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:
February 28, 1998 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 4,336,931 shares
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Class Outstanding at March 31, 1998
Class B Common Stock, without par value per share 6,293,000 shares
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Class Outstanding at March 31, 1998
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 ........................................................... 14
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
EduTrek International, Inc.
Consolidated Balance Sheet
(In thousands, except share amounts)
February 28, May 31,
1998 1997
------------ --------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .................................................... $ 7,378 $ 678
Accounts receivable -- net of allowance for doubtful accounts of
$286 and $33, respectively ................................................. 2,922 272
Other ........................................................................ 1,053 375
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Total current assets ........................................................... 11,353 1,325
Property, plant, and equipment -- net .......................................... 5,765 4,737
Goodwill -- net of accumulated amortization of $1,452 and $696, respectively ... 38,855 39,611
Deferred financing cost -- net of accumulated amortization of $165 ............. -- 1,156
Other .......................................................................... 1,826 842
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$57,799 $47,671
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------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ............................................................. $ 1,858 $ 1,501
Accrued expenses ............................................................. 1,105 1,167
Value-added tax payable ...................................................... 274 606
Unearned revenues ............................................................ 7,603 3,997
Income taxes payable ......................................................... 1,075 1,756
Notes payable ................................................................ 407 --
Current maturities -- long-term debt ......................................... 489 2,014
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Total current liabilities ...................................................... 12,811 11,041
Long-term debt -- less current maturities ...................................... 1,717 27,649
Due to affiliates .............................................................. -- 412
Other liabilities .............................................................. 794 692
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, Class A voting, one vote per share, without par value, 40,000,000 36,565 1,287
shares authorized, 4,319,041 and 665,000, issued and outstanding, respectively
Common stock, Class B voting, ten votes per share, without par value, 10,000,000 3,973 4,000
shares authorized, 6,293,000 issued and outstanding
Common stock warrants .......................................................... -- 677
Foreign currency translation ................................................... 122 147
Retained earnings .............................................................. 1,817 1,766
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Total shareholders' equity ..................................................... 42,477 7,877
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$57,799 $47,671
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See notes to consolidated financial statements.
1
EduTrek International, Inc.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Three Months Ended February 28, Nine Months Ended February 28,
------------------------------- ------------------------------
1997 1997
1998 1997 Pro Forma (3) 1998 1997 (2) Pro Forma (3)
---- ---- ------------- ---- -------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net revenues ..................................... $ 12,701 $ 8,803 $ 8,803 $ 28,241 $ 14,173 $ 20,363
Costs and expenses:
Cost of education and facilities ............... 4,647 3,217 3,217 11,553 5,321 8,533
Selling and promotional expenses ............... 1,801 868 868 4,407 1,384 2,966
General and administrative expenses ............ 2,886 1,961 2,253 8,191 3,492 5,579
Amortization of goodwill ....................... 252 253 253 756 422 765
------- ------ ------- ------- ------- ------
Total costs and expenses ....................... 9,586 6,299 6,591 24,907 10,619 17,843
------- ------ ------- ------- ------- ------
Income from campus operations .................... 3,115 2,504 2,212 3,334 3,554 2,520
Income from management agreement ................. -- 194 194 23 244 224
------- ------ ------- ------- ------- ------
Income from operations ........................... 3,115 2,698 2,406 3,357 3,798 2,744
Interest expense ................................. 65 991 50 1,275 1,451 1,289
Other income -- net .............................. 81 21 99 137 23 216
------- ------ ------- ------- ------- ------
Income before income taxes and extraordinary item 3,131 1,728 2,455 2,219 2,370 1,671
Provision for income taxes ....................... (1,353) (793) (1,084) (1,189) (1,273) (975)
------- ------ ------- ------- ------- ------
Income before extraordinary item ................. 1,778 935 $ 1,371 1,030 1,097 $ 696
-------- ---------
-------- ---------
Extraordinary loss less applicable income taxes .. -- -- (960) --
------- ------ ------- -------
Net income ....................................... $ 1,778 $ 935 $ 70 $ 1,097
-------- -------- -------- --------
-------- -------- -------- --------
Basic income per share before extraordinary item.. $ 0.17 $ 0.13 $ 0.11 $ 0.08
Basic net income per share ....................... $ 0.17 $ 0.01
Diluted income per share before extraordinary item $ 0.16 $ 0.12 $ 0.10 $ 0.07
Diluted net income ............................... $ 0.16 $ 0.01
Average shares outstanding ....................... 10,608 10,608 9,161 9,161
Dilutive effect of stock options ................. 456 456 750 750
-------- -------- ------- -------
Average shares outstanding assuming dilution ..... 11,064 11,064 9,911 9,911
See notes to consolidated financial statements.
2
EduTrek International, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended February 28,
------------------------------
1998 1997
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(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Net income .......................................................... $ 70 $ 1,097
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Extraordinary loss before applicable income taxes ................. 1,600 --
Depreciation and amortization ..................................... 1,847 692
Amortization of loan discount ..................................... 22 94
Decrease (increase) in accounts receivable ........................ (2,650) 887
Increase in accounts payable and accrued liabilities .............. 295 465
Increase (decrease) in unearned revenues .......................... 3,606 (4,617)
Decrease in value-added taxes payable ............................. (332) (668)
Increase (decrease) in income taxes payable ....................... (681) 737
Other ............................................................. (1,726) 183
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Net cash provided by (used in) operating activities ............... 2,051 (1,130)
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INVESTING ACTIVITIES
Acquisition of Predecessor ........................................ -- (30,746)
Purchases of property, plant, and equipment ....................... (2,005) (255)
Other ............................................................. (346) --
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Net cash used in investing activities ............................. (2,351) (31,001)
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FINANCING ACTIVITIES
Net receipts (payments) -- line-of-credit and other ............... (3,003) 1,093
Net additions (payments) under capital lease obligations .......... 73 (502)
Net long-term debt (payments) proceeds ............................ (24,587) 27,576
Proceeds from issuance of common stock ............................ 34,580 4,000
Other ............................................................. (38) --
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Net cash provided by financing activities ......................... 7,025 32,167
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Effect of exchange rate changes on cash ........................... (25) (6)
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NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 6,700 30
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................... 678 154
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................ $ 7,378 $ 184
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest .......................................................... $ 1,495 $ 354
Income taxes ...................................................... 1,212 --
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 to Form 10-Q and Article 10 of
Regulation S-X. 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 nine months ended February 28, 1998 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)
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, (ii) elimination of interest expense which would not have occurred due
to the use of Offering proceeds, and (iii) the addition of other income-net
related to the investment of net Offering proceeds.
General and administrative expenses were adjusted by the addition of
Company expenses of $292,000 for staff, office space, and the cost of being
a public company.
Interest expense was adjusted by the elimination of $941,000 relating to
the retirement of debt from the use of Offering proceeds.
Other income-net was adjusted by the addition of interest income of $78,000
relating to the investment of net Offering proceeds after retirement of
applicable debt.
Provision for income taxes was adjusted by $291,000 to give effect to the
pro forma adjustments.
Pro forma average shares outstanding, assuming dilution, of 11,089,000
include 4,796,000 of Class A Common Stock and 6,293,000 shares of Class B
Common Stock issued and outstanding at the end of the third quarter
adjusted for all outstanding warrants and options 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 - Significant Accounting Policies
Other Assets -- The Company has approximately $313,000 of pre-opening costs
included in Other Assets at February 28, 1998. The Company's policy is to
capitalize all pre-opening costs except those costs related to advertising
prior to the commencement of a new educational program. Pre-opening costs are
amortized over twelve months upon commencement of the new program.
Statement of Position 98-5, "Reporting on the Costs of Start-up Activities,"
(SOP 98-5) will require the Company to expense all pre-opening costs as incurred
and to write off any pre-opening costs included on the balance sheet beginning
in June 1999 (SOP 98-5 takes effect for fiscal years beginning after December
15, 1998).
Note 5 - New Accounting Pronouncements
In the current quarter ending February 28, 1998, the Company adopted SFAS 128
"Earnings Per Share." In accordance with SFAS 128, the Company has presented
both basic net income per share and diluted net income per share in all
statements of operations presented.
Note 6 - 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.
5
Note 7 - Subsequent Events
On February 16, 1998, the Company entered into a 138-month lease for a 75,711
square foot building in the North Atlanta area for its North Atlanta Campus.
The Company is to begin its occupancy in July 1998 and will incur rent
payments of approximately $1.0 million for fiscal year 1999 and approximately
$2.0 million each fiscal year thereafter.
On March 31, 1998, the Company and ITI Education Corporation (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 education system. The expanded licensing arrangements
include 11 major market areas in the United States and internationally. The
Company and ITI believe the principal benefits previously expected in the merger
can be obtained through this expanded licensing arrangement. Under the amended
arrangements, the Company plans to use the ITI system in its Master of
Information Technology and Bachelor of Information Technology degree programs in
four to five new campus locations in the Company's 1999 fiscal year.
In the fourth quarter, the Company will expense approximately $650,000 of
accounting, legal, and other costs associated with the planned combination with
ITI. The Company has approximately $160,000 of combination costs included in
Other Current Assets at February 28, 1998.
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 nine months ended February 28, 1998 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:
7
Three Months Ended February 28, Nine Months Ended February 28,
-------------------------------- ---------------------------------
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 ..................... 36.6% 36.5% 40.9% 41.9%
Selling and promotional expenses ..................... 14.2% 9.9% 15.6% 14.6%
General and administrative expenses .................. 22.7% 25.6% 29.0% 27.4%
Amortization of goodwill ............................. 2.0% 2.9% 2.7% 3.8%
------ ------ ----- -----
Total costs and expenses ............................ 75.5% 74.9% 88.2% 87.6%
------ ------ ----- -----
Income from campus operations .......................... 24.5% 25.1% 11.8% 12.4%
Income from management agreement ....................... 0.0% 2.2% 0.1% 1.1%
------ ------ ----- -----
Income from operations ................................. 24.5% 27.3% 11.9% 13.5%
Interest expense ....................................... 0.5% 0.6% 4.5% 6.3%
Other income -- net .................................... 0.6% 1.1% 0.5% 1.1%
------ ------ ----- -----
Income before income taxes and extraordinary item 24.7% 27.9% 7.9% 8.2%
Provision for income taxes ............................. (10.7%) (12.3%) (4.2%) (4.8%)
------ ------ ----- -----
Income before extraordinary item ................ 14.0% 15.6% 3.6% 3.4%
------ ------ ----- -----
------ ------ ----- -----
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(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 February 28, 1997 as this
information would not be meaningful.
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 nine months ended February 28,
1998 to the Predecessor's pro forma results for the three months and nine
months ended February 28, 1997. The pro forma results of the Predecessor as
described
8
herein assume 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 November is comprised of the Summer I term, the Summer II term, and
two-thirds of the Fall term. The period from December through February is
comprised of one-third of the Fall term and four-fifths of the Winter term.
Three Months Ended February 28, 1998 Compared to Three Months Ended February
28, 1997 (Pro Forma)
NET REVENUES. Net revenues increased by approximately $3.9 million, or 44.3%,
from $8.8 million for the three months ended February 28, 1997 (pro forma)
(the "1997 period") to $12.7 million for the three months ended February 28,
1998 (the "1998 period"). Of the 44.3% increase, 20.0%, or approximately $1.8
million, was due to the consolidation of The American College in Dubai
("Dubai") (see Note 6 of notes to financial statements). Of the remaining
24.3%, 9.0%, or approximately $795,000, was due to an increase in student
enrollment and 7.4%, or approximately $655,000, was the result of a tuition
increase. The remaining 7.7%, or approximately $679,000 was from the
corporate education division, which did not begin generating revenues until
June 1997. All campuses had increases in net revenues and student enrollments
from the 1997 period to the 1998 period. Enrollment for the Fall term totaled
3,045 in the 1998 period, up from 2,815 in the 1997 period, and enrollment
for the Winter term totaled 2,899 in the 1998 period, up from 2,699 in the
1997 period.
COST OF EDUCATION AND FACILITIES. Cost of education and facilities increased
approximately $1.4 million, or 44.5%, from $3.2 million in the 1997 period to
$4.6 million in the 1998 period. Education costs increased approximately
$998,000, or 56.9%, from $1.8 million in the 1997 period to $2.8 million in the
1998 period. Of the 56.9% increase, 18.7%, or approximately $328,000, relates to
the consolidation of Dubai; 27.9%, or approximately $490,000, was due to
instructional cost increases (approximately $304,000 relates to the corporate
education division and the Graduate School of Information Technology which are
new programs); and 10.3%, or approximately $180,000, was due to royalty payments
associated with curriculum licensing for the corporate education and the
Graduate School of Information Technology. Facility costs increased
approximately $432,000, or 29.5%, from $1.5 million in the 1997 period to $1.9
million in the 1998 period. Of the 29.5% increase, 6.3%, or approximately
$92,000, relates to the consolidation of Dubai. The remaining 23.2%, or
approximately $340,000, 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 increased slightly from 36.5% in the 1997 period to 36.6% in the 1998
period.
SELLING AND PROMOTIONAL EXPENSES. Selling and promotional expenses increased by
approximately $933,000, or 107.5%, from $868,000 in the 1997 period to $1.8
million in the 1998 period. Of the 107.5% increase, 8.4%, or approximately
$73,000, relates to the consolidation of Dubai. Approximately 65%, or
approximately $565,000, relates to increases in marketing and advertising
expenses at the Company's campuses during the 1998 period. Of the $565,000,
$265,000 relates to the Graduate School of Information Technology, which began
classes in December 1997, and $73,000 relates to the Center for Professional
Studies, which began in March 1998. The remaining $227,000 of marketing and
advertising relates to the AIU campuses. Of the remaining 34.0%, 30.0%, or
approximately $261,000, was due to commissions paid to salespeople in the
Company's corporate education division during the 1998 period and 4.0%, or
approximately $35,000, was due to increases in admissions costs. Selling and
promotional expenses increased as a percentage of net revenues from 9.9% in the
1997 period to 14.2% in the 1998 period primarily due to marketing costs
increasing at a higher rate than net revenues due to the start-up costs of new
programs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $633,000, or 28.1%, from $2.3 million in the 1997 period
to $2.9 million in the 1998
9
period. Of the net increase, general and administrative expenses increased
$957,000 due to the consolidation of Dubai and decreased approximately $324,000
due to the capitalization of pre-operating costs (see Note 4 of notes to
financial statements). As a percentage of net revenues, general and
administrative expenses decreased from 25.6% in the 1997 period to 22.7% in the
1998 period.
AMORTIZATION OF GOODWILL. Amortization of goodwill of $252,000 in the 1998
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 1997 period assume goodwill expense of $252,000.
INCOME FROM MANAGEMENT AGREEMENT. As a result of the consolidation of Dubai
effective September 1, 1997, there was no income from the Dubai management
agreement in the 1998 period. The portion of income from operations related
to Dubai is approximately $311,000, which represents an increase of 60.3%
primarily due to an increase in enrollment.
INTEREST EXPENSE. Interest expense is primarily due to borrowing costs and
remained relatively constant during the 1997 and 1998 periods.
OTHER INCOME -NET. Other income--net is primarily due to interest income and
remained relatively constant during the 1997 and 1998 periods.
Nine Months Ended February 28, 1998 Compared to Nine Months Ended February 28,
1997 (Pro Forma)
NET REVENUES. Net revenues increased by approximately $7.9 million, or 38.7%,
from $20.4 million for the nine months ended February 28, 1997 (pro forma)
(the "nine month 1997 period") to $28.2 million for the nine months ended
February 28, 1998 (the "nine month 1998 period"). Of the 38.7% increase,
14.6%, or approximately $3.0 million, was due to the consolidation of Dubai.
Of the remaining 24.1%, 11.0%, or approximately $2.2 million, was due to an
increase in student enrollment and 6.1%, or approximately $1.3 million, was
the result of a tuition increase. The remaining 7.0%, or approximately $1.4
million, was from revenues from the corporate education division, which did
not begin generating revenues until June 1997. All campuses had increases in
net revenues and student enrollments from the nine month 1997 period to the
nine month 1998 period. Enrollments for the first and second Summer terms
totaled 2,721, up from 2,244 the previous year. Enrollment for the Fall term
totaled 3,045, up from 2,815 the previous year. Enrollment for the Winter
term totaled 2,899, up from 2,699 the previous year.
COST OF EDUCATION AND FACILITIES. Cost of education and facilities increased
approximately $3.0 million, or 35.4%, from $8.5 million in the nine month 1997
period to $11.5 million in the nine month 1998 period. Education costs increased
approximately $2.0 million, or 43.0%, from $4.8 million in the nine month 1997
period to $6.8 million in the nine month 1998 period. Of the 43.0% increase,
12.6%, or approximately $598,000, relates to the consolidation of Dubai; 22.7%,
or approximately $1.1 million, was due to instructional cost increases
(approximately $429,000 relates to the corporate education division and the
Graduate School of Information Technology which are new programs); and 7.7%, or
approximately $367,000, was due to royalty payments associated with curriculum
licensing for the corporate education division and the Graduate School of
Information Technology. Facility costs increased approximately $976,000, or
25.3%, from $3.9 million in the nine month 1997 period to $4.8 million in the
nine month 1998 period. Of the 25.3% increase, 5.3%, or approximately $203,000,
relates to the consolidation of Dubai. Of the remaining 20.0%, or approximately
$773,000, $578,000 was due to an increase in the number of housing students and
$195,000 was due to rent increases. Costs of education and facilities
10
decreased slightly as a percentage of net revenues from 41.9% in the nine month
1997 period to 40.9% in the nine month 1998 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 $1.4 million, or 48.6%, from $3.0 million in the nine month 1997
period to $4.4 million in the nine month 1998 period. Of the 48.6% increase,
4.8%, or approximately $142,000, relates to the consolidation of Dubai. Of the
remaining 43.8%, 19.9%, or approximately $592,000, relates to increases in
marketing and advertising expenses at the Company's campuses during the 1998
period. Of the $592,000, $347,000 relates to the Graduate School of Information
Technology, which began classes in December 1997, and $73,000 relates to the
Center for Professional Studies, which began classes in March 1998. The
remaining $172,000 of marketing and advertising relates to the AIU campuses. Of
the remaining 23.9%, 16.2%, or approximately $480,000, was due to commissions
paid to salespeople in the Company's corporate education division during the
nine month 1998 period and 7.7%, or approximately $227,000, was due to increases
in admission costs. Selling and promotional expenses slightly increased as a
percentage of net revenues from 14.6% in the nine month 1997 period to 15.6% in
the nine month 1998 period primarily due to marketing costs increasing at a
higher rate than net revenues due to the start-up costs of new programs.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $2.6 million, or 46.8%, from $5.6 million in the nine
month 1997 period to $8.2 million in the nine month 1998 period. Of the 46.8%
increase, 27.6%, or approximately $1.5 million 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 programs. As a percentage of net
revenues, general and administrative expenses increased from 27.4% in the nine
month 1997 period to 29.0% in the nine month 1998 period.
AMORTIZATION OF GOODWILL. Amortization of goodwill of $756,000 in the nine month
1998 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 $756,000.
INCOME FROM MANAGEMENT AGREEMENT. Income from the Dubai management agreement
decreased 89.7%, or approximately $201,000, from the nine month 1997 period due
to the consolidation of Dubai effective September 1, 1997. The portion of income
from operations related to Dubai for the nine month 1998 period is approximately
$486,000, which represents an increase of 117.0% primarily due to an increase in
enrollment.
INTEREST EXPENSE. Interest expense is primarily due to borrowing costs and
remained relatively constant during the nine month 1997 and 1998 periods.
OTHER INCOME -NET. Other income--net decreased by approximately $79,000, or
36.6%, primarily due to a nonrecurring health insurance refund in the 1997
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, the Company's first and second fiscal quarter
enrollments and related revenues generally are lower than the third and fourth
fiscal quarters due to traditionally lower student enrollment levels in the
summer terms (first fiscal quarter is comprised of the Summer I term and
one-half of the Summer II term; second fiscal quarter is comprised of one-half
of the Summer II term and two-thirds of the Fall term). First and second fiscal
quarter costs and expenses historically are higher as a percentage of net
revenues as a result of certain
11
fixed costs which are not significantly affected by the seasonal first and
second fiscal quarter declines in net revenues.
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 February 28, 1998, 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.
The Company experienced positive operating cash flow of approximately $2.1
million for the nine month 1998 period which was primarily the result of AIU's
Fall and Winter term tuition receipts and noncash depreciation and amortization
charges of approximately $1.8 million.
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 three month 1998 period, the Company spent
approximately $778,000 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 $500,000. Also by August
1998, the Company plans to implement the Master of Information Technology
("MIT") program in the District of Columbia. The Company implemented the MIT
program in December 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 District of Columbia 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 $4.0 million will be funded
primarily from working capital, the Revolving Loan, proceeds from the Offering,
and a new credit facility currently being negotiated with NationsBank, N.A. 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 calendar year 1999 and that it
will require approximately $1.5 million in fiscal 1998 and 1999 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 these financing agreements 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, internally generated funds, an additional line of credit currently being
negotiated, and funds under the Company's 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
12
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. 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 February 28, 1998, AIU does not satisfy all
financial responsibility standards. At February 28, 1998, the Company had a
positive tangible net worth of $3.6 million, but its acid test ratio of .8 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 expired on March 31, 1998. The U.S. Department of
Education (DOE) has passed a new set of regulations effective July 1, 1998 to
monitor the financial stability of private, postsecondary schools. The DOE will
rely on three fiscal targets to determine the eligibility for participation in
federal student aid programs of private non- and for-profit schools. These
ratios include primary reserve ratio, equity ratio, and net income ratio. These
particular financial ratios were chosen to account for an institution's total
financial resources, including financial viability, profitability, liquidity,
ability to borrow, and capital resources. Each ratio is weighted and summed to
determine an overall score for each postsecondary school. Management believes
that the Company will be within the DOE's new guidelines and thus will no longer
be required to maintain its letter of credit once the Company has reported its
fiscal 1998 financial results to the DOE.
On March 31, 1998, the Company and ITI Education Corporation (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 education system. The expanded licensing arrangements
include 11 major market areas in the United States and internationally. The
Company and ITI believe the principal benefits previously expected in the merger
can be obtained through this expanded licensing arrangement. Under the amended
arrangements, the Company plans to use the ITI system in its Master of
Information Technology and Bachelor of Information Technology degree programs in
four to five new campus locations in the Company's 1999 fiscal year.
IMPACT OF INFLATION
The Company does not believe its operations have been materially affected
by inflation.
YEAR 2000
The Company's computer information system is not currently configured to
recognize the year 2000 in the two digit date field used by such system. The
Company is currently implementing a new centralized information system to
integrate AIU's operations and financial data including admissions, financial
aid, student services, placement services, and default management. The new
system is designed to properly recognize the year 2000 in the two digit date
field. The Company anticipates that the information system will be fully
operational by the end of calendar year 1999 and that it will require a total of
approximately $1.5 in fiscal 1998 and fiscal 1999 to develop and implement this
integrated information system. The management of the Company does not anticipate
that 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, management
will evaluate other available options to revise its computer programs, as
necessary, for the effect of the year 2000 problem.
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PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.17 - Lease: Embassy Row 500 Between EduTrek International,
Inc., a Georgia Corporation (Tenant) and a Maryland
Corporation (Landlord)
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 February 28, 1998.
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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: April 13, 1998 By: /s/ Steve Bostic
----------------
Steve Bostic, President and
Chief Executive Officer
(principal executive officer)
Date: April 13, 1998 By: /s/ Donald J. Blankers
----------------------
Donald J. Blankers, Chief Financial
Officer (principal financial and
accounting officer)
15