<PAGE> 1
UNITED STATES 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:
June 30, 1999 0-23021
EDUTREK INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(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.)
500 Embassy Row, 6600 Peachtree Dunwoody Road, Atlanta, Georgia 30328
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(Address of principal executive offices) (Zip Code)
404-965-8000
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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 4,454,188 shares
- --------------------------------------- ------------------------------
Class Outstanding at August 9, 1999
Class B Common Stock, without par value 6,293,000 shares
- --------------------------------------- ------------------------------
Class Outstanding at August 9, 1999
<PAGE> 2
EduTrek International, Inc.
Form 10-Q Index
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6
Item 3. Qualitative and Quantitative Disclosures About Market Risk 11
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 2,962 $ 2,779
Accounts receivable -- net of allowance of $533 and $277, respectively 3,867 3,054
Deferred income taxes 308 308
Income taxes receivable 397 166
Other 1,300 1,288
-------- --------
Total current assets 8,834 7,595
Property, plant, and equipment -- net of accumulated depreciation 18,700 14,971
Goodwill -- net of accumulated amortization of $2,797 and $2,292, respectively 37,863 38,369
Deferred income taxes 3,149 2,496
Other 1,886 1,103
======== ========
$ 70,432 $ 64,534
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 4,060 $ 4,816
Accrued expenses 2,684 1,632
Accrued related party transactions (see note 5) 247 0
Value-added tax payable 477 473
Unearned revenues 5,274 8,477
Line of credit (see note 4) 10,600 1,820
Current maturities -- long-term debt 1,914 1,686
-------- --------
Total current liabilities 25,256 18,904
Capital leases and other--less current maturities 7,293 5,821
Deferred rent 962 966
Other liabilities 174 82
-------- --------
Total liabilities 33,685 25,773
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, Class A voting, one vote per share, without par value, 40,000,000
shares authorized, 4,484,048 and 4,362,605 issued and outstanding, respectively 36,696 36,611
Common stock, Class B voting, ten votes per share, without par value, 10,000,000
shares authorized, 6,293,000 issued and outstanding 3,973 3,973
Accumulated other comprehensive income (4) 24
Accumulated deficit (3,918) (1,847)
-------- --------
Total shareholders' equity 36,747 38,761
======== ========
$ 70,432 $ 64,534
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
EDUTREK INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
1999 1998
---------------------------
(unaudited) (unaudited)
<S> <C> <C>
Net revenues $ 15,305 $ 12,100
Costs and expenses:
Cost of education and facilities 8,223 5,075
Selling and promotional expenses 3,718 1,932
General and administrative expenses 4,928 3,313
Acquisition costs - 307
Amortization of goodwill 252 252
----------------------
Total costs and expenses 17,121 10,879
----------------------
Income (loss) from operations (1,816) 1,221
Interest expense 362 27
Other income -- net 52 1,391
----------------------
Income (loss) before income taxes and minority interest (2,126) 2,585
Income tax benefit (provision) 942 (911)
----------------------
Income (loss) before minority interest (1,184) 1,674
Minority interest in earnings of American University in Dubai (481) (375)
----------------------
Net income (loss) $ (1,665) $ 1,299
======================
Earnings (Loss) Per Share:
Basic net income (loss) per share $ (0.15) $ 0.12
Diluted net income (loss) per share $ (0.15) $ 0.12
Average shares outstanding 10,743 10,627
Dilutive effect:
Options - 493
----------------------
- 493
----------------------
Average shares outstanding assuming dilution 10,743 11,120
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
---------------------------
(unaudited) (unaudited)
<S> <C> <C>
Net revenues $ 32,038 $ 25,622
Costs and expenses:
Cost of education and facilities 16,793 10,259
Selling and promotional expenses 6,656 3,774
General and administrative expenses 9,490 5,743
Acquisition costs - 487
Amortization of goodwill 504 504
----------------------
Total costs and expenses 33,443 20,767
----------------------
Income (loss) from operations (1,405) 4,855
Interest expense 617 89
Other income -- net 84 1,473
----------------------
Income (loss) before income taxes and minority interest (1,938) 6,239
Income tax benefit (provision) 1,045 (2,276)
----------------------
Income (loss) before minority interest (893) 3,963
Minority interest in earnings of American University in Dubai (1,178) (1,000)
----------------------
Net income (loss) $ (2,071) $ 2,963
======================
Earnings (Loss) Per Share:
Basic net income (loss) per share $ (0.19) $ 0.28
Diluted net income (loss) per share $ (0.19) $ 0.27
Average shares outstanding 10,702 10,622
Dilutive effect:
Options - 465
----------------------
- 465
----------------------
Average shares outstanding assuming dilution 10,702 11,086
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
EDUTREK INTERNATIONAL, INC.
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
----------- ----------
(unaudited) (unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(2,071) $ 2,963
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 1,748 1,306
Bad debt expense 255 98
Increase in accounts receivable (1,069) (1,067)
Decrease (increase) in prepaid expenses and other receivables (899) 135
Increase in accounts payable and accrued liabilities 543 204
Decrease in unearned revenues (3,203) (3,926)
Increase (decrease) in value-added taxes payable 4 (182)
Increase in income taxes payable -- 924
Other 63 (975)
------- -------
Net cash used in operating activities (4,629) (520)
------- -------
INVESTING ACTIVITIES
Additions to curriculum development costs (692) (1,564)
Purchases of property, plant, and equipment (2,108) 421
------- -------
Net cash used in investing activities (2,800) (1,143)
------- -------
FINANCING ACTIVITIES
Borrowings - Net 8,780 --
Principal payments under capital lease obligations (751) (181)
Principal repayments on long-term debt (243) (1,720)
Other (136) 8
------- -------
Net cash provided by (used in) financing activities 7,650 (1,893)
------- -------
Effect of exchange rate changes on cash (38) (17)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 183 (3,573)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,779 7,743
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,962 $ 4,170
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 492 $ 56
Income taxes -- 1,296
Non-cash investing activities:
Acquisition of property through capital leases 2,694 477
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
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 the three and six months ended June 30,
1999 are not necessarily indicative of the results to be expected for the full
year ending December 31, 1999. For further information, refer to the
consolidated financial statements and notes thereto for the 7 month transition
period from June 1, 1998 to December 31, 1998 included in the Transition Report
on Form 10-K as filed with the Securities and Exchange Commission.
Note 2 - Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income" establishes standards for reporting and
displaying comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general purpose financial statements. The
components of comprehensive income are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss) $(1,665) $ 1,299 $(2,071) $ 2,963
Change in equity due to foreign
currency translation adjustments (19) (40) (28) (59)
------- ------- ------- -------
Comprehensive income (loss) $(1,684) $ 1,259 $(2,099) $ 2,904
======= ======= ======= =======
</TABLE>
Note 3 - U.S. and Foreign Operations
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way that public business enterprises
report information about operating segments and related information in financial
statements. SFAS No. 131 uses the management approach for determining what
operating segment information to report. The management approach is based on the
way that management organizes the operating segments within the Company for
making decisions and assessing performance. The Company operates solely in the
education industry, and management makes decisions and assesses performance
based on the geographic locations of its campuses. Therefore, the Company has
elected to report segment information based on geographic areas.
4
<PAGE> 7
The Company's operations are located in the United States, the United
Kingdom, and Dubai, United Arab Emirates. Net revenues and income (loss) from
operations by geographic area for the three and six months ended June 30, 1999
and 1998 and identifiable assets by geographic area at June 30, 1999 and
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
United States $ 9,966 $ 6,781 $ 19,718 $ 13,833
United Kingdom 3,616 3,784 8,410 8,298
Dubai, UAE 1,723 1,535 3,910 3,491
Home Office -- -- -- --
-------- -------- -------- --------
Total $ 15,305 $ 12,100 $ 32,038 $ 25,622
======== ======== ======== ========
Income (loss) from operations:
United States $ (369) $ 2,161 $ 199 $ 4,777
United Kingdom 1,191 1,464 3,303 3,548
Dubai, UAE 744 580 1,816 1,545
Home Office (3,382) (2,984) (6,723) (5,015)
-------- -------- -------- --------
Total $ (1,816) $ 1,221 $ (1,405) $ 4,855
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Identifiable assets:
United States $ 66,447 $ 60,001
United Kingdom 2,605 2,753
Dubai, UAE 1,380 1,780
Home Office - -
-------- --------
Total $ 70,432 $ 64,534
======== ========
</TABLE>
Note 4 - Line of Credit
The Company finances its operating activities and capital requirements,
including debt repayments, principally from cash provided by operating
activities and borrowings under bank credit facilities. The Company has a $10
million revolving line of credit with a bank (the "Credit Agreement") which
matures on April 30, 2001. Amounts outstanding bear interest at LIBOR plus
2.75%. At August 9, 1999, the Company had outstanding borrowings under the
Credit Agreement of $8.1 million. In addition, the Company has issued $1.9
million in letters of credit against the Credit Agreement. These letters of
credit are required as security under building leases in Los Angeles, Washington
D.C., and Miami.
On May 25, 1999, the Company amended the Credit Agreement to provide
for an additional revolving line of credit with the same bank. This additional
line of credit was added to improve working capital flexibility during the
Company's second and third quarters, which are the Company's lower enrollment
periods. The additional line of credit provides borrowing up to a maximum
additional amount of $3.3 million for the period ending August 31, 1999 reducing
to $2.8 million for the month of September, $2.3 million for the month of
October, and $1.3 million for November and December. The additional line of
credit expires on December 31, 1999. Amounts outstanding bear interest at the
prime rate plus 2%. At August 9, 1999 the Company had outstanding borrowings
under the additional line of credit of $3.3 million.
On August 16, 1999, the Company entered into another amendment to the
Credit Agreement which revised the net worth covenant and waived certain other
financial covenants for the months of July through December 1999 and the quarter
ending September 30, 1999. Also, an agreement in principle has been reached with
another lender to obtain an additional $1.3 million by August 31, 1999. Subject
to this additional funding, the Company's primary bank has agreed in principle
to: (i) amend the Credit Agreement to extend the expiration of the additional
$3.3 million line of credit until February 29, 2000; (ii) extend the maximum
amount of borrowing ($3.3 million) to September 30, 1999 with monthly reductions
of $500,000 thereafter until the expiration on February 29, 2000. The Company
believes that it will obtain the additional funding, although there can be no
assurance that it will.
Note 5 - Related Party Transactions
Three members of the family of the Company's Chairman and Chief
Executive Officer terminated their employment with EduTrek International, Inc.
during the three months ended June 30, 1999. Termination payments of
approximately $274,000 were accrued in June 1999 with payments scheduled through
May 2000.
5
<PAGE> 8
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 should be read in conjunction with the "Selected
Consolidated Financial Data" and the Company's consolidated financial statements
and notes thereto for the 7 month transition period from June 1, 1998 to
December 31, 1998 included in the Company's Transition Report on Form 10-K as
filed with the Securities and Exchange Commission, as well as in conjunction
with the consolidated financial statements and notes thereto for the three and
six months ended June 30, 1999 included in Item 1. Unless otherwise specified,
any reference to a "fiscal year" is to a fiscal year ended December 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
locations, 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).
6
<PAGE> 9
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net revenues 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of education and facilities 53.7 41.9 52.4 40.0
Selling and promotional expenses 24.3 16.0 20.8 14.7
General and administrative expenses 32.2 27.4 29.6 22.4
Acquisition costs 0.0 2.5 0.0 1.9
Amortization of goodwill 1.6 2.1 1.6 2.0
------ ------ ------ ------
Total costs and expenses 111.9 89.9 104.4 81.1
------ ------ ------ ------
Income (loss) from operations (11.9) 10.1 (4.4) 18.9
Interest expense 2.4 0.2 1.9 0.3
Other income -- net 0.3 11.5 0.3 5.7
------ ------ ------ ------
Income (loss) before income taxes and minority interest (13.9) 21.4 (6.0) 24.4
Income tax benefit (provision) 6.2 (7.5) 3.3 (8.9)
------ ------ ------ ------
Income (loss) before minority interest (7.7) 13.8 (2.8) 15.5
Minority interest in earnings of American University in Dubai (3.1) (3.1) (3.7) (3.9)
------ ------ ------ ------
Net income (loss) (10.9) 10.7 (6.5) 11.6
</TABLE>
7
<PAGE> 10
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
NET REVENUES. Net revenues increased by approximately $3.2 million or 26.5% from
$12.1 million for the three months ended June 30, 1998 (the "1998 period") to
$15.3 million for the three months ended June 30, 1999 (the "1999 period"). The
increase in net revenues was due to a tuition increase and an increase in
student enrollments, including the opening of new campuses in California,
Georgia, Florida, and the District of Columbia.
COST OF EDUCATION AND FACILITIES. Cost of education and facilities increased
approximately $3.1 million or 62.0% from $5.1 million in the 1998 period to $8.2
million in the 1999 period. Education costs increased approximately $2.4 million
or 71.6% from $3.3 million in the 1998 period to $5.7 million in the 1999 period
due to salary, courseware, and other education costs at the Company's new
campuses. Facility costs increased approximately $777,000 or 44.1% from $1.8
million in the 1998 period to $2.6 million in the 1999 period due to the opening
of the Company's new campuses. For the reasons set forth above, cost of
education and facilities increased as a percentage of net revenues from 41.9% in
the 1998 period to 53.7% in the 1999 period.
SELLING AND PROMOTIONAL EXPENSES. Selling and promotional expenses increased by
approximately $1.8 million or 92.4% from $1.9 million in the 1998 period to $3.7
million in the 1999 period. The increase was due to increases in salary and
other selling and promotional expenses related to the opening of new campuses
and to new educational programs such as the Masters in Information Technology,
the Bachelors in Information Technology, and the Bachelors in Business
Administration for adult evening students at the Company's new campuses. As a
percentage of net revenues, selling and promotional expenses increased from
16.0% in the 1998 period to 24.3% in the 1999 period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $1.6 million or 48.7% from $3.3 million in the 1998
period to $4.9 million in the 1999 period. The increase was primarily due to
additions of personnel at the new campuses and the home office to support the
Company's growth. As a percentage of net revenues, general and administrative
expenses increased from 27.4% in the 1998 period to 32.2% in the 1999 period.
ACQUISITION COSTS. Acquisition costs consisted of approximately $307,000 of
accounting, legal, and other costs in the 1998 period associated with the then
planned combination with ITI Education Corporation ("ITI"). In March 1998, the
Company and ITI announced that the planned combination was terminated. There
were no acquisition costs in the 1999 period.
AMORTIZATION OF GOODWILL. Goodwill amortization of $252,000 for both periods was
the result of the October 1996 acquisition of American European Corporation and
Subsidiaries with goodwill costs being amortized over a 40-year period.
INTEREST EXPENSE. Interest expense increased approximately $335,000 from $27,000
in the 1998 period to $362,000 in the 1999 period as a result of increased
outstanding borrowings under the Company's revolving line of credit during the
1999 period compared to the 1998 period.
OTHER INCOME - NET. Other income - net decreased approximately $1.3 million or
96.3% in the 1999 period from the 1998 period. During the 1998 period, Other
income-net included the sale of the company aircraft and tax recoveries. There
were no similar items in the 1999 period.
MINORITY INTEREST IN EARNINGS OF AMERICAN UNIVERSITY IN DUBAI. Minority interest
in earnings increased approximately $106,000 or 28.3% from the 1998 period to
the 1999 period due to an increase in operating income at the Dubai campus.
NET INCOME (LOSS). For the reasons set forth above, the Company experienced a
net loss of approximately $1.7 million for the 1999 period compared to net
income of approximately $1.3 million for the 1998 period.
8
<PAGE> 11
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
NET REVENUES. Net revenues increased by approximately $6.4 million or 25.0% from
$25.6 million for the six months ended June 30, 1998 (the "1998 six-month
period") to $32.0 million for the six months ended June 30, 1999 (the "1999
six-month period"). The increase in net revenues was due to a tuition increase
and an increase in student enrollments, including the opening of new campuses in
California, Georgia, Florida, and the District of Columbia.
COST OF EDUCATION AND FACILITIES. Cost of education and facilities increased
approximately $6.5 million or 63.7% from $10.3 million in the 1998 period to
$16.8 million in the 1999 period. Education costs increased approximately $4.8
million or 72.9% from $6.6 million in the 1998 period to $11.4 million in the
1999 period due to salary, courseware, and other education costs at the
Company's new campuses. Facility costs increased approximately $1.7 million or
47.2% from $3.7 million in the 1998 period to $5.4 million in the 1999 period
due to the opening of the Company's new campuses. For the reasons set forth
above, cost of education and facilities increased as a percentage of net
revenues from 40.0% in the 1998 period to 52.4% in the 1999 period.
SELLING AND PROMOTIONAL EXPENSES. Selling and promotional expenses increased by
approximately $2.9 million or 76.4% from $3.8 million in the 1998 period to $6.7
million in the 1999 period. The increase was due to increases in salary and
other selling and promotional expenses related to the opening of new campuses
and to new educational programs such as the Masters in Information Technology,
the Bachelors in Information Technology, and the Bachelors in Business
Administration for adult evening students at the Company's new campuses. As a
percentage of net revenues, selling and promotional expenses increased from
14.7% in the 1998 period to 20.8% in the 1999 period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased approximately $3.8 million or 65.2% from $5.7 million in the 1998
period to $9.5 million in the 1999 period. The increase was primarily due to
additions of personnel at the new campuses and the home office to support the
Company's growth. As a percentage of net revenues, general and administrative
expenses increased from 22.4% in the 1998 period to 29.6% in the 1999 period.
ACQUISITION COSTS. Acquisition costs consisted of $487,000 of accounting, legal,
and other costs in the 1998 period associated with the then planned combination
with ITI. In March 1998, the Company and ITI announced that the planned
combination was terminated. There were no acquisition costs in the 1999 period.
AMORTIZATION OF GOODWILL. Goodwill amortization of $504,000 for both periods was
the result of the October 1996 acquisition of American European Corporation and
Subsidiaries with goodwill costs being amortized over a 40-year period.
INTEREST EXPENSE. Interest expense increased approximately $528,000 from $89,000
in the 1998 period to $617,000 in the 1999 period as a result of increased
outstanding borrowings under the Company's revolving line of credit during the
1999 period compared to the 1998 period.
OTHER INCOME - NET. Other income - net decreased approximately $1.4 million or
94.3% in the 1999 period from the 1998 period. During the 1998 period, Other
income - net included the sale of the company aircraft and tax recoveries. There
were no similar items in the 1999 period.
MINORITY INTEREST IN EARNINGS OF AMERICAN UNIVERSITY IN DUBAI. Minority interest
in earnings increased approximately $178,000 or 17.8% due to an increase in
operating income at the Dubai campus.
NET INCOME (LOSS). For the reasons set forth above, the Company experienced a
net loss of approximately $2.1 million for the 1999 period compared to net
income of approximately $3.0 million for the 1998 period.
9
<PAGE> 12
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 second and third
fiscal quarter enrollments and related revenues generally are lower than the
first and fourth fiscal quarters due to traditionally lower student enrollment
levels in the summer. Second and third fiscal quarter costs and expenses are
higher as a percentage of net revenues as a result of certain fixed costs which
are not significantly affected by the seasonal second and third fiscal quarter
declines in net revenues. The Company believes that this seasonality will be
mitigated by new educational programs which are offered throughout the year in
new campuses in California, Georgia, Florida, northern Virginia, and the
District of Columbia.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operating activities and capital requirements,
including debt repayments, principally from cash provided by operating
activities and borrowings under bank credit facilities. The Company has a $10
million revolving line of credit with a bank (the "Credit Agreement") which
matures on April 30, 2001. Amounts outstanding bear interest at LIBOR plus
2.75%. At August 9, 1999, the Company had outstanding borrowings under the
Credit Agreement of $8.1 million. In addition, the Company has issued $1.9
million in letters of credit against the Credit Agreement. These letters of
credit are required as security under building leases in Los Angeles, Washington
D.C., and Miami.
On May 25, 1999, the Company amended the Credit Agreement to provide
for an additional revolving line of credit with the same bank. This additional
line of credit was added to improve working capital flexibility during the
Company's second and third quarters, which are the Company's lower enrollment
periods. The additional line of credit provides borrowing up to a maximum
additional amount of $3.3 million for the period ending August 31, 1999 reducing
to $2.8 million for the month of September, $2.3 million for the month of
October, and $1.3 million for November and December. The additional line of
credit expires on December 31, 1999. Amounts outstanding bear interest at the
prime rate plus 2%. At August 9, 1999 the Company had outstanding borrowings
under the additional line of credit of $3.3 million.
On August 16, 1999, the Company entered into another amendment to the
Credit Agreement which revised the net worth covenant and waived certain other
financial covenants for the months of July through December 1999 and the quarter
ending September 30, 1999. Also, an agreement in principle has been reached with
another lender to obtain an additional $1.3 million by August 31, 1999. Subject
to this additional funding, the Company's primary bank has agreed in principle
to: (i) amend the Credit Agreement to extend the expiration of the additional
$3.3 million line of credit until February 29, 2000; (ii) extend the maximum
amount of borrowing ($3.3 million) to September 30, 1999 with monthly reductions
of $500,000 thereafter until the expiration on February 29, 2000. The Company
believes that it will obtain the additional funding, although there can be no
assurance that it will.
The Company has been working for several months to install a new
student billing system at its Dunwoody, Georgia campus. The system installation
is complete and all student billing records are being reconciled. However, as a
result of the system implementation and reconciliation process combined with a
large influx of students, the processing of student financial aid has slowed
considerably creating a backlog of over $2.0 million in accounts receivable
adding pressure to the Company's cash position. It is expected that this backlog
will be substantially alleviated by September 30, 1999.
Net cash used in investing activities increased from $1.1 million in
the 1998 six-month period to $2.8 million in the 1999 six-month period. The
increase in investing activities was principally due to the increase in the
number of locations. Purchases of property, plant, and equipment for the 1999
period were approximately $2.1 million compared to $421,000 for the 1998
six-month period. Total purchases of property, plant, and equipment for the year
ended December 31, 1999 are expected to range from $3.7 to $4.3 million due to
(1) the completion of the build-out of the Washington, D.C. and Miami campuses
(2) hardware and software costs related to the installation of a new management
information system; (3) improvements to the Company's computer facilities and
telecommunications equipment at the corporate level; (4) investments in computer
technology to support information technology curriculum; and (5) increases in
normal recurring capital expenditures due to the overall increases in student
and employment levels resulting from the Company's growth. For the six months
ended June 30, 1999 curriculum development costs totaled approximately $692,000.
Curriculum development costs for the year ended December 31, 1999 are expected
to be in the range of $1.3 million to $1.5 million. The Company expects to fund
capital expenditures for existing and new campuses through cash from operations
and proceeds from the Credit Agreement.
10
<PAGE> 13
The Company's ability to fund its working capital and capital
expenditure requirements, implement new programs, make interest and principal
payments, and meet its other cash requirements, depends on, among other things,
current cash and cash equivalents, internally generated funds, and the Company's
Credit Agreement. Management believes that such sources, augmented through the
implementation of the agreements in principle for additional financing discussed
above, and reduction of student accounts receivables will be sufficient to meet
the Company's capital requirements and operating needs for the remainder of the
fiscal year. However, if there is a significant reduction of internally
generated funds or the company is unable to complete the additional financing,
the Company may require additional funds from outside sources. In such event,
there can be no assurance that the Company will be able to obtain such funding
as and when required or on acceptable terms.
The Department of Education requires that Title IV program funds
collected by an institution for unbilled tuition be kept in a separate cash or
cash equivalent account until the students are billed for the portion of their
program related to these funds. In addition, all funds transferred to the
Company through electronic funds transfer programs are held in a separate cash
account until certain conditions are satisfied. As of June 30, 1999, the Company
had approximately $184,000 in these separate accounts to comply with these
requirements. These funds generally remain in these separate accounts for an
average of 60 to 75 days from the date of collection. These restrictions on cash
have not affected the Company's ability to fund daily operations.
YEAR 2000 COMPLIANCE
The year 2000 problem arises from the fact that many existing
information technology hardware and software systems and non-information
technology products containing embedded microchip processors may not recognize
the year 2000. Accordingly, problems may arise for such products and systems
when processing information containing dates that fall after December 31, 1999.
Some of the Company's computer information systems are not currently
configured to recognize the year 2000. The Company has completed the testing of
its computer information systems and has identified those needing adjustments in
order to be fully year 2000 compliant. Software patches and other adjustments
have either been received and implemented or are planned for implementation and
testing prior to December 31, 1999.
The Company is currently implementing a new centralized information
system to integrate its operations and financial data including admissions,
financial aid, student services, placement services, and default management. The
new system is designed to properly recognize the year 2000. To date, the
admissions system has been implemented at all domestic campus locations. The
student services and billing systems have been implemented at the Dunwoody, GA
campus with the old and new systems currently running in parallel. The Company
anticipates that the full information system will be fully operational before
the year 2000 and that it will require a total of approximately $2 million to
develop and implement this integrated information system, although there can be
no assurance that the new system will be implemented on a timely basis or that
total expenditures will not exceed $2 million. Management does not anticipate
that the expenditure of such funds to implement the new computer system will
have a material impact on the Company's results of operations, liquidity, or
capital resources. In the event this information system is not implemented in a
timely fashion, management will evaluate other available options to revise its
computer programs, as necessary, for the effect on the year 2000 problem
including, in a worst case scenario, relying on manual record keeping, until
full compliance is achieved.
The Company has reviewed its material relationships with third parties
such as vendors and evaluated the consequences of third party year 2000 problems
on the Company. The Company is requiring contract letters of compliance from all
vendors. The Company does not believe year 2000 problems of these third parties
pose a material risk to the Company. However, because the Company is in a
regulated industry and indirectly relies on only a few sources for a substantial
portion of its revenues, the Company is dependent upon those entities' efforts
to address their own year 2000 issues. Should any such third parties experience
year 2000 related disruptions, it could have a material adverse impact on the
Company's business, results of operations, liquidity, or financial condition.
For example, as with all postsecondary education-oriented businesses whose
students receive governmental financial aid, the Company's operations and
liquidity depend upon the student funding provided by Title IV Programs for its
students. Processing of applications for this funding is handled by the
Department of Education's computer systems. The Company currently uses the
latest version of Department of Education software which is year 2000 compliant.
IMPACT OF INFLATION
The Company does not believe its operations have been materially
affected by inflation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
No response is required to this item.
11
<PAGE> 14
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Shareholders
On Thursday, June 10, 1999, the Company held its Annual Meeting of
Shareholders. At the meeting, the following persons were elected to serve on the
Company's Board of Director's for a term of one year and until their successors
are elected and have qualified: Steve Bostic, Paul D. Beckham, Fred C. Davison,
Gaylen D. Kemp, J. Robert Fitzgerald, Ronald P. Hogan, Gerald Tellefsen, and A.
Reza Jafari. The number of votes cast for and against the election of each
nominee for director was as follows:
<TABLE>
<CAPTION>
Authority
to Vote
Director For Withheld
- ------------------------- ------------ --------
<S> <C> <C>
Steve Bostic 66,976,345 14,900
Paul D. Beckham 66,976,420 14,825
Fred C. Davison 66,976,420 14,825
Gaylen D. Kemp 66,976,420 14,825
J. Robert Fitzgerald 66,976,420 14,825
Ronald P. Hogan 66,976,420 14,825
Gerald Tellefsen 66,976,420 14,825
A. Reza Jafari 66,971,195 20,050
</TABLE>
In addition, the Company's shareholders approved the proposal to adopt an
Employee Stock Purchase Plan. The number of votes cast in favor of adoption of
the proposal was 66,433,769 and the number of votes cast against adoption of the
proposal was 21,400. There were 620 abstentions and broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<S> <C> <C>
10.5.1 - First Amendment to Credit Agreement dated as of May 27,
1999 between the Company and First Union National Bank
27 - Financial Data Schedule (for SEC use only)
</TABLE>
(b) Reports on Form 8-K. One report on Form 8-K dated May 26,
1999 was filed relating to the resignation of A. Reza
Jafari.
12
<PAGE> 15
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: August 16, 1999 By: /s/ Steve Bostic
---------------------
Steve Bostic, President and
Chief Executive Officer
(principal executive officer)
Date: August 16, 1999 By: /s/ Daniel D. Moore
------------------------
Daniel D. Moore, Chief Financial
Officer (principal financial and
accounting officer)
<PAGE> 1
EXHIBIT 10.5.1
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made and
entered into as of the 27th day of May, 1999, by and between EDUTREK
INTERNATIONAL, INC., a Georgia corporation ("Borrower"), the undersigned
Guarantors party hereto (the "Guarantors") and FIRST UNION NATIONAL BANK
("Lender").
W I T N E S S E T H:
WHEREAS, Borrower and Lender are a party to that certain Credit
Agreement, dated as of March 25, 1999 (the "Credit Agreement") pursuant to which
Lender made available to Borrower a $10,000,000 revolving line of credit (the
"Original Line of Credit"); and
WHEREAS, Borrower has requested that Lender make available revolving
credit loans in excess of the amount permitted by the Original Line of Credit
and Lender, subject to the terms and conditions hereof, has agreed to such
request;
NOW, THEREFORE, for and in consideration of the foregoing premises, the
mutual promises, covenants and agreements contained herein, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. DEFINITIONS. All capitalized terms used herein and not expressly
defined herein shall have the same respective meanings given to such terms in
the Credit Agreement.
2. AMENDMENTS. Subject to the conditions contained herein, the Credit
Agreement is hereby amended as follows:
2.1. DEFINITION OF AVAILABLE COMMITMENT. The
definition of "Available Commitment" contained in Section 1.1 of the
Credit Agreement is hereby amended by deleting such definition in its
entirety, and substituting in lieu thereof a new definition, to read as
follows:
"Available Commitment" means at any time, an amount
equal to the excess, if any, of (a) the aggregate amount of
the Commitment over (b) the sum of (i) the outstanding
principal amount of the Loans plus (ii) the outstanding
principal or face amount of the L/C Obligations.
2.2. DEFINITION OF COMMITMENT. The definition of
"Commitment" contained in Section 1.1 of the Credit Agreement is hereby
amended by deleting such definition in its entirety, and substituting
in lieu thereof a new definition, to read as follows:
<PAGE> 2
"Commitment" means collectively, the Facility A
Commitment and the Facility B Commitment.
2.3. DEFINITION OF CREDIT FACILITY. The definition of
"Credit Facility" contained in Section 1.1 of the Credit Agreement is
hereby amended by deleting such definition in its entirety, and
substituting in lieu thereof a new definition, to read as follows:
"Credit Facility" means, unless limited by a
reference to a specific facility, each of the revolving credit
facilities established pursuant to Article 2 hereof and the
letter of credit facility established pursuant to Article 3
hereof.
2.4. DEFINITION OF LEVERAGE RATIO. The definition of
"Leverage Ratio" contained in Section 1.1 of the Credit Agreement is
hereby amended by deleting such definition in its entirety, and
substituting in lieu thereof a new definition, to read as follows:
"Leverage Ratio" means, for Borrower and its
consolidated Subsidiaries at any date of determination
thereof, the ratio of (a) Funded Debt of Borrower and its
consolidated Subsidiaries as of such date of determination, to
(b) EBITDA of Borrower and its consolidated Subsidiaries for
the twelve (12) month period ending on or most recently ended
prior to such date, determined in each case on a consolidated
basis for Borrower and its Subsidiaries in accordance with
GAAP.
2.5. DEFINITION OF LOAN. The definition of "Loan"
contained in Section 1.1 of the Credit Agreement is hereby amended by
deleting such definition in its entirety, and substituting in lieu
thereof a new definition, to read as follows:
"Loan" means any revolving loan made to the Borrower
pursuant to Section 2.1, whether a Facility A Loan or a
Facility B Loan, and all such Loans collectively as the
context requires.
2.6. DEFINITION OF LOAN DOCUMENTS. The definition of
"Loan Documents" contained in Section 1.1 of the Credit Agreement is
hereby amended by deleting such definition in its entirety, and
substituting in lieu thereof a new definition, to read as follows:
"Loan Documents" means, collectively, this Agreement,
the Facility A Note, the Facility B Note, any Hedging
Agreement executed by Lender or any of its Affiliates, the
Applications, the Security Documents and each other document,
instrument and agreement executed and delivered by the
Borrower, its Subsidiaries or their counsel in connection with
this Agreement or otherwise referred to herein or contemplated
hereby, all as may be amended, restated or otherwise modified.
2
<PAGE> 3
2.7. DEFINITION OF NOTE. The definition of "Note"
contained in Section 1.1 of the Credit Agreement is hereby amended by
deleting such definition in its entirety, and substituting in lieu
thereof a new definition, to read as follows:
"Note" means, collectively, the Facility A Note and
the Facility B Note.
2.8. NEW DEFINITIONS. Section 1.1 of the Credit
Agreement is hereby further amended by adding thereto in appropriate
alphabetical order the following new definitions:
"Capital Expenditures" means, with respect to any
Person, for any period of calculation thereof, all
expenditures made and liabilities incurred for the acquisition
of assets during such period which are not, in accordance with
GAAP, treated as expense items for such Person in such period
or as a prepaid expense applicable to a future period or
periods.
"Facility A" means the Credit Facility established
pursuant to Section 2.1(a) hereof
"Facility A Commitment" means the obligation of the
Lender to make Loans to, or to issue Letters of Credit for the
account of, the Borrower pursuant to Section 2.1(a) hereof in
an aggregate principal at any time outstanding not to exceed
$10,000,000, as the same may be reduced or modified at any
time or from time to time pursuant to the terms hereof.
"Facility A Loan" means any revolving loan made to
the Borrower pursuant to Section 2.1(a), and all such Loans
collectively as the context requires.
"Facility A Note" means the Revolving Credit Note
made by the Borrower payable to the order of the Lender,
substantially in the form of Exhibit A-1 hereto, evidencing
the Facility A Credit Facility, and any amendments and
modifications thereto, any substitutes therefor, and any
replacements, restatements, renewals or extension thereof, in
whole or in part.
"Facility B" means the Credit Facility established
pursuant to Section 2.1(b) hereof
"Facility B Commitment" means the obligation of the
Lender to make Loans to the Borrower pursuant to Section
2.1(b) hereof in an aggregate principal at any time
outstanding not to exceed during the applicable periods set
forth below, the amount set forth below in respect of each
such period:
3
<PAGE> 4
PERIOD: FACILITY AMOUNT
First Amendment Effective $ 650,000
Date - 05/31/99
06/01/99 - 06/30/99 $2,800,000
07/01/99 - 08/31/99 $3,300,000
09/01/99 - 09/30/99 $2,800,000
10/01/99 - 10/31/99 $2,300,000
11/01/99 - 12/30/99 $1,300,000
Thereafter $ 0
as the same may be reduced or modified at any time or from
time to time pursuant to the terms hereof.
"Facility B Loan" means any revolving loan made to
the Borrower pursuant to Section 2.1(b), and all such Loans
collectively as the context requires.
"Facility B Note" means the Revolving Credit Note
made by the Borrower payable to the order of the Lender,
substantially in the form of Exhibit B-2 hereto, evidencing
the Facility B Credit Facility, and any amendments and
modifications thereto, any substitutes therefor, and any
replacements, restatements, renewals or extension thereof, in
whole or in part.
"Facility B Termination Date" means the earliest of
(a) December 31, 1999, (b) the date of termination by the
Borrower pursuant to Section 2.5(a), (c) the Termination Date;
and (d) the date of termination by the Lender pursuant to
Section 11.2(a).
"First Amendment" shall mean that certain First
Amendment to Credit Agreement, dated as of May 27, 1999,
between Borrower and Lender.
"First Amendment Effective Date" shall mean that date
on which all of the conditions precedent set forth in Section
3 of the First Amendment have been satisfied and the First
Amendment has become effective.
2.9. REVOLVING LOANS. Section 2.1 of the Credit
Agreement is hereby amended by deleting such section in its entirety,
and substituting in lieu thereof a new Section 2.1, to read as follows:
SECTION 2.1. Revolving Credit Loans.
(a) Facility A Loans. Subject to the terms
and conditions of this Agreement, Lender agrees to make
Facility A Loans to
4
<PAGE> 5
the Borrower from time to time from the Closing Date through
the Termination Date as requested by the Borrower in
accordance with the terms of Section 2.2 provided, that (i)
the aggregate principal amount of all outstanding Facility A
Loans (after giving effect to any amount requested), when
aggregated with the outstanding principal amount of the L/C
Obligations, shall not exceed the Facility A Commitment and
(ii) the aggregate principal amount of all outstanding Loans
(after giving effect to any amount requested), when aggregated
with the outstanding principal amount of the L/C Obligations,
shall not exceed the aggregate amount of the Commitments.
Subject to the terms and conditions hereof, the Borrower may
borrow, repay and reborrow Facility A Loans hereunder until
the Termination Date.
(b) Facility B Loans. Subject to the terms
and conditions of this Agreement, Lender agrees to make
Facility B Loans to the Borrower from time to time from the
First Amendment Effective Date through the Facility B
Termination Date as requested by the Borrower in accordance
with the terms of Section 2.2 provided, that (i) the aggregate
principal amount of all outstanding Facility B Loans (after
giving effect to any amount requested) shall not exceed the
Facility B Commitment as then in effect and (ii) the aggregate
principal amount of all outstanding Loans (after giving effect
to any amount requested), when aggregated with the outstanding
principal amount of the L/C Obligations, shall not exceed the
aggregate amount of the Commitments. Subject to the terms and
conditions hereof, the Borrower may borrow, repay and reborrow
Facility B Loans hereunder until the Facility B Termination
Date. The Borrower may not borrow any Facility B Loans unless
and until Facility A has been fully drawn.
2.10. REPAYMENT OF LOANS. The Credit Agreement is
hereby further amended by deleting Section 2.3 thereof in its entirety
and by substituting therefor a new Section 2.3 to read as follows:
SECTION 2.3 Repayment of Loans.
(a) Repayment of Facility A Loans. The Borrower
shall repay the outstanding principal amount of all Facility A
Loans in full, together with all accrued but unpaid interest
thereon, on the Termination Date.
(b) Repayment of Facility B Loans. The Borrower
shall repay the Facility B Loans (i) on the date of any
reduction in the Facility B Commitment, to the extent the
principal amount of the outstanding Facility B Loans exceeds
the Facility B Commitment, giving effect to such reduction and
(ii) in full, on the Facility B Termination Date.
5
<PAGE> 6
(c) Optional Repayments. The Borrower may at any
time and from time to time repay the Loans, in whole or in
part, upon delivery of notice, in the form attached hereto as
Exhibit D (a "Notice of Prepayment") specifying the date and
amount of repayment; provided, however, that except as
provided in Section 3.1 hereof, no Facility A Loans may be
repaid until the outstanding Facility B Loans have been repaid
in full. If any such notice is given, the amount specified in
such notice shall be due and payable on the date set forth in
such notice. Partial repayments shall be in an aggregate
amount of at least $100,000 or a whole multiple of $10,000 in
excess thereof.
2.11. NOTES. The Credit Agreement is hereby amended
by deleting Section 2.4 thereof in its entirety, and substituting in
lieu thereof the following new Section 2.4 to read as follows:
SECTION 2.4. Notes.
(a) The Facility A Loans and the obligation
of the Borrower to repay the Facility A Loans shall be
evidenced by a Facility A Note executed by the Borrower
payable to the order of the Lender representing the Borrower's
obligation to pay the Facility A Commitment or, if less, the
aggregate unpaid principal amount of all Facility A Loans made
and to be made to the Borrower hereunder, plus interest and
all other fees, charges and other amounts due thereon. The
Facility A Note shall be dated the date of issuance thereof
and shall bear interest on the unpaid principal amount thereof
at the applicable interest rate per annum specified in Section
4.1.
(b) The Facility B Loans and the obligation
of the Borrower to repay the Facility B Loans shall be
evidenced by a Facility B Note executed by the Borrower
payable to the order of the Lender representing the Borrower's
obligation to pay the Facility B Commitment or, if less, the
aggregate unpaid principal amount of all Facility B Loans made
and to be made to the Borrower hereunder, plus interest and
all other fees, charges and other amounts due thereon. The
Facility B Note shall be dated the First Amendment Effective
Date and shall bear interest on the unpaid principal amount
thereof at the applicable interest rate per annum specified in
Section 4.1.
2.12. COMMITMENT REDUCTION. The Credit Agreement is
hereby amended by deleting Section 2.5 thereof in its entirety, and
substituting in lieu thereof the following new Section 2.5 to read as
follows:
SECTION 2.13 Permanent Reduction of the Commitment.
6
<PAGE> 7
(a) The Borrower shall have the right at any time
and from time to time, upon at least five (5) Business Days
prior written notice to the Lender, to permanently reduce, in
whole at any time or in part from time to time, without
premium or penalty, either the Facility A Commitment or the
Facility B Commitment in an aggregate principal amount not
less than $100,000 or any whole multiple of $10,000 in excess
thereof.
(b) Each permanent reduction permitted or required
pursuant to this Section 2.5 shall be accompanied by a payment
of principal sufficient to reduce the sum of the aggregate
outstanding Facility A Loans plus the outstanding L/C
Obligations after such reduction to the Facility A Commitment
as so reduced and/or to reduce the sum of the aggregate
outstanding Facility B Loans after such reduction to the
Facility B Commitment as so reduced. Any reduction of the
Commitment to zero shall be accompanied by payment of all
outstanding Obligations (and furnishing of cash collateral
satisfactory to the Lender for all L/C Obligations).
2.14. LETTERS OF CREDIT. The Credit Agreement is
hereby amended by deleting Section 3.1 thereof in its entirety, and
substituting in lieu thereof the following new Section 3.1 to read as
follows:
SECTION 3.1 L/C Commitment. Subject to the terms and
conditions hereof, the Lender agrees to issue standby letters
of credit ("Letters of Credit") for the account of the
Borrower on any Business Day from the Closing Date through but
not including the Termination Date in such form as may be
approved from time to time by the Lender; provided, that the
Lender shall have no obligation to issue any Letter of Credit
if, after giving effect to such issuance, (a) the L/C
Obligations would exceed the L/C Commitment, (b) the Available
Commitment would be less than zero or (c) the sum of the
aggregate amount of the L/C Obligations and the aggregate
principal amount of the Facility A Loans would exceed the
Facility A Commitment. Each Letter of Credit shall (i) be
denominated in Dollars in a minimum amount of $10,000, (ii) be
a standby letter of credit issued to support obligations of
the Borrower or any of its Subsidiaries, contingent or
otherwise, incurred in the ordinary course of business, (iii)
expire on a date satisfactory to the Lender, which date shall
be no later than the Termination Date and (iv) be subject to
the Uniform Customs and, to the extent not inconsistent
therewith, the laws of the State of Georgia. The Lender shall
not at any time be obligated to issue any Letter of Credit
hereunder if such issuance would conflict with, or cause the
Lender to exceed any limits imposed by, any Applicable Law.
References herein to "issue" and derivations thereof with
respect to Letters of Credit shall also include extensions or
modifications of any existing Letters of Credit, unless the
context otherwise requires. All Letters of Credit will be
issued under
7
<PAGE> 8
Facility A. In the event Borrower requests a Letter of Credit
at a time when Facility A is fully utilized but Facility B is
unutilized in an amount equal to or greater than the amount of
the Letter of Credit requested, then simultaneously with its
request for such Letter of Credit Borrower shall be deemed to
have requested a Facility B Loan in a principal amount equal
to the Letter of Credit requested. Such Facility B Loan shall
be made simultaneously with the issuance of such Letter of
Credit and the proceeds of such Facility B Loans shall be used
to prepay the outstanding Facility A Loans to the extent
necessary to allow such Letter of Credit to be issued.
2.15. LETTER OF CREDIT REIMBURSEMENT. The Credit
Agreement is hereby amended by deleting the last sentence of Section
3.4 thereof in its entirety, and substituting in lieu thereof the
following new sentence to read as follows:
If the Borrower fails to timely reimburse the Lender on the
date the Borrower receives the notice referred to in this
Section 3.4, the Borrower shall be deemed to have timely given
a Notice of Borrowing hereunder to the Lender requesting a
Facility A Loan on such date in an amount equal to the amount
of such drawing and, subject to the satisfaction or waiver of
the conditions precedent specified in Article 5, the Lender
shall make a Facility A Loan in such amount, the proceeds of
which shall be applied to reimburse the Lender for the amount
of the related drawing and costs and expenses.
2.16. INTEREST. Section 4.1 of the Credit Agreement
is hereby amended by deleting subsections (a), (b) and (c) thereof in
their entirely and substituting in lieu thereof new subsections (a),
(b) and (c) to read as follows:
(a) Interest Rate. Subject to the provisions of
this Section 4.1, (i) the aggregate principal amount of the
Facility A Loans or any portion thereof shall bear interest at
the LIBOR Market Index Rate plus 2.75%, as that rate may
change from day to day in accordance with changes in the LIBOR
Market Index Rate and (ii) the aggregate principal amount of
the Facility B Loans shall bear interest at the Base Rate plus
2.00%, as that rate may change from day to day in accordance
with changes in the Prime Rate or the Federal Funds Rate.
(b) Circumstances Affecting LIBOR Market Index Rate
Availability. If the Lender shall determine that, by reason of
circumstances affecting the foreign exchange and interbank
markets generally, deposits in eurodollars, in the applicable
amounts are not being quoted via Telerate Page 3750 or offered
to the Lender, then the Lender shall forthwith give notice
thereof to the Borrower. Thereafter, until the Lender notifies
the Borrower that such circumstances no longer exist, the
aggregate principal
8
<PAGE> 9
amounts of the Facility A Loans or any portion thereof, shall
bear interest at the Base Rate.
(c) Laws Affecting LIBOR Market Index Rate
Availability. If, after the date hereof, the introduction of,
or any change in, any Applicable Law or any change in the
interpretation or administration thereof by any Governmental
Authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the
Lender with any request or directive (whether or not having
the force of law) of any such Authority, central bank or
comparable agency, shall make it unlawful or impossible for
the Lender to quote or maintain Loans based on the LIBOR
Market Index Rate, the Lender shall promptly give notice
thereof to the Borrower. Thereafter, until the Lender notifies
the Borrower that such circumstances no longer exist, the
aggregate principal amounts of the Facility A Loans or any
portion thereof, shall bear interest at the Base Rate.
2.17. CERTIFICATION. Section 6.1 of the Credit
Agreement is hereby amended by adding at the end thereof a new
subsection (aa) to read as follows:
(aa) CERTIFICATION. The schools operated by Borrower
and its Subsidiaries (i) have been accredited by the Southern
Association of Colleges and Schools or other accrediting
agency approved by the United States Department of Education
("DOE"); (ii) have been provisionally certified by the DOE for
participation in the financial assistance programs under Title
IV of the Higher Education Act of 1965, as amended (the "Title
IV Programs") and (iii) are eligible in all other respects for
participation in the Title IV Programs. Borrower knows of no
reason why it will not be given full certification by the DOE
for participation in the Title IV Programs prior to the
expiration of such provisional certification. Borrower has not
received any notice of any termination of such accreditation,
certification or eligibility and knows of no event or
condition which would provide a basis for the termination of
such accreditation, certification or eligibility.
2.18. INTERIM FINANCIAL STATEMENTS. Section 7.1 of
the Credit Agreement is hereby amended by deleting subsection (a)
thereof in its entirety and by substituting therefor a new subsection
(a) to read as follows:
(a) Monthly Financial Statements. As soon as
practicable and in any event within twenty-five (25) days
after the end of each month, unaudited consolidated and
consolidating balance sheets of the Borrower and its
Subsidiaries as of the close of such month and unaudited
consolidated and consolidating statements of operations and
cash flows for the month then ended and that portion of the
Fiscal Year then ended, including the notes thereto, all in
reasonable detail setting forth in
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<PAGE> 10
comparative form the corresponding figures for the preceding
Fiscal Year and prepared by the Borrower in accordance with
GAAP (except as to the absence of footnotes) and, if
applicable, containing disclosure of the effect on the
financial position or results of operations of any change in
the application of accounting principles and practices during
the period, and certified by the chief financial officer of
the Borrower to present fairly in all material respects the
financial condition of the Borrower and its Subsidiaries as of
their respective dates and the results of operations of the
Borrower and its Subsidiaries for the respective periods then
ended, subject to normal year end adjustments.
2.19. MONTHLY CASH FLOW PROJECTION. Section 7.1 of
the Credit Agreement is hereby further amended by added at the end
thereof a new subsection (d) to read as follows:
(d) Cash Flow Projection. So long as the Facility B
Commitment is in effect or any Facility B Loans remain
outstanding, not later than the twenty-fifth (25th) day of
each month, an updated cash flow projection for the month
immediately following such month.
2.20. LEVERAGE RATIO. Section 9.3 of the Credit
Agreement is hereby amended by deleting such Section in its entirety,
and substituting in lieu thereof a new Section 9.3 to read as follows:
SECTION 9.3 Leverage Ratio. Permit Borrower's
Leverage Ratio to be more than (a) 6.15 to 1.00 for the fiscal
quarter of Borrower ending December 31, 1999 or (b) 2.50 to
1.00 as of the last day of any fiscal quarter thereafter.
2.21. RATIO OF ACTUAL TO BUDGETED REVENUES. Section
9.5 of the Credit Agreement is hereby amended by deleting such Section
in its entirety, and substituting in lieu thereof a new Section 9.5, to
read as follows:
SECTION 9.5. Ratio of Actual to Budgeted Revenues.
For the period from the First Amendment Closing Date to and
including December 31, 1999, permit Borrower's Revenues for
each month to be less than ninety-five percent (95%) of the
revenues budgeted by Borrower for such fiscal quarter in the
budget set forth on Schedule 9.5 hereto.
2.22. ADDITIONAL FINANCIAL COVENANTS. The Credit
Agreement is hereby further amended by adding at the end of Article 9
thereof new Sections 9.7 and 9.8 to read as follows:
SECTION 9.7. Capital Expenditures. Permit the Capital
Expenditures made or committed to by Borrower and its
Subsidiaries during the period from
10
<PAGE> 11
May 1, 1999 to and including December 31, 1999 to exceed
$5,750,000, determined on a consolidated basis for Borrower
and its Subsidiaries in accordance with GAAP.
SECTION 9.8. Accounts Payable. Permit at any time
more than ten percent (10%) of the aggregate amount of the
trade accounts payable of Borrower and its Subsidiaries to
remain unpaid more than sixty (60) days from the date of the
invoice therefor, determined on a consolidated basis for
Borrower and its Subsidiaries in accordance with GAAP.
2.23. LIMITATIONS ON DIVIDENDS AND DISTRIBUTIONS.
Section 10.6 of the Credit Agreement is hereby amended by deleting ";
and" at the end of subsection (b) thereof, by substituting a period
therefor and by deleting subsection (c) thereof in its entirety.
2.24. FORM OF NOTES. The Credit Agreement is hereby
further amended by deleting Exhibit A attached thereto, and
substituting in lieu thereof new Exhibits A-1 and A-2 in the forms of
Exhibit A-1 and A-2 attached hereto, respectively.
2.25. FORM OF OFFICER'S CERTIFICATE. The Credit
Agreement is hereby further amended by deleting Exhibit E attached
thereto, and substituting in lieu thereof a new Exhibit E in the form
of Exhibit E attached hereto.
2.26. BUDGET. The Credit Agreement is hereby further
amended by deleting Schedule 9.5 attached thereto, and substituting in
lieu thereof a new Schedule 9.5 in the form of Schedule 9.5 attached
hereto.
3. CONDITIONS PRECEDENT. The amendments and consents contained herein,
shall not become effective unless and until the Lender shall have received each
of the following instruments, documents and agreements:
(a) this Amendment, duly executed and delivered by the
Borrower and each Guarantor;
(b) the Facility A Note and the Facility B Notes, duly
executed and delivered by the Borrower;
(c) a certificate from the chief executive officer or chief
financial officer of the Borrower, in form and substance satisfactory
to the Lender, to the effect that all representations and warranties of
the Borrower contained in the Credit Agreement, this Amendment and the
other Loan Documents are true, correct and complete; that giving effect
to this Amendment the Borrower is not in violation of any of the
covenants contained in the Credit Agreement and the other Loan
Documents; and that, after giving effect to this Amendment, no Default
or Event of Default has occurred and is continuing.
11
<PAGE> 12
(d) a certificate of the secretary or assistant secretary of
each Credit Party certifying that (i) the certificate or articles of
incorporation and by-laws of such Credit Party, or the comparable
organizational documents of such Credit Party, have not been amended,
modified or supplemented since the Closing Date and (ii) attached
thereto is a true and complete copy of resolutions duly adopted by the
Board of Directors of the Borrower authorizing the execution, delivery
and performance of this Amendment and the other Amendment Documents to
which it is a party; and as to the incumbency and genuineness of the
signature of each officer of such Credit Party executing the Amendment
Documents to which it is a party.
(e) favorable opinions of counsel to the Borrower and the
Guarantors addressed to the Lender with respect to the Borrower, the
Guarantors, this Amendment, the Loan Documents and such other matters
as the Lender shall reasonably request.
(f) such other instruments, documents and agreements as the
Lender may reasonably request.
4. ARRANGEMENT FEES. In consideration of Lender entering into this
Amendment, Borrower hereby agrees to pay the following arrangement fees to
Lender:
4.1. FIXED ARRANGEMENT FEE. Borrower agrees to pay a fixed
arrangement fee equal to $250,000 payable on the earlier to occur of
(a) the termination of the Credit Agreement and the repayment of the
Obligations in full and (b) January 3, 2000. Borrower and each
Guarantor hereby acknowledges and agrees that such fee has been fully
earned by Lender, is non-refundable and is irrevocably payable on the
due date thereof without offset, deduction, counterclaim.
4.2. CONTINGENT ARRANGEMENT FEE. Borrower also agrees to pay a
contingent arrangement fee equal to the lesser of (a) $250,000 and (b)
0.50% of the increase in the Market Capitalization (as such term is
hereinafter defined) of Borrower between the date hereof and the
earlier of (i) December 31, 1999 and (ii) the date the Credit Agreement
is terminated and the Obligations are repaid in full, payable on the
earlier of January 3, 2000 and the date of such termination and
repayment. As used herein, "Market Capitalization" as of any date shall
be an amount equal to the number of issued and outstanding shares of
capital stock of Borrower multiplied by the average closing price of
Borrower's Class A Common Stock for the 20 consecutive date period
ending on the day immediately preceding such date.
5. REPRESENTATIONS AND WARRANTIES; NO DEFAULT. The Borrower and each of
the Guarantors (individually a `Credit Party and collectively, the "Credit
Parties") hereby jointly and severally represent and warrant to the Lender that
(a) all of Credit Parties' representations and warranties contained in the
Credit Agreement, the other Loan Documents and this Amendment are true and
correct on and as of the date of this Amendment (or, if any such representation
or warranty is expressly stated to have been made as of a specific date, as of
such specific date); (b) no Default or Event of Default has occurred and is
continuing as of such date under any Loan Document; (c) each Credit Party has
the power and authority to enter into this Amendment and the instruments,
documents
12
<PAGE> 13
and agreements executed and delivered pursuant hereto or in connection
herewith (the "Amendment Documents") and to perform all of its obligations
hereunder and thereunder; (d) the execution, delivery and performance of this
Amendment and the Amendment Documents have been duly authorized by all necessary
corporate or partnership action on the part of each Credit Party; (e) this
Amendment and the Amendment Documents are the legal, valid and binding
obligations of the Credit Parties, enforceable in accordance with their
respective terms, except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar state or federal debtor relief
laws from time to time in effect which affect the enforcement of creditors'
rights in general and the availability of equitable remedies; and (f) the
execution and delivery of this Amendment and the Amendment Documents and
performance thereof by the Credit Parties do not and will not violate the
Certificate or Articles of Incorporation, By-laws or other organizational
documents of any Credit Party and do not and will not violate or conflict with
any law, order, writ, injunction, or decree of any court, administrative agency
or other governmental authority applicable to any Credit Party or its
properties.
6. REAFFIRMATION OF LOAN DOCUMENTS.
(a) Each of the Credit Parties other than American European
acknowledges and agrees that the portion of the Obligations of Borrower
arising under Facility B or under this Amendment, including, but not
limited to, the Facility B Loans:
(i) are included in the "Guaranteed Obligations," as
such term is defined in the Guaranty, and are guaranteed by
the Guaranty;
(ii) are included in the "Secured Obligations," as
such term is defined in the Security Agreement, and are
secured by the Security Agreement;
(iii) are included in the "Secured Obligations," as
such term is defined in the Pledge Agreement, and are secured
by the Pledge Agreement;
(b) Lender, American European and the other Credit Parties
agree that the obligations of American European under the Guaranty,
Security Agreement and Pledge Agreement are limited to that portion of
the Obligations arising under Facility A or otherwise arising out of
the Credit Agreement and the Loan Documents but not arising out of the
Facility B.
(c) Each of the Credit Parties hereby reaffirms its
obligations under the Loan Documents, and acknowledges and agrees that
each of the Loan Documents to which such Credit Party is a party, and
the obligations of such Credit Party thereunder, remain in full force
and effect, without release, diminution or impairment, notwithstanding
the execution and delivery of this Amendment or any other agreement,
document or instrument in connection therewith and notwithstanding the
limitation of American European's liability pursuant to the forgoing
Section 6(b).
7. EXPENSES. The Credit Parties, jointly and severally, agree to pay,
immediately upon demand by the Lender, all costs, expenses, reasonable
attorneys' fees and other charges and expenses
13
<PAGE> 14
actually incurred by the Lender in connection with the negotiation, preparation,
execution and delivery of this Agreement and any other instrument, document,
agreement or amendment executed in connection with this Agreement.
8. DEFAULTS HEREUNDER. The breach of any representation, warranty or
covenant contained herein or in any document executed in connection herewith, or
the failure to serve or comply with any term or agreement contained herein shall
constitute an Event of Default under the Credit Agreement and the Lender shall
be entitled to exercise all rights and remedies it may have under the Credit
Agreement, any other documents executed in connection therewith and applicable
law.
9. REFERENCES. All references in the Credit Agreement and the Loan
Documents to the Credit Agreement shall hereafter be deemed to be references to
the Credit Agreement as amended hereby and as the same may hereafter be amended
from time to time.
10. LIMITATION OF AGREEMENT. Except as especially set forth herein,
this Amendment shall not be deemed to waive, amend or modify any term or
condition of the Credit Agreement, each of which is hereby ratified and
reaffirmed and which shall remain in full force and effect, nor to serve as a
consent to any matter prohibited by the terms and conditions thereof.
11. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and any party hereto may execute any counterpart, each of which,
when executed and delivered, will be deemed to be an original and all of which,
taken together will be deemed to be but one and the same agreement.
12. FURTHER ASSURANCES. Borrower agrees to take such further action as
the Lender shall reasonably request in connection herewith to evidence the
amendments herein contained to the Credit Agreement.
13. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the successors and permitted assigns of the parties
hereto.
14. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Georgia, without regard to
principles of conflicts of law.
15. NO CLAIM. Each Credit Party hereby represents, warrants,
acknowledges and agrees to and with the Lender that as of the date hereof (a)
such Credit Party neither holds nor claims any right of action, claim, cause of
action or damages, either at law or in equity, against the Lender, its officers,
directors, agents, employees or Affiliates, or any of them, which arises from,
may arise from, allegedly arise from, are based upon or are related in any
manner whatsoever to the Credit Agreement and the Loan Documents or which are
based upon acts or omissions of the Lender, any such officer, director, agent,
employee or Affiliate of Lender, or any of them, in connection therewith and (b)
the Obligations are absolutely owed to the Lender, without offset, deduction or
counterclaim.
14
<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
under seal as of the date first written above.
CREDIT PARTIES:
BORROWER:
[CORPORATE SEAL] EDUTREK INTERNATIONAL, INC.
By:
Name:
Title:
15
<PAGE> 16
GUARANTORS:
[CORPORATE SEAL] EDUTREK SYSTEMS, INC.
By:
----------------------------------------
Name:
Title:
[CORPORATE SEAL] AMERICAN INTERCONTINENTIAL
UNIVERSITY, INC.
By:
Name:
Title:
[CORPORATE SEAL] AMERICAN COLLEGE IN LONDON, LTD, U.S.
By:
Name:
Title:
[CORPORATE SEAL] AMERICAN EUROPEAN MIDDLE EAST
CORPORATION, LLC
By: American College in London, Ltd., U.S.
By:
Name:
Title:
(signatures continued on next page)
16
<PAGE> 17
(signatures continued from previous page)
LENDER:
FIRST UNION NATIONAL BANK
By:
-------------------------------------
Name:
Title:
17
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