Let's Japan.org Debunking Eikaiwa and Ramblings in Japan

Thanks to a kind reader, I received a copy of Ernst & Young's report to creditors on the closure of GEOS Melbourne. Many comments have been made about how GEOS siphoned its Australia schools dry, and the report offers an explanation as to how that happened. I've summarized key parts of the report to illustrate why GEOS Melbourne suddenly went into voluntary administration.

First, let's deal with the question about ownership of the GEOS Australia schools. When GEOS Japan issued its "apology" in February, it tried to downplay the affair by saying that the schools were locally incorporated businesses, that the decision to close was made locally, and that none of this affected GEOS Japan. The first two reasons may technically be true, but when it comes to that last one, the Ernst & Young report leaves you wondering how the closure of GEOS Melbourne and all of the other GEOS schools in Australia can't have anything but a negative effect on GEOS Japan. As of February, 23, 2010, the date of the report, Appendix A on page 30 carries this organization chart (click for larger image):

The GEOS Australia schools may be locally incorporated, but they are be 100% owned by GEOS Japan. Furthermore, the report states that as of October 15, 1996, Tsuneo Kusunoki was one of GEOS Melbourne's directors and that:

GEOS Melbourne is a 100% owned by GEOS Corporation (Japan). GEOS Corporation owns all 100,000 fully paid $1 shares in the Company (p.6).

The sudden closure of the school is curious given its recent performance. The table shows that the school's revenues had been increasing since FY07 (p.6).

The report notes:

GEOS Melbourne has been operating profitably for the previous two financial years (FY07 and FY09) as well as for the 6 months to 31 December 2009. Steady growth in profits has been seen due to growth in revenue coupled with a decrease in marketing, teaching and administration expenses as a percentage of revenue. (p.7)

Melbourne was profitable for the past two and a half years right up until its closure. Here's GEOS Melbourne's balance sheet.

Of concern here are the Receivables - Loan GEOS Australia Holdings and Receivables- Loan related entities under Non-current assets, and Dividends Paid under Equity. It is the loans to GEOS Australia Holdings which are at the heart of why the school closed.

Receivables - Loan GEOS Australia Holdings

The Victorian Regulation and Qualification Authority (VQRA) stopped the Melbourne school from accepting new enrollments in December 2009 after investigating an accounting report prepared for it by GEOS Melbourne. The departure of senior management personnel and the change in student enrollment hurt the school's revenues in the first half of FY10. The report goes on to say:

During the same period, a umber of other entities in the GEOS Australia Group were experiencing financial difficulties. This led to the directors to begin to understand that the ability of all companies in the Group to repay outstanding intercompany loans may be compromised. Without the repayment of these loans, the Company could not cover future obligation. It was on this basis that the directors appointed the Administrators.

The majority of excess cash generated from the operations of GEOS Melbourne appears to have been used in one of three ways, payment of dividends, loans to related entities and retained in GEOS Melbourne's bank account (p.10).

This table shows that much of the money went to other GEOS-related entities (p.10).

The Ernst & Young report concludes:

The ability of the related parties to re-pay the loan amounts outstanding was crucial to the ability of GEOS Melbourne to continue to trade. Without the repayment of the above loan, or the ability to raise cash from other sources, GEOS Melbourne did not have sufficient funds to continue operations (p.11).

The dividends of $633,755 and $1 million were paid by Melbourne GEOS to GEOS Japan (p.10). They were not cash payments, but a reduction in the balance of the GEOS Australia Holdings loan (p.11).

Receivables - Loan related entities

As for money that went elsewhere within GEOS, the report lists the following amounts (p.13):

The Administrator's comment on the money:

On 4 February 2010 the Administrators issued a demand on GEOS Australia Holdings in relation to the debt payable to Melbourne. Given that GEOS Australia Holdings did not operate in its own capacity other than to act as a holding company for other members of the GEOS Australia group, the Administrators questioned the ability of GEOS Australia Holdings to repay the outstanding amounts. Further, it is also the Administrator's understanding that a large amount of the funds provided to GEOS Australia Holdings were further lent to other GEOS entities globally and as such may not be readily available for repayment.

A similar situation exists for the amount outstanding from GEOS Cairns Pty Ltd (administrators appointed). The Administrators were also appointed to this company on 29 January 2010.

As such, the Administrators have estimated the realizable value of these assets as nil (p.13).

According to the Administrators, a school that was profitable for the past two and half years was making loans to a GEOS holding company with no prospect of those loans ever being repaid. The money is gone, funneled back to Japan and to other parts of GEOS.

Another interesting tidbit in the report is that upon taking over GEOS Melbourne, the Administrators met with representatives of GEOS Japan and related entities in Australia to discuss whether money would be made available to the Administrators so they could reopen the school. GEOS Japan gave them no money. The Administrators were forced to announce the closure of GEOS Melbourne to staff and students on February 1. For whatever reason, GEOS Japan chose to not bail out a profitable school.

Investigations

Apart from trying to rehabilitate GEOS Melbourne, the Administrators also investigated the school's business to understand the circumstances of its failure and form an opinion as to how it would act in the interests of GEOS Melbourne's creditors. Under the Corporations Act, the Administrators identified seven offenses that warranted further investigation.

1. Failure to exercise reasonable degree of care and diligence
2. Failure to act in good faith
3. Making improper use of position to gain advantage
4. Making improper use of information to gain advantage
5. Reckless or intentional dishonesty in failing to exercise duties in good faith
6. Failure of director to disclose interest in contract with company
7. Being a director at the time when an insolvent company incurs a debt and there are reasonable grounds for suspecting the company to be insolvent. (p.18)

In examining the actions of the directors, the Administrators believe making loans to GEOS Australia Holdings to be a breach of good faith as GEOS Australia Holdings had no means to repay those loans (p.19). Those loans left GEOS Melbourne with insufficient funds to operate.

The Administrators identify $2,273,975 in uncommerical transactions, transactions that have no benefit or are detrimental to the company. Of that amount, $725,521 went to GEOS Australia Holdings and $1,144,500 to GEOS Japan, with the remainder going to other GEOS entities ($220,000) and a $1 million dividend. Here's a breakdown (p.21-22):

The Administrators concluded that GEOS Melbourne received no benefit from these transactions and that the loans left the school with no money to continue operations (p.22).

On the other hand, the Administrators found that GEOS Australia Holdings did benefit from the loans and may have become insolvent had it not received the money since it had no other means of generating income. The Administrators still do not understand the purpose of the loans but believe that "…in the past 18 months, approximately $1.36m was made available for the purposes of transfer from GEOS Australia Holdings to GEOS Corporation (Japan) or other GEOS entities (p.23)." Unfortunately, the Administrators feel that recovering the money from GEOS Japan is unlikely due to the cost involved, but think that going after the related companies may be worthwhile. However, without funding from creditors it doesn't appear that the money will ever be recovered.

Unreasonable director-related transactions (UDRT)

The report notes that some transactions between with GEOS Australia Holdings may be UDRTs as the directors of GEOS Melbourne are also directors of GEOS Australia Holdings, and one director of GEOS Melbourne is director and chairman of GEOS Japan (p.23).

Insolvent trading

The Administrators ask two questions:

• How likely were the loans made to GEOS Australia Holdings to be paid back?
• Is it reasonable to assume that GEOS Australia Holdings was insolvent? (p.24)

This matters because GEOS Australia Holdings' net assets over the past three years was negative. If it was trading while insolvent, the actual date the loans was considered unrecoverable needs to be determined in order to take action against the directors (p.25).

However, the directors did place GEOS Melbourne into voluntary administration when they were aware that the money from GEOS Australia Holdings would not be recovered, so they may have a valid defense against any recovery action. Although it appears that GEOS Australia Holdings was insolvent for some time, further investigation is required to determine the point it became insolvent .

The dividend

As already noted, a dividend of $1 million was paid to GEOS Melbourne's shareholder, GEOS Japan in the form of a reduction of the outstanding loan from GEOS Australia Holdings (p.25). Since no cash was involved, there is nothing to be recovered. The Administrators also note that by law, dividends may only be paid out of profits and that statutory and common law principles have to be applied in assessing whether or not the dividend complied with the law.

Recommendations

The Administrators are of the opinion that their appointment should be terminated, that GEOS Melbourne is insolvent, and that it should be wound up by the Court. They recommend that it is in the interest of creditors to place GEOS Melbourne into liquidation (p.26). However, as of this report, the Administrators believe that there will be insufficient funds to pay any unsecured creditors (p.27).

That's the bulk of the report. The money funneled off the Japan will likely never be seen again and GEOS Melbourne doesn't have any assets of value with which to pay off any creditors.

A few readers asked for a separate thread for discussion about GEOS Oceania given recent developments. Good idea. Use this thread for discussing GEOS Oceania.

Since there are more than 300 comments in the GEOS Rumours thread, I've decided to close the thread and start a fresh one here.

This is going to leave a mark:

China's Education Ministry on Sunday warned students considering studying overseas against Australian schools run by the GEOS group after more than 40 Chinese students were left stranded with the group's collapse.

More than 2,300 students in GEOS group schools across Australia were affected after the college closures. The schools were scattered across Sydney, Melbourne, Brisbane, Perth and Cairns.

GEOS is a Japanese company which owns hundreds of colleges around the world. The GEOS group has run out of money for its Australian colleges,according to Australian media reports.

Chinese embassies and consulates in Australia are negotiating with local authorities to settle the issue to safeguard students' legitimate rights.

The Education Ministry has drawn up a recommendation list of nearly 15,000 schools in 33 countries worldwide on its website. The recommended schools are relatively trustworthy and reliable.

Australia has been a preferred destination for overseas education for Indian and Chinese students.

The Australian Bureau of Statistics said the number of Chinese student enrollments was 146,000 by June 2009, up an average annual 16 percent over the past six years.

Remember, Kusunoki has told us that everything is just fine with GEOS.

As scheduled, GEOS announced the measures it will take for its students affected by the closure of the schools in Australia: free English lessons.

More specifically, if you had a contract with GEOS Australia slated to start from February 2, 2010 or had made an application before January 29, GEOS will offer you 6 months of "Active lessons" at at any GEOS school in Japan at no charge. Students wishing to accept the offer have to provide GEOS with their details no later than December 29, 2010.

What a joke. Why would an international student go to Japan to to study English for 6 months? The offer only makes sense if you're Japanese. If you happen to be Vladimir Anelekov from Russia, Marcio Alves from Brazil, Pascal Fux from Switzerland, Mario Galindo from Colombia, or Filippo Zilio from Italy, you'd have to be insane to go to a non-English-speaking country to study English.

When Kusunoki says 6 months of free lessons, he means just the lessons. You can bet that any non-Japanese student interested in the lessons will have to arrange visas and accommodations on their own. You can also bet that Kusunoki is counting on a large portion of the students not taking up GEOS's offer.

The bare minimum from GEOS would have been a refund of unused tuition and a profound apology. But since Kusunoki has stated that the Australia schools weren't really part of GEOS he doesn't have to. The money siphoned from them is probably gone, too. Instead, students who traveled from around to world to Australia only to find their schools shut down receive a terse one-page memo (in Japanese no less!) posted on the GEOS website.

What an insult.

UPDATE I: Willy Wanka in comments nails it:

Haha, active lessons are the cheapest that Geos has. Up to 8 students per class. Another head costs them zero... the teacher is already there, classmates are already there, before they start they'll probably have to drop 10,000 on textbook set, and by the end of it all, they'll probably get hit up by the manager to "renew" the active contract.

GEOS's announcement of free lessons is worse than a half measure: It costs them nothing while it will cost any non-Japanese student taking up GEOS's offer everything. They will have to pay for their flight to Japan, arrange a visa and accommodations on their own, and probably have to find a part-time job, too. Since these students probably don't speak Japanese and their visas may not allow it, finding a job will be difficult if not impossible. Moreover, why would they want to work in a job that will require them to interact in Japanese? It's also not clear how many hours a week they will be studying. One or two classes a week will do nothing to improve their language skills. GEOS's offer is really no offer at all. At best, it's a way for GEOS to look like it's acting in good faith when it really isn't.

GEOS has posted a brief note on its website [PDF] saying that it will explain what it will do in response to the school closures on Wednesday the 10th, following meetings in Australia:

この度はオーストラリア法人の各学校の閉鎖に関しまして、お騒がせ しましたことを改めてお詫び致します。

今回の件が現地法人で起こった事であり、弊社が商標権を許諾してい たとはいえ、GEOSブランドを信用してご入学頂き、今回の出来事にあ われました皆様に対して、現地での全ての説明会が終了した後、 2月10日(水)、弊社ホームページにて対応を発表致します。

From this short note, it appears that GEOS is backing away from the they-only-licensed-the-GEOS-brand excuse and realizes that the closures have damaged the GEOS brand. Maybe Kusunoki has been following Toyota's poor handling of its recall and understands that the appearance of inactivity is about the worst thing you can do in a crisis. It sounds like he or a representative went to Australia to find out what's been going on or apologize. That said, there will be no press conference on Wednesday; GEOS will make their announcement in the form of another PDF on its website. Any takers on what GEOS plans to do?

TBS correspondent in Australia, Hiroki Iijima, is covering the GEOS school closures and would like to hear from you.

Help him out. Contact him at: 0419 432 758 (mobile phone in Australia) or email hiroki [at] mcmstv.com.au.

Back in 2001(my emphasis):

Around 20 companies affiliated with English-language school operator GEOS Corp. failed to declare some 280 million yen in income in the five years to March 2000, industry sources said Thursday.

This total includes 130 million yen in concealed revenues, the sources said.

Auditors at the Tokyo Regional Taxation Bureau who investigated the Tokyo-based company also found that GEOS President Tsuneo Kusunoki and his wife, who serves as vice president, failed to report more than 200 million yen in personal income in the three years through 1999, they said.

Kusunoki is suspected of obtaining part of the affiliates' undeclared income for his personal use, the sources said.

Today's The Age:

Industry insiders said the global financial crisis had hit GEOS hard and its Japanese operations were in trouble.

Even before the appointment of administrators, the Victorian education regulator had been in talks with GEOS to set up a trust fund and other arrangements that would have secured funds in the Melbourne business.

The Victorian Registration and Qualifications Authority had become concerned about GEOS following a financial audit.

The authority's director, Lynn Glover, said in a statement: ''The VRQA had discovered that the directors [two Australian and one Japanese] have been diverting revenue from GEOS Melbourne to support the operations of other holdings in both Australia and overseas.''

Do you see a connection here? What will GEOS have to say if the administrators Down Under start finding some unusual money transfers? Remember, GEOS was quick to disown its Australian schools and say that everything is fine in Japan.

News coverage in Japan has been sparse so far, sticking to regurgitating the basic facts: eight schools closed, thousands of students affected, Ernst & Young are the administrators. What's not being reported is GEOS Japan siphoning money out of its overseas schools. Jiji.com simply notes that the schools ran into financial difficulties (資金繰り悪化). Things, however, are not that simple.

This is the destruction wrought by the closures:

Bill Egerton, who is contracted by GEOS to pick up foreign students for the Surfers Paradise school in his Koala Blue bus, said: "The receivers walked in and told everyone to leave. They have closed the doors. I'm owed about $4000 from them."

Mr Egerton said there were about 260 students at the school.

He said 15 students were due to arrive this weekend but would have nowhere to go.

"These kids pay $10,000 to $15,000 each for tuition."

The Age:

AUSTRALIA'S international education industry has suffered another massive blow with the collapse of eight English language colleges, leaving 2300 foreign students around the country in the dark over their future.

The single largest group affected is in Melbourne and has an estimated 530 students unable to complete their courses. Some had just one more week before the end of their course. A total of 390 employees have lost their jobs.

[...]

Marcio Alves, 33, from Brazil, who paid $4000 and was expecting to finish his course in five weeks, said: ''I think I lost money here. In Brazil I worked for one year to save for this course.''

Pascal Fux, 40, a banker from Switzerland, paid $10,000 and said he had come to Australia in the hope of starting a new life. ''It's a country where everything should work fine, like in Switzerland … but this is a bad way to start a new life.''

The Australian:

Students and staff are owed more than $10 million in pre-paid fees and entitlements.

Worst-hit are about 1000 students who had paid GEOS for homestay accommodation and who could now face eviction.

GEOS student Joachim Adam from Germany has already been told by his landlady in Melbourne to immediately pay his weekly rent of $220 dollars or leave, even though he has already paid all his rent to GEOS.

"I must pay by this evening or I must go," he said.

Administrator Justin Walsh of Ernst and Young said remaining funds "are vastly insufficient to continue trading". GEOS was put into administration by its Japanese parent on Friday.

The Australian understands students, landlords and agents could be owed about $10 million, while the entitlements of the nearly 400 staff also run into the millions.

[...]

Mario Galindo, a 39-year-old university tutor from Colombia, paid almost $7000 for a ten-month course to improve his English. He has been left stranded with two months tuition owed.

"I thought this was a serious country . . . but now I think it was a mistake," Mr Galindo said.

Pina Vigo of West Preston in Melbourne was yesterday showing her newly arrived nephew, Filippo Zilio, from Italy, where his GEOS college was, only to find it closed. Mr Zilio, 19 had paid for a month's study.

"It stinks," Ms Vigo said. "How can they do this to the students? How can the government not know?"

This is what could be coming to Japan's shores very soon. Unlike Nova, there are no court cases to follow, no share price to monitor, and virtually no reporting in Japan. GEOS is a privately-owned company and isn't obligated to show its books to the public. If bankruptcy is in the cards, I think the end could happen quickly. There won't be months of drama unfolding on TV as with Nova's collapse. Staff and students could wake up one day to find the schools locked and shuttered.

If you work for GEOS, you have to start asking yourself, "What am I going to do if the shit hits the fan?" You need to start preparing for the worst. If you don't believe that bankruptcy will happen, ask yourself, "How long can I keep working for a company that operates with complete disregard for the well-being of its staff and students and still sleep at night?"

GEOS Judas president and CEO, Tsuneo Kusunoki has issued an apology for the closures of the eight schools in Australia. Sadly, like the brief blurb on the GEOS website a couple of days ago, Kusunoki tries to assure everyone that things are OK while denying any connection to the schools. The apology in Japanese can be found here [PDF]. Here's a quick and dirty translation.

I want to express my sincere apologies to the students, those hoping to study with GEOS, and everyone involved for causing so much anxiety regarding the placement of all eight Australia schools under voluntary administration with Ernst and Young as its administrator.

Reading between the lines, I get the sense that he's saying that none of this is his fault. Do you feel reassured?

Somewhere, a rooster is getting ready to crow three times.

Earlier today:

The Victorian Registration and Qualifications Authority (VRQA) says it will protect the 2,300 students affected by the possible closure of a number of English language schools across Australia.

[...]

"If a decision is made by the administrators for the college to close, all overseas students will be protected by the tuition insurance scheme," she [Lynn Glover, director of the VRQA]said.

"This will mean that students will be placed in suitable alternative courses, here in Melbourne, at no additional cost and the VRQA will be supporting that process."

This evening:

The voluntary administrators of eight English language schools say that the schools will not reopen because of the financial situation.

Justin Walsh and Adam Nikitins of Ernst & Young say they are working with the federal department of education and state government departments to find arrangements for the 2300 international students.

The administrators were continuing to investigate the nine companies operating under the GEOS name and hope to provide a further update on Wednesday, Ernst & Young said in a statement on Monday.

"We've very quickly worked through the options to keep the schools open, but were unable to do so," Mr Walsh said.

"That included speaking with the Japanese parent."

The interesting bits, however, are this:

The authority discovered that directors of GEOS have been diverting revenue from its Melbourne business, to support the operations of its other companies both in Australia and overseas.

And this:

But it is believed the GEOS group owes creditors tens of millions of dollars and will struggle to operate without significant help.

Back in Japan, GEOS is trying to downplay the closures and act as if nothing has happened. GEOS schools in Australia in trouble? We don't know what's going on. They just use our name under license. Everything is fine in Japan.

This just doesn't pass the smell test. How is it that eight schools, all taking in new students and seemingly operating without a problem, suddenly close and end up in voluntary administration overnight?

How do you distance yourself from the Australia schools while taking their money? What will GEOS say if the administrators in Australia find what they think are unusual money transfers? GEOS Australia and GEOS Japan may be two separate legal entities, but they are connected by the GEOS brand--a brand that is quickly tarnishing.

What does it say about the company when they post a few measly lines on their website saying everything is OK and not to worry? More information would do much to squash rumours about the company's health and mollifying any complaints its customers may have.

But it's too late for that. The schools won't be re-opening. As a student or employee of GEOS, you can't help but wonder if this isn't Nova all over again.