SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
November 30, 1997 0-23021
EDUTREK INTERNATIONAL, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-2255472
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3340 Peachtree Road, Suite 2000, Atlanta, Georgia 30326
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(Address of principal executive offices (Zip Code)
404-812-8200
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class A Common Stock, without par value per share 4,319,041 shares
- ------------------------------------------------- --------------------------------
Class Outstanding at December 31, 1997
Class B Common Stock, without par value per share 6,293,000 shares
- ------------------------------------------------- --------------------------------
Class Outstanding at December 31, 1997
EduTrek International, Inc.
Form 10-Q Index
PAGE
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
PART II.--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EduTrek International, Inc.
Consolidated Balance Sheet
(In thousands, except share amounts)
NOVEMBER 30, MAY 31,
1997 1997
------------ ---------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents........................................................... $ 7,081 $ 678
Accounts receivable--net of allowance for doubtful accounts of
$241 and $33, respectively........................................................ 1,508 272
Deferred income taxes............................................................... 151 151
Other............................................................................... 1,051 224
------------ ---------
Total current assets.................................................................. 9,791 1,325
Property, plant, and equipment--net................................................... 5,203 4,737
Goodwill--net of accumulated amortization of $1,200 and $696, respectively............ 39,107 39,611
Deferred financing cost--net of accumulated amortization of $165...................... -- 1,156
Other................................................................................. 1,511 842
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$ 55,612 $ 47,671
------------ ---------
------------ ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.................................................................... $ 1,539 $ 1,501
Accrued expenses.................................................................... 1,264 1,167
Value-added tax payable............................................................. 271 606
Unearned revenues................................................................... 7,664 3,997
Income taxes payable................................................................ 780 1,756
Notes payable....................................................................... 286 --
Current maturities--long-term debt.................................................. 705 2,014
------------ ---------
Total current liabilities............................................................. 12,509 11,041
Long-term debt--less current maturities............................................... 1,573 27,649
Due to affiliates..................................................................... -- 412
Other liabilities..................................................................... 756 692
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, Class A voting, one vote per share, without par value, 40,000,000
shares authorized, 4,099,000 and 665,000, issued and outstanding, respectively..... 36,407 1,287
Common stock, Class B voting, ten votes per share, without par value, 10,000,000
shares authorized, 6,335,000 issued and outstanding................................ 4,000 4,000
Common stock warrants................................................................ 137 677
Foreign currency translation......................................................... 146 147
Retained earnings.................................................................... 84 1,766
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Total shareholders' equity........................................................... 40,774 7,877
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$ 55,612 $ 47,671
------------ ---------
------------ ---------
See notes to consolidated financial statements.
1
EduTrek International, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
--------------------------------------- ---------------------------------------
1996 1996
1997 1996 PRO FORMA (3) 1997 1996 (2) PRO FORMA (3)
----------- ----------- ------------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net revenues................. $ 9,312 $ 5,370 $ 6,718 $ 15,540 $ 5,370 $ 11,560
Costs and expenses:
Cost of education and
facilities............... 3,932 2,104 2,869 6,906 2,104 5,316
Selling and promotional
expenses................. 1,297 516 1,075 2,606 516 2,098
General and administrative
expenses................. 3,063 1,397 1,788 5,305 1,531 3,326
Amortization of goodwill... 252 169 260 504 169 512
----------- ----------- ------ ----------- ----------- -------------
Total costs and expenses... 8,544 4,186 5,992 15,321 4,320 11,252
----------- ----------- ------ ----------- ----------- -------------
Income from campus
operations................. 768 1,184 726 219 1,050 308
Income from management
agreement.................. -- 50 52 23 50 30
----------- ----------- ------ ----------- ----------- -------------
Income from operations....... 768 1,234 778 242 1,100 338
Interest expense............. 300 460 312 1,210 460 1,239
Other income--net............ 56 2 59 56 2 117
----------- ----------- ------ ----------- ----------- -------------
Income (loss) before income
taxes and extraordinary
item....................... 524 776 525 (912) 642 (784)
Provision for income taxes... (310) (480) (314) 164 (480) 109
----------- ----------- ------ ----------- ----------- -------------
Income (loss) before
extraordinary item......... 214 296 $ 211 (748) 162 $ (675)
--------- -------------
--------- -------------
Extraordinary loss less
applicable income taxes
(Note 4)................... (960) -- (960) --
----------- ----------- ----------- -----------
Net income (loss)............ $ (746) $ 296 $ (1,708) $ 162
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) per share
before extraordinary
item....................... $ 0.02 $ 0.02 $ (0.09) $ (0.08)
Net loss per share........... $ (0.08) $ (0.20)
Weighted average shares and
common equivalents
outstanding................ 10,319 10,319
Weighted average shares
outstanding................ 9,621 8,417 8,417
Supplementary income
(loss) per share (8)
Income (loss) per share
before extraordinary
item....................... $ 0.03 $ 0.03 $ (0.01) $ (0.01)
Net loss per share........... $ (0.06) $ (0.10)
Weighted average shares and
common equivalents
outstanding................ 11,019 11,019
Weighted average shares
outstanding................ 10,321 10,155 10,155
See notes to consolidated financial statements.
2
EduTrek International, Inc.
Consolidated Statements of Cash Flows
(In thousands)
SIX MONTHS ENDED
NOVEMBER 30,
------------------------
1997 1996
----------- -----------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)...................................................................... $ (1,708) $ 162
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Extraordinary loss before applicable income taxes (Note 4)......................... 1,600 --
Depreciation and amortization...................................................... 1,165 290
Amortization of loan discount...................................................... 22 72
Decrease (increase) in accounts receivable......................................... (1,236) 983
Increase in accounts payable and accrued liabilities............................... 135 96
Increase (decrease) in unearned revenues........................................... 3,667 (2,659)
Decrease in value-added taxes payable.............................................. (335) (299)
Decrease in income taxes payable................................................... (976) (56)
Other.............................................................................. (1,832) 398
----------- -----------
Net cash provided by (used in) operating activities.................................. 502 (1,013)
----------- -----------
INVESTING ACTIVITIES
Acquisition of Predecessor........................................................... -- (30,746)
Purchases of property, plant, and equipment.......................................... (1,113) (85)
----------- -----------
Net cash used in investing activities................................................ (1,113) (30,831)
----------- -----------
FINANCING ACTIVITIES
Net receipts (payments)--line-of-credit and other.................................... (3,003) 258
Net payments under capital lease obligations......................................... (62) (384)
Long-term debt additions (payments).................................................. (24,500) 28,643
Proceeds from issuance of common stock............................................... 34,580 4,000
----------- -----------
Net cash provided by financing activities............................................ 7,015 32,517
----------- -----------
Effect of exchange rate changes on cash.............................................. (1) 60
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................................. $ 6,403 $ 733
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD......................................... 678 154
CASH AND CASH EQUIVALENTS, END OF PERIOD............................................... 7,081 887
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest........................................................................... $ 1,431 $ 128
Income taxes....................................................................... 199 --
See notes to consolidated financial statements.
3
EduTrek International, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions of Form 10-Q.
Accordingly, they do not include all of the information and disclosures
required by generally accepted accounting principles for complete financial
statements. These unaudited financial statements include all adjustments,
consisting of only normal, recurring accruals, which EduTrek International,
Inc. (the "Company") considers necessary for a fair presentation of the
financial position and the results of operations for these periods.
The results of operations for three and six months ended November 30,
1997 are not necessarily indicative of the results to be expected for the
full year ending May 31, 1998. For further information, refer to the
financial statements and notes thereto for the fiscal year ended May 31, 1997
included in the Company's Registration Statement on Form S-1, as amended, and
related prospectus as filed with the Securities and Exchange Commission.
The Company effected a 7 for 1 stock split in June 1997. All share and
per share information in the accompanying unaudited consolidated financial
statements have been restated to reflect the stock split as if such had
occurred as of the earliest period presented.
NOTE 2--ACQUISITION
The Company, formerly known as E Holdings, Inc., was organized by Mr.
Steve Bostic, the Company's current Chairman and Chief Executive Officer, on
July 1, 1996 for the purpose of acquiring all of the capital stock of EduTrek
Systems, Inc. ("EduTrek Systems") (a company also controlled by Mr. Bostic),
American Intercontinental University, Inc. ("AIU, Inc."), formerly known as
American European Corporation, and American College in London, Ltd. U.S., as
well as 85% of the membership interests of American European Middle East
Corporation, L.L.C. ("AEMEC" which, together with AIU, Inc. and American
College in London, Ltd., U.S. are collectively referred to herein as the
"Predecessor"). On October 8, 1996, the Company acquired the capital stock
and membership interests of the Predecessor which, prior to its acquisition,
operated The American College, now known as American Intercontinental
University ("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.
Note 3--Basis for Pro Forma Presentation
The pro forma presentation in the accompanying unaudited financial
statements assumes that the Company was formed on June 1, 1996 and gives
effect to the acquisitions of the Predecessor and EduTrek Systems as if such
acquisitions had occurred on June 1, 1996 and that cash proceeds from the
September 23, 1997 initial public offering (the "Offering") were received on
September 29, 1996 and were used to retire applicable debt.
4
The pro forma adjustments for the three months ended detailed below
reflect (i) the addition of revenue and related costs of the Predecessor for
the month of September 1996, (ii) the elimination of identifiable
nonrecurring actual costs incurred by the Predecessor for the month of
September 1996, (iii) adjustments for identifiable actual costs which would
have been incurred by the Company to replace certain of the eliminated costs
resulting from the ownership change in September 1996, (iv) elimination of
interest expense which would not have occurred due to the use of Offering
proceeds, (v) the impact on income taxes resulting from the change to C
Corporation status from the Predecessor's and EduTrek Systems's S Corporation
status for income tax purposes, and (vi) the addition of the extraordinary
loss resulting from the retirement of debt due to the use of the Offering
proceeds.
Revenue was adjusted by the addition of $1,348,000 in revenue for the month
of September 1996 along with related expenses.
General and administrative expenses were adjusted to eliminate $490,000 in
net expenses relating to the addition of Company expenses of $206,000 for
staff, office space, and the cost of being a public company less elimination
of Predecessor expenses of $696,000 for staff, bonuses, office space, and
expenses relating to assets purchased by the selling shareholder of the
Predecessor.
Amortization of goodwill was adjusted by the addition of $84,000 to reflect
the effect of goodwill amortization for the month of September.
Interest expense was adjusted by the elimination of $335,000 in net interest
expense relating to the addition of interest expense of $253,000 for
September, the elimination of interest expense of $469,000 for October
and November resulting from the retirement of debt from the use of Offering
proceeds, and the elimination of interest expense of $119,000 relating to
the selling of shareholder related debt.
Other income-net was adjusted by the elimination of $23,000 of interest
income from shareholder notes paid in full at the date of acquisition and
the addition of interest income of $52,000 relating to the investment of net
Offering proceeds after retirement of applicable debt.
Provision for income taxes was adjusted by $166,000 to give effect to the
losses of the Predecessor and EduTrek Systems for September. Prior to the
acquisition both were S Corporations and, therefore, had no federal tax
obligations.
The extraordinary item represents a loss of $1,600,000 less related income
tax effect of $640,000 to reflect the retirement of debt due to the use of
the Offering proceeds (see related Note 4 below).
Pro forma weighted average shares and common equivalents outstanding of
10,319,000 include 4,099,000 of Class A Common Stock and 6,335,000 shares of
Class B Common Stock issued and outstanding at the end of the second quarter
adjusted for all outstanding warrants and options (725,382) with respect to
Class A Common Stock. The number of shares outstanding from the assumed
exercise of all warrants and stock options is measured under the treasury
stock method.
NOTE 4--EXTRAORDINARY ITEM
The extraordinary item represents a loss of $1,600,000 less related
income tax effect of $640,000 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.
5
Note 5--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 College in Dubai
("Dubai"). These modifications give effective control of the joint venture to
AEMEC as defined in Statement of Financial Accounting Standards ("SFAS") 94
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." The result of these
modifications and related consolidation is not expected to change AEMEC's
income related to Dubai.
Note 6--Subsequent Events
On December 3, 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.
On December 10, 1997, the Company and ITI Education Corporation (ITI)
signed a definitive agreement under which the Company will issue .3021 shares
of common stock for each share of ITI exchanged shares resulting in a
transaction valued at approximately $75 million. The transaction, which has
been approved by the Boards of Directors of both the Company and ITI, is
expected to close in the second calendar quarter of 1998. Completion of the
transaction is subject to regulatory review and approval by the shareholders
of both companies. Upon completion of the transaction, which is expected to
be accounted for as a pooling of interests, ITI will be a subsidiary of the
Company, and shareholders of ITI will hold approximately 22.5% of the
Company's common stock.
Note 7 -- New Accounting Pronouncements
The Financial Accounting Standards Board recently issued SFAS 128
"Earnings Per Share" and SFAS 130 "Reporting Comprehensive Income." SFAS 128
establishes standards for computing and presenting earnings per share and is
effective for the Company for the third quarter ending February 28, 1998.
SFAS 130 establishes standards for reporting comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. SFAS 130 is effective for the Company in fiscal
year ending May 31, 1999. Management believes there will be no material
impact to the Company's consolidated financial statements for the adoption of
these new accounting pronouncements.
Note 8 -- Supplementary Income (Loss) Per Share
Supplementary income (loss) per share represents income (loss) before
extraordinary loss and net income (loss) adding back interest expense,
effected for income taxes, totaling approximately $150,000 for the three
months ended November 30, 1997 and 1996 (pro forma) and approximately
$600,000 for the six months ended November 30, 1997 and 1996 (pro forma)
related to $28.6 million of long-term debt retired in the Company's Offering.
The shares issued in the Offering totaling 2,990,000 shares of Class A Common
Stock are assumed to be outstanding as of the beginning of all periods
presented.
NOTE 9--CONTINGENCIES
The Company is a party to lawsuits incidental to its business.
Management believes that the ultimate resolution of these matters will not
have a material adverse impact on the financial condition, operations, or
cash flows of the Company.
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion of the results of operations and financial
condition of the Company and the Predecessor should be read in conjunction
with the "Selected Consolidated Financial Data," the Company's Consolidated
Financial Statements and Notes thereto and the Predecessor's Consolidated
Financial Statements and the Notes thereto for the fiscal year ended May 31,
1997 included in the Company's Registration Statement on Form S-1, as
amended, and the related prospectus as filed with the Securities and Exchange
Commission, as well as in conjunction with the consolidated financial
statements and notes thereto for the three months and six months ended
November 30, 1997 included in Item 1. Unless otherwise specified, any
reference to a "fiscal year" is to a fiscal year ended May 31.
This Quarterly Report on Form 10-Q 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 Quarterly 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 regulatory
requirements, changes in or new 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 states, changes in student enrollment, and other factors set forth in
this Quarterly Report on Form 10-Q 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).
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain statement of operations items to net revenues for the
Company and the Predecessor:
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
---------------------------------- ------------------------------------
1996 1996
1997 1996 PRO FORMA (3) 1997 1996 (2) PRO FORMA (3)
-------- --------- ------------ ---------- -------- ------------
Net revenues............................................. 100.0% (a) 100.0% 100.0% (a) 100.0%
Costs and expenses:
Cost of education and facilities....................... 42.2% 42.7% 44.4% 46.0%
Selling and promotional expenses....................... 13.9% 16.0% 16.8% 18.1%
General and administrative expenses.................... 32.9% 26.6% 34.1% 28.8%
Amortization of goodwill............................... 2.7% 3.9% 3.2% 4.4%
-------- ------------ ---------- ------------
Total costs and expenses........................... 91.8% 89.2% 98.6% 97.3%
-------- ------------ ---------- ------------
Income from campus operations............................ 8.2% 10.8% 1.4% 2.7%
Income from management agreement......................... 0.0% 0.8% 0.1% 0.3%
-------- ------------ ---------- ------------
Income from operations................................... 8.2% 11.6% 1.6% 2.9%
Interest expense......................................... 3.2% 4.6% 7.8% 10.7%
Other income--net........................................ 0.6% 0.9% 0.4% 1.0%
-------- ------------ ---------- ------------
Income (loss) before income taxes and extraordinary item. 5.6% 7.8% (5.9%) (6.8%)
Provision for income taxes............................... (3.3%) (4.7%) 1.1% 0.9%
-------- ------------ ---------- ------------
Income (loss) before extraordinary item.................. 2.3% 3.1% (4.8%) (5.8%)
-------- ------------ ---------- ------------
-------- ------------ ---------- ------------
(a) Because 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 were immaterial in amount, and generated no
revenue, the Company has not presented information with respect to the
period from July 1, 1996 through November 30, 1996 as this information would
not be meaningful. EduTrek International, Inc.
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 three months and six months ended November 30, 1997
to the Predecessor's pro forma results for the three months and six months
ended November 30, 1996. The pro forma results of the Predecessor as
described herein assume
7
that the acquisition of the Predecessor occurred on June 1, 1996 and that the
Offering occurred at the end of September 1996. The period June through
August is comprised of AIU's Summer I term and one-half of AIU's Summer II
term. The period from September through November is comprised of one-half of
AIU's Summer II term and two-thirds of AIU's Fall term.
Three Months Ended November 30, 1997 Compared to Three Months Ended
November 30, 1996 (Pro Forma)
NET REVENUES. Net revenues increased by approximately $2.6 million, or
38.6%, from $6.7 million for the three months ended November 30, 1996 (pro
forma) (the "1996 period") to $9.3 million for the three months ended
November 30, 1997 (the "1997 period"). Of the 38.6% increase, 17.9%, or
approximately $1.2 million, was due to the consolidation of The American
College in Dubai ("Dubai") (see Note 5 of notes to financial statements). Of
the remaining 20.7%, 9.9%, or approximately $668,000, was due to an increase
in student enrollment and 4.9%, or approximately $329,000, was the result of
a tuition increase. The remaining 5.9%, or approximately $397,000, was from
revenues from the Company's corporate education division, which did not begin
generating revenues until June 1997. All campuses had increases in net
revenues and student enrollments from the 1996 period to the 1997 period.
Enrollment for the Summer II term totaled 1,112 in the 1997 period, up from
868 in the 1996 period. Enrollment for the Fall term totaled 3,045 in the
1997 period, up from 2,815 in the 1996 period.
COST OF EDUCATION AND FACILITIES. Cost of education and facilities
increased approximately $1.1 million, or 37.1%, from $2.9 million in the 1996
period to $3.9 million in the 1997 period. Education costs increased
approximately $695,000, or 43.0%, from $1.6 million in the 1996 period to
$2.3 million in the 1997 period. Of the 43.0% increase, 16.7%, or
approximately $270,000, relates to the consolidation of Dubai; 20.2%, or
approximately $326,000, was due to salary and other cost increases; and 6.1%,
or approximately $99,000, was due to royalty payments associated with
curriculum licensing for the Company's corporate education division, which
did not begin generating revenues until June 1997. Facility costs increased
approximately $369,000, or 29.4%, from $1.3 million in the 1996 period to
$1.6 million in the 1997 period. Of the 29.4% increase, 8.8%, or
approximately $111,000, relates to the consolidation of Dubai. The remaining
20.6%, or approximately $258,000, is due to rent increases and an increase in
the number of housing students. As a percentage of net revenues, costs of
education and facilities decreased slightly from 42.7% in the 1996 period to
42.2% in the 1997 period.
SELLING AND PROMOTIONAL EXPENSES. Selling and promotional expenses
increased by approximately $222,000, or 20.7%, from $1.1 million in the 1996
period to $1.3 million in the 1997 period. Of the 20.7% increase, 6.4%, or
approximately $69,000, relates to the consolidation of Dubai. Of the
remaining 14.3%, 3.7%, or approximately $39,000, relates to increases in
marketing and advertising expenses at the Company's campuses during the 1997
period, and 10.6%, or approximately $114,000, was due to commissions paid to
salespeople in the Company's corporate education division during the 1997
period. Selling and promotional expenses decreased as a percentage of net
revenues from 16.0% in the 1996 period to 13.9% in the 1997 period primarily
due to net revenues increasing at a higher rate than marketing costs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $1.3 million, or 71.3%, from $1.8 million in the 1996
period to $3.1 million in the 1997 period. Of the 71.3% increase, 32.7%, or
approximately $584,000, relates to the consolidation of Dubai. The remaining
increase in costs was primarily due to additions of personnel at the home
office related to new program development. As a percentage of net revenues,
general and administrative expenses increased from 26.6% in the 1996 period
to 32.9% in the 1997 period.
AMORTIZATION OF GOODWILL. Amortization of goodwill of $252,000 in the
1997 period was the result of the October 1996 acquisition of the Predecessor
with goodwill costs being amortized over a 40-year period. The pro forma
results of the Predecessor for the 1996 period assume goodwill expense of
$252,000.
8
INCOME FROM MANAGEMENT AGREEMENT. Income from the Dubai management
agreement is zero in the 1997 period due to the consolidation of Dubai
effective September 1, 1997 (see Note 5 of notes to financial statements).
The portion of income from operations related to Dubai is approximately
$155,000, which represents an increase of 198.1% primarily due to an increase
in enrollment of 42% over the 1996 period.
INTEREST EXPENSE. Interest expense decreased approximately $12,000, or
3.8%, from $312,000 in the 1996 period to $300,000 in the 1997 period. The
interest expense is primarily due to borrowing costs in the month of
September (before the Offering).
OTHER INCOME -NET. Other income--net decreased slightly from $59,000 for
the 1996 period to $56,000 for the 1997 period.
Six Months Ended November 30, 1997 Compared to Six Months Ended November
30, 1996 (Pro Forma)
NET REVENUES. Net revenues increased by approximately $4.0 million, or
34.4%, from $11.6 million for the six months ended November 30, 1996 (pro
forma) (the "six month 1996 period") to $15.5 million for the six months
ended November 30, 1997 (the "six month 1997 period"). Of the 34.4% increase,
10.4%, or approximately $1.2 million, was due to the consolidation of Dubai.
Of the remaining 24.0%, 12.4%, or approximately $1.4 million, was due to an
increase in student enrollment and 5.1%, or approximately $595,000, was the
result of an effective price increase. The remaining 6.5%, or approximately
$748,000, was derived from revenues from the Company's corporate education
division, which did not begin generating revenues until June 1997. All
campuses had increases in net revenues and student enrollments from the six
month 1996 period to the six month 1997 period. Enrollments for the first and
second Summer terms totaled 2,739, up from 2,244 the previous year, and
enrollment for the Fall term totaled 3,045, up from 2,815 the previous year.
COST OF EDUCATION AND FACILITIES. Cost of education and facilities
increased approximately $1.6 million, or 29.9%, from $5.3 million in the six
month 1996 period to $6.9 million in the six month 1997 period. Education
costs increased approximately $1.0 million, or 34.9%, from $3.0 million in
the six month 1996 period to $4.0 million in the six month 1997 period. Of
the 34.9% increase, 9.0%, or approximately $270,000, relates to the
consolidation of Dubai; 19.7%, or approximately $590,000, was due to salary
and other cost increases; and 6.2%, or approximately $187,000, was due to
royalty payments associated with curriculum licensing for the Company's
corporate education division, which did not begin generating revenues until
June 1997. Facility costs increased approximately $544,000, or 22.7%, from
$2.4 million in the six month 1996 period to $2.9 million in the six month
1997 period. Of the 22.7% increase, 4.6%, or approximately $111,000, relates
to the consolidation of Dubai. The remaining 18.1%, or approximately
$433,000, is primarily due to an increase in the number of housing students.
Costs of education and facilities decreased as a percentage of net revenues
from 46.0% in the six month 1996 period to 44.4% in the six month 1997 period
primarily due to greater net revenues being spread over the fixed costs
related to centralized student services.
SELLING AND PROMOTIONAL EXPENSES. Selling and promotional expenses
increased by approximately $508,000, or 24.2%, from $2.1 million in the six
month 1996 period to $2.6 million in the six month 1997 period. Of the 24.2%
increase, 3.3%, or approximately $69,000, relates to the consolidation of
Dubai. Of the remaining 20.9%, 10.5%, or approximately $220,000, relates to
increases in marketing and advertising expenses at the Company's campuses
during the 1997 period, and 10.4%, or approximately $219,000 was due to
commissions paid to salespeople in the Company's corporate education division
during the six month 1997 period. Selling and promotional expenses decreased
as a percentage of net revenues from 18.1% in the six month 1996 period to
16.8% in the six month 1997 period primarily due to net revenues increasing
at a higher rate than marketing costs.
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GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $2.0 million, or 59.5%, from $3.3 million in the six
month 1996 period to $5.3 million in the six month 1997 period. Of the 59.5%
increase, 17.6%, or approximately $584,000 relates to the consolidation of
Dubai. The remaining increase in costs was primarily due to additions of
personnel at the home office related to new program development. As a
percentage of net revenues, general and administrative expenses increased
from 28.8% in the six month 1996 period to 34.1% in the six month 1997 period.
AMORTIZATION OF GOODWILL. Amortization of goodwill of $504,000 in the
six month 1997 period was the result of the October 1996 acquisition of the
Predecessor with goodwill costs being amortized over a 40-year period. The
pro forma results of the Predecessor for the 1996 period assume goodwill
expense of $504,000.
INCOME FROM MANAGEMENT AGREEMENT. Income from the Dubai management
agreement decreased 23.3%, approximately $7,000, from the six month 1996
period due to the consolidation of Dubai effective September 1, 1997 (see
Note 5 of notes to financial statements) . The portion of income from
operations related to Dubai for the six month 1997 period is approximately
$178,000, which represents an increase of 493.3% primarily due to an increase
in enrollment of 51% over the six month 1996 period.
INTEREST EXPENSE. Interest expense remained relatively constant during
the six month 1996 and 1997 periods. The interest expense is primarily due to
borrowing costs in the months of June, July, August, and September (before
the Offering).
OTHER INCOME -NET. Other income--net decreased by approximately $61,000,
or 52.1%, primarily due to a nonrecurring health insurance refund in the 1996
period.
SEASONALITY
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, first quarter (June through
August) enrollments and related revenues generally are lower than other
quarters due to traditionally lower student enrollment levels in the summer
terms. First quarter costs and expenses historically are higher as a
percentage of net revenues as a result of certain fixed costs which are not
significantly affected by the seasonal first quarter declines in net
revenues. Second quarter (September through November) enrollments and related
revenues are generally higher than the first quarter but lower than the third
and fourth quarters, as the second quarter is comprised of one-half of AIU's
Summer II term and two-thirds of AIU's Fall term. Second quarter costs and
expenses historically are lower as a percentage of net revenues compared to
first quarter but are higher compared to the third and fourth quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operating activities and capital requirements
principally from cash provided by operating activities, proceeds from its
Offering completed September 29, 1997, and borrowings under its revolving
loan (the "Revolving Loan"). Borrowings under the Revolving Loan currently
bear interest at 9.5% and are payable quarterly. As of November 30, 1997, the
maximum permitted borrowings under the Revolving Loan was $1.75 million. On
October 1, 1998 the maximum permitted borrowings under the Revolving Loan
will be further reduced to $1.0 million. There has been no outstanding
balance against the Revolving Loan since September 1997.
On September 29, 1997, the Company raised approximately $34.6 million, net
of underwriting discounts and commission and offering expenses, in its
initial public offering of Class A Common Stock. The Company used $28,571,000
of the proceeds to repay long-term debt and related accrued and unpaid
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interest incurred in connection with the acquisition of the Predecessor and
approximately $620,000 to repay short-term debt outstanding under the
Revolving Loan. The remaining net proceeds of approximately $5,691,000 are
being used for general corporate purposes, including working capital
requirements of the Company resulting from its growth.
The Company experienced positive operating cash flow of approximately
$2.6 million for the 1997 period which was primarily the result of AIU's Fall
term tuition receipts and noncash depreciation and amortization charges of
approximately $594,000. The Company experienced negative operating cash flow
of approximately $2.1 million for the first quarter of 1997 and positive
operating cash flow of $.5 million for the six month 1997 period .
The Company's capital assets consist primarily of classroom equipment
(such as computers, software, and video equipment), classroom and office
furniture, and leasehold improvements. All building facilities are leased.
The Company plans to continue to expand current facilities, upgrade and
replace equipment, and open new campuses. During the 1997 period, the Company
spent approximately $695,000 to upgrade certain classroom equipment and
furniture and for other capital items. During the remainder of fiscal 1998,
the Company intends to make certain improvements to its campuses including
furniture, fixtures and equipment improvements, computerizing classrooms, and
implementing electronic library systems at an estimated cost of $1.1 million.
Also by June 1998, the Company plans to implement the Master of Information
Technology ("MIT") program in the Los Angeles campus curricula. The Company
implemented the MIT program in December of 1997 in the Atlanta campus
curricula with investment and start-up costs of approximately $1.5 million.
The Company estimates that the total cash required to implement the Los
Angeles MIT program, including computers, software, leasehold improvements,
license fees and other start-up expenses, will be approximately $2.0 million.
The Company anticipates that these investment and start-up costs of
approximately $3.5 million will be funded primarily from cash generated from
operations, the Revolving Loan, proceeds from the Offering, and a line of
credit currently being negotiated with a bank that would replace the existing
Revolving Loan. The Company expects primarily to use cash flow to repay such
investment and start-up costs associated with the implementation of the MIT
program over a period of approximately two years. To support its growth, the
Company also is implementing a centralized information system to integrate
AIU's campus operations and financial data including admissions, financial
aid, student services, placement services, and default management. The
Company anticipates that the information system will be fully operational by
the end of fiscal 1998 and that it will require approximately $1.0 million in
fiscal 1998 to develop and implement this integrated information system.
While the Company's financing agreements limit the amount of capital
expenditures that may be incurred by the Company, management intends to
renegotiate on terms acceptable to the Company, although there can be no
assurance that such renegotiation, if undertaken, will be successful. To take
advantage of the highly fragmented postsecondary education market and to
expand its international presence, from time to time the Company also plans
to acquire existing schools in favorable locations throughout the U.S. as
well as utilize joint ventures to open campuses outside the U.S. The
Company's ability to fund its working capital and capital expenditure
requirements, implement the MIT program, make interest payments, fund future
acquisitions, and meet it other cash requirements, depends on, among other
things, cash generated from operations, the Revolving Loan, proceeds from the
Offering, and a line of credit currently being negotiated with a bank that
would replace the existing Revolving Loan. Management believes that such
sources, together with the remaining net proceeds of the Company's Offering,
will be sufficient to meet the Company's capital requirements and operating
needs for the remainder of fiscal 1998. However, if there is a significant
reduction of internally generated funds or if the Company is unable to
satisfy the financial covenants of the Revolving Loan, 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.
Cash flow from operations on a long-term basis is partly dependent on the
receipt of funds from Title IV Programs. Disbursement of funds available
under the various federal student financial assistance programs ("Title IV
Programs") under Title IV of the Higher Education Act of 1965, as amended
("HEA") is dictated by federal regulations including, among others, certain
financial responsibility standards.
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Presently, approximately 27% of the Company's net revenues is derived from
Title IV Programs. Based on the consolidated financial statements of the
Company as of November 30, 1997, AIU does not satisfy all financial
responsibility standards. At November 30, 1997, the Company had a positive
tangible net worth of $1.7 million, but its acid test ratio of .7 was under
the required 1.0 ratio. Notwithstanding, the Company has maintained AIU's
eligibility to continue participating in the Title IV Programs by posting an
irrevocable letter of credit in the amount of $3.75 million in favor of the
U.S. Department of Education, which amount is approximately 50% of the Title
IV Program funds received by students enrolled at AIU. The letter of credit
was posted on March 19, 1997 and will expire on March 31, 1998. Because the
amount of the letter of credit is based on the amount of Title IV Program
funds received by AIU's students, to the extent that such funds have
increased during 1997, the Company may be required to increase the letter of
credit on or around March 19, 1998, the date the U.S. Department of Education
re-assesses AIU's compliance with the financial responsibility standards. The
Company believes that it will have sufficient liquidity to increase the
letter of credit should the U.S. Department of Education so require. However,
there can be no assurance that, if required, the Company will be able to
maintain its letter of credit or increase its letter of credit in the future.
In addition, expenditures required to implement the MIT program may adversely
affect the Company's ability to satisfy these financial responsibility
standards. Because the HEA and the regulations promulgated thereunder (the
"Regulations") are subject to amendment, and because the U.S. Department of
Education may change its interpretation of the HEA and the Regulations, there
can be no assurance that such requirements will not change in the future.
On December 10, 1997, the Company and ITI Education Corporation (ITI)
signed a definitive agreement under which the Company will issue .3021 shares
of common stock for each share of ITI common stock resulting in a transaction
valued at approximately $75 million. The transaction, which has been approved
by the Boards of Directors of both the Company and ITI, is expected to close
in the second calendar quarter of 1998. Completion of the transaction is
subject to regulatory review and approval by the shareholders of both
companies. Upon completion of the transaction, which is expected to be
accounted for as a pooling of interests, ITI will be a subsidiary of the
Company, and shareholders of ITI will hold approximately 22.5% of the
Company's common stock.
IMPACT OF INFLATION
The Company does not believe its operations have been materially affected
by inflation.
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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
11.1--Earnings Per Share Calculation
27.1--Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K. No report on Form 8-K was filed during the
quarter ended November 30, 1997.
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SIGNATURES
Pursuant to the requirements 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: January 13, 1998 By: /S/ Steve Bostic
--------------------------------------
Steve Bostic, President and
Chief Executive Officer
(principal executive officer)
Date: January 13, 1998 BY: /S/ Donald J. Blankers
--------------------------------------
Donald J. Blankers, Chief Financial
Officer (principal financial and
accounting officer)
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