized
term when used herein shall have the same respective meaning as is set forth in
the Lease.
2. BUILD-OUT; RIGHTS OF OCCUPANCY. In accordance with Section 4.4 of
------------------------------
the Tenant Work Letter attached to the Lease as Exhibit B (the "TENANT WORK
LETTER"), the Premises will be constructed in three phases with the scheduled
completion dates being October 15, 1998 for Phase I, January 1, 1999 for Phase
II and July 15, 1999 for Phase III, with the space that is the subject of each
such Phase being more particularly described on Exhibit A attached hereto.
Notwithstanding anything contained in the Lease to the contrary, the parties
acknowledge and agree that, except as set forth in this First Amendment, Tenant
shall have no right to occupy the Phase I space prior to October 15, 1998, the
Phase II space prior to January 1, 1999 or the Phase III space prior to June 1,
1999, and, except as set forth in this First Amendment, Landlord shall have sole
possession and control over the space that is the subject of each applicable
Phase until the schedule completion date for such Phase, such rights of
possession and control during such period to include the unrestricted right of
Landlord to lease such space to such third parties under such terms and
conditions as Landlord may desire in its sole discretion, subject only to
Landlord's agreeing (i) to make the space available, subject to the terms of the
Tenant Work Letter, for buildout in accordance with a detailed construction
schedule to be prepared by Tenant that is designed to result in the Tenant
Improvements contemplated for each Phase being completed no later than the
completion date scheduled for such Phase, and (ii) except as otherwise set forth
in this First Amendment, to deliver to Tenant exclusive possession and control
of the Phase I space on October 15, 1998, the Phase II space on January 1, 1999
and the Phase III space on June 1, 1999, in each event subject to the terms of
the Lease. Notwithstanding anything in this Section 2 to the contrary (including
Landlord's right to exclusive possession and control as set forth above), Tenant
hereby acknowledges and agrees that all of the terms and conditions of the Lease
shall remain in full force and effect and shall be applicable in connection with
Tenant's completion of improvements in the Premises. Furthermore, Landlord and
Tenant hereby acknowledge and agree that nothing in this Section 2 shall in any
way delay or otherwise modify the Lease Commencement Date, as set forth in
Section 7.2 of the Lease Summary. In addition to any other indemnity set forth
in the Lease, Tenant agrees to indemnify, protect, defend and hold Landlord
harmless from and against any acts or omissions of Tenants or its contractors,
subcontractors, agents or representatives with respect to the construction
activities undertaken under the Tenant Work Letter.
3. EARLY OCCUPANCY RIGHT.
---------------------
3.1 IN GENERAL. Landlord and Tenant hereby acknowledge and
----------
agree that the Lease Commencement Date shall occur as set forth in Section 7.2
of the Summary; provided, however, that notwithstanding the terms of Section 2,
above, subject to the terms of this Section 3, effective as of the date hereof
(a) the terms of Section 7.2(iii) of the Summary shall not apply with respect to
the portion of the initial Premises located on the first (1st) floor of the
Building (the "FIRST FLOOR SPACE"), and (b) prior to the Lease Commencement
Date, Tenant shall have the right to
<PAGE>
occupy the First Floor Space for business operations (and in connection
therewith Landlord shall, subject to the terms of the Lease, deliver exclusive
possession and control thereof to Tenant), provided that (I) a temporary
certificate of occupancy, or its equivalent, shall have been issued by the
appropriate governmental agencies with respect to the First Floor Space, and
(II) all of the terms and conditions of the Lease shall apply, except Tenant's
obligation to pay Base Rent and Direct Expenses and except Landlord's obligation
to provide janitorial services to the First Floor Space (which shall be the
express responsibility of Tenant), as though the Lease Commencement Date had
occurred with respect to the First Floor Space (although the Lease Commencement
Date for the First Floor Space shall not actually occur until the occurrence of
the same with respect to the entire Premises, as set forth in Section 7.2 of the
Summary).
3.2. HVAC FOR FIRST FLOOR SPACE. Landlord supply HVAC to the First
--------------------------
Floor Space during the "Early Occupancy Term," as that term is defined below,
provided that on or before the first day of each calendar month during the Early
Occupancy Term, Tenant shall pay to Landlord, as Additional Rent, an amount (the
"HVAC RENT") equal to One Thousand Three Hundred Thirty-Two and No/100 Dollars
($1,332.00), provided that Tenant shall pay to Landlord an amount equal to One
Thousand One Hundred Fifty-Four and 40/100 Dollars ($1,154.40) as HVAC Rent for
the month of September, 1998. HVAC Rent shall be payable in the same manner and
subject to the same method of proration and other conditions as are applicable
to Base Rent pursuant to the terms of the Lease. For purposes of this First
Amendment, the "EARLY OCCUPANCY TERM" shall mean the period commencing as of the
date hereof and continuing through and including the date immediately preceding
the Lease Commencement Date.
4. OPERATING EXPENSES Landlord and Tenant hereby acknowledge and agree
------------------
that the terms of Section 4.2.5(F) of the Lease is hereby deleted in its
entirety.
5. CONFLICT. In the event of a conflict between the terms and
--------
conditions of this First Amendment and the terms and conditions of the Lease,
the terms and conditions of this First Amendment shall control.
6. NO FURTHER MODIFICATION. Except as set forth in this First
-----------------------
Amendment, all of the terms and provisions of the Lease shall be and remain
unmodified and in full force and effect.
7. BINDING EFFECT. The provisions of this First Amendment shall be
--------------
binding upon and inure to the benefit of the heirs, representatives, successors
and permitted assigns of the parties hereto.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have caused this First
Amendment to be executed on the day and date first above written.
"Landlord":
W9/WLA REAL ESTATE LIMITED
PARTNERSHIP,
a Delaware limited partnership
By: Legacy Partners Commercial, Inc., a Texas
corporation, as Manager and Agent for
Landlord
By:
Name: D. Allen Palmer
Its: Senior Vice President
The Foregoing Is Accepted And
Agreed To:
"Tenant":
EDUTREK INTERNATIONAL, INC.,
a Georgia corporation
By:
Its:
By:
Its:
-3-
<PAGE>
EXHIBIT A
-4-
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No. 333-
41543 and No. 333-46655 of EduTrek International, Inc. on Form S-8 of our report
dated March 25, 1999 appearing in the Annual Report on Form 10-K of EduTrek
International, Inc. for the seven months ended December 31, 1998.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 30, 1999
<PAGE>
Exhibit 24.1
Power of Attorney of Stephen G. Franklin, Sr.
STATE OF GEORGIA
COUNTY OF FULTON
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 Daniel D. Moore, jointly and severally, my true and lawful
attorneys-in-fact, each with full power of substitution and resubstitution, for
me in any and all capacities, to sign the Annual Report on Form 10-K for EDUTREK
INTERNATIONAL, INC. for the fiscal year ended December 31, 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 9th day of
March 1999.
/s/ Stephen G. Franklin, Sr.
------------------------------
Stephen G. Franklin, Sr.
ACKNOWLEDGMENT
--------------
BEFORE me this 9th day of March 1999, 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/ Dee Ann Stone
------------------
NOTARY PUBLIC
State of Georgia
-------
My Commission Expires:
February 1, 2003
----------------
<PAGE>
Exhibit 24.2
Power of Attorney of Paul D. Beckham
STATE OF GEORGIA
COUNTY OF FULTON
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Paul D. Beckham, a Director of EDUTREK
INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint Steve
Bostic and Daniel D. Moore, jointly and severally, my true and lawful attorneys-
in-fact, each with full power of substitution and resubstitution, for me in any
and all capacities, to sign the Annual Report on Form 10-K for EDUTREK
INTERNATIONAL, INC. for the fiscal year ended December 31, 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 5th day of
March 1999.
/s/ Paul D. Beckham
---------------------
Paul D. Beckham
ACKNOWLEDGMENT
--------------
BEFORE me this 5th day of March 1999, 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/ Dee Ann Stone
------------------
NOTARY PUBLIC
State of Georgia
-------
My Commission Expires:
February 1, 2003
----------------
<PAGE>
Exhibit 24.3
Power of Attorney of Fred C. Davison
STATE OF GEORGIA
COUNTY OF FULTON
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Fred C. Davison, a Director of EDUTREK
INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint Steve
Bostic and Daniel D. Moore, jointly and severally, my true and lawful attorneys-
in-fact, each with full power of substitution and resubstitution, for me in any
and all capacities, to sign the Annual Report on Form 10-K for EDUTREK
INTERNATIONAL, INC. for the fiscal year ended December 31, 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 5th day of
March 1999.
/s/ Fred C. Davison
---------------------
Fred C. Davison
ACKNOWLEDGMENT
--------------
BEFORE me this 5th day of March 1999, 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/ Dee Ann Stone
------------------
NOTARY PUBLIC
State of Georgia
-------
My Commission Expires:
February 1, 2003
----------------
<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 Daniel D. Moore, jointly and severally, my true and lawful attorneys-
in-fact, each with full power of substitution and resubstitution, for me in any
and all capacities, to sign the Annual Report on Form 10-K for EDUTREK
INTERNATIONAL, INC. for the fiscal year ended December 31, 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 15th day of
March 1999.
/s/ Ronald P. Hogan
--------------------
Ronald P. Hogan
ACKNOWLEDGMENT
--------------
BEFORE me this 15th day of March 1999, 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 FULTON
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Gaylen D. Kemp, a Director of EDUTREK
INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint Steve
Bostic and Daniel D. Moore, jointly and severally, my true and lawful attorneys-
in-fact, each with full power of substitution and resubstitution, for me in any
and all capacities, to sign the Annual Report on Form 10-K for EDUTREK
INTERNATIONAL, INC. for the fiscal year ended December 31, 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 5th day of
March 1999.
/s/ Gaylen D. Kemp
--------------------
Gaylen D. Kemp
ACKNOWLEDGMENT
--------------
BEFORE me this 5th day of March 1999, 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/ Dee Ann Stone
------------------
NOTARY PUBLIC
State of Georgia
-------
My Commission Expires:
February 1, 2003
----------------
<PAGE>
Exhibit 24.6
Power of Attorney of Gerald Tellefsen
STATE OF GEORGIA
COUNTY OF FULTON
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, Gerald Tellefsen, Director of EDUTREK
INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint Steve
Bostic and Daniel D. Moore, jointly and severally, my true and lawful attorneys-
in-fact, each with full power of substitution and resubstitution, for me in any
and all capacities, to sign the Annual Report on Form 10-K for EDUTREK
INTERNATIONAL, INC. for the fiscal year ended December 31, 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 5th day of
March 1999.
/s/ Gerald Tellefsen
----------------------
Gerald Tellefsen
ACKNOWLEDGMENT
--------------
BEFORE me this 5th day of March 1999, 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/ Dee Ann Stone
------------------
NOTARY PUBLIC
State of Georgia
-------
My Commission Expires:
February 1, 2003
----------------
<PAGE>
Exhibit 24.7
Power of Attorney of J. Robert Fitzgerald
STATE OF GEORGIA
COUNTY OF FULTON
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I, J. Robert Fitzgerald, Director of
EDUTREK INTERNATIONAL, INC., a Georgia corporation, do constitute and appoint
Steve Bostic and Daniel D. Moore, jointly and severally, my true and lawful
attorneys-in-fact, each with full power of substitution and resubstitution, for
me in any and all capacities, to sign the Annual Report on Form 10-K for EDUTREK
INTERNATIONAL, INC. for the fiscal year ended December 31, 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 5th day of
March 1999.
/s/ J. Robert Fitzgerald
--------------------------
J. Robert Fitzgerald
ACKNOWLEDGMENT
--------------
BEFORE me this 5th day of March 1999, came J. Robert Fitzgerald, personally
known to me, who in my presence did sign and seal the above and foregoing Power
of Attorney and acknowledged the same as his true act and deed.
/s/ Dee Ann Stone
------------------
NOTARY PUBLIC
State of Georgia
-------
My Commission Expires:
February 1, 2003
----------------
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<PAGE>
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