The second largest student travel firm has a turnover of $600 million and employs 15,000 people in 200 offices worldwide but its financial difficulties may change all that, writes John McManus.

At 8 a.m. Eastern Standard Time on September 11th, the management of USIT was having breakfast in Boston's Four Seasons Hotel.

They were meeting representatives of a Nasdaq-quoted company to discuss placing 35 per cent of a recently acquired US subsidiary.

It was the latest step in a journey which had seen a two-man operation, established in 1956, grow into the world's second-largest student and youth travel business.

Under its chief executive, Mr Gordon Colleary, USIT had become a company turning over $600 million (€694 million) a year and employing 15,000 people in 200 offices worldwide.

The potential of the US operation, Council Travel, was huge. It turned over $230 million, which was only three times more than USIT's Irish operation, despite having access to a student population almost 80 times larger.

The meeting was interrupted shortly after 8.45 a.m. when news broke that a hijacked American Airlines plane had crashed into the north tower of the World Trade Centre in New York.

In the financial turmoil that followed, the complex funding arrangement put in place for the takeover of Council Travel on September 1st quickly unravelled, which had disastrous consequences for USIT.

Ulster Bank cancelled a $7.5 million short-term facility that USIT planned to use to bridge the takeover, which USIT had intended ultimately to be self-financing.

Short-term finance - including the Ulster Bank loan, $2 million from Bank of Scotland and $2.5 million from Cendant - were to be repaid out of the cash assets of Council, which stood at $20 million on August 1st.

The company would have been refinanced through a private placing, and the money raised would be used to develop the US company.

This rather neat plan was scuppered by the events of September 11th. Sales at the US subsidiary collapsed and its suppliers screamed for their cash.

Within weeks, Council's cash balance of $20 million had evaporated and the US operation was unable to pay some $13 million it owed the rest of the USIT group for inter-company trading.

September 11th hit USIT on several fronts. In the aftermath of the attacks, the company's suppliers began seeking cash bonds before they would do business with them.

The total cost to USIT of providing these bonds was estimated at more than €19 million.

One bond in particular became a problem. The International Air Transport Association (IATA) sought a €1.8 million (£1.4 million) bond for the British operation.

Initially, USIT Britain's management believed it could get the money locally, but when it could not be sourced in Britain, the funds were drawn down instead from the Dublin treasury operation.

This drawdown on January 4th initiated the treasury problems which led to National Irish Bank seeking the winding-up this week of USIT Ltd - the treasury company - on foot of an unapproved overdraft of €3.38 million.

The cash situation got steadily worse. A payment of €6.34 million due from the company's Spanish partner - which was expected at the end of December - was postponed to the end of February.

Similarly, a €3 million payment due from the sale of 35 per cent of the Portuguese operation due in mid-December was also deferred.

These delays compounded the already problematic situation where the company had sought extended credit terms from suppliers for the first time in its history.

By early January, the financial crisis was such that the decision was taken to look for a new investor for the whole group.

The company set out to raise €30 million in new equity and a similar amount in short-term debt. The company had pledges for €10 million of new equity, and the mezzanine finance secured by January 12th when it had a crunch meeting with representatives of National Irish Bank.

The meeting did not go well. The bank refused to provide any more money and instead demanded that USIT clear its €3.38 million overdraft.

The bank had been monitoring the account carefully since January 10th and believed USIT executives were writing cheques on the NIB account, even though there was no money to pay them.

In an attempt to keep the account in the black, the executives were writing cheques to it from other USIT bank accounts which were bouncing.

The bank sent KPMG in to look at the accounts, and found a deficit of some €20 million in the treasury operation.

NIB told USIT to lodge €1 million in its NIB account, or the bank would proceed to seek the winding-up of the treasury business.

USIT lodged some $370,000 to the account the next day and told NIB that it was in talks with STA Travel - its larger Swiss-owned rival - about a takeover. STA finally agreed to buy USIT group on January 23rd, but STA's advisers told NIB it had no intention of bailing out the troubled treasury operation and was looking at putting the group into examinership if it felt that was necessary.

On Tuesday last, NIB sought the liquidation of the treasury company - which is owed some €120 million by the other companies in the group. The consequences of this for the USIT group as a whole will become clear in the next few days.

If the company goes into examinership, the liquidator of the treasury company - Mr Ray Jackson of KPMG - will become one of the major creditors.