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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-27248
LEARNING TREE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3133814
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6053 WEST CENTURY BOULEVARD
LOS ANGELES, CA 90045-0028
(310) 417-9700
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK
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 by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]
The aggregate market value of the common stock, $.0001 par value, held by
non-affiliates of the registrant, as of December 16, 1997, was $262,983,000.
(Excludes 11,879,771 shares held by directors and officers of the Registrant
since such persons may be deemed to be affiliates.)
The number of shares of common stock, $.0001 par value, outstanding as of
December 16, 1997, was 21,994,507 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of the registrant to be delivered
to shareholders in connection with the 1998 Annual Meeting of Shareholders are
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Form
10-K.
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
<TABLE>
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PAGE
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<C> <S> <C>
Part I
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 17
Item 3. Legal Proceedings......................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders....................................... 17
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters...................... 18
Item 6. Selected Consolidated Financial Data...................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 20
Item 8. Financial Statements and Supplementary Data................................................ 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures...... 47
Part III
Item 10. Directors and Executive Officers of the Registrant......................................... 47
Item 11. Executive Compensation..................................................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 48
Item 13. Certain Relationships and Related Transactions............................................. 49
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 50
Signatures........................................................................................... 51
</TABLE>
Learning Tree(R), the Learning Tree and Professional Certification logos,
EDUCATION IS OUR BUSINESS(R), EDUCATION YOU CAN TRUST(R), WE BRING EDUCATION TO
LIFE(R), PRODUCTIVITY THROUGH EDUCATION(R), LearnTrack(TM), Training
Passport(R), Training Advantage(R), Alumni Gold(TM), TRAINING YOU CAN TRUST(TM),
learningtree.com(TM), 800-THE-TREE(R), 800-LRN-TREE(R) and 888-CBT-TREE(R) are
trademarks and service marks of the Company.
In addition to the trademarks and service marks of the Company, this Annual
Report on Form 10-K also contains trademarks and trade names of other companies.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed herein and in the caption "Risk Factors" in the Company's
Registration Statement on Form S-1 filed on September 20, 1996.
OVERVIEW
Learning Tree International, Inc. ("Learning Tree" or the "Company"), is a
leading worldwide provider of education and training to information technology
("IT") professionals in business and government organizations. The Company
develops, markets and delivers a broad, proprietary library of instructor-led
course titles focused on client/server systems, Internet/intranet technologies,
computer networks, operating systems, databases, programming languages,
graphical user interfaces, object-oriented technology and IT management. The
Company also tests and certifies IT professionals in 21 IT job functions, and
its courses are recommended for college credit by the American Council on
Education. In addition to its instructor-led courses, the Company also provides
a line of multimedia computer-based training courses ("CBT") incorporating audio
and graphical elements that are designed for both stand-alone CD-ROM and
network-based delivery. The Company is paid directly by the employers of its
course participants and does not receive funding from any government aid or loan
programs. As a result, the Company does not depend on government appropriations
for those programs and is not subject to certain governmental regulations.
THE INFORMATION TECHNOLOGY EDUCATION AND TRAINING MARKET
The market for IT training is driven by technological change. As the rate of
this change accelerates, organizations find themselves increasingly hampered in
their ability to exploit the latest information technologies because their IT
professionals lack up-to-date knowledge and skills. Most organizations are
addressing this challenge by retraining their existing IT professionals. An
International Data Corporation ("IDC") study estimates that the 1996 worldwide
market for all IT training was $16.4 billion. The training of IT professionals,
such as programmers, analysts, and engineers, represents the majority of the
market for IT training.
The market for training IT professionals is driven by several factors. These
factors include: (i) the continuous introduction and evolution of new
client/server hardware and software technologies; (ii) the proliferation of
Internet and intranet applications; (iii) the proliferation of computers and
networks throughout all levels of organizations; (iv) the shift from legacy
mainframe systems to new client/server technologies; and (v) periodic corporate
downsizing, resulting in increased training requirements for employees who must
perform new job functions or multiple job tasks that require knowledge of varied
software applications and technologies. Furthermore, since many businesses use
hardware and software products provided by a variety of vendors, their IT
professionals require training on an increasing number of products and
technologies which apply across vendors, platforms and operating systems.
While much of the training for IT professionals continues to be provided by
internal training departments, many organizations are expanding their use of
external training providers due to the lack of internal trainers experienced in
the latest technologies, the cost of developing and maintaining internal
training courses in rapidly evolving technologies or corporate downsizing,
reorganizing and
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reallocation of resources. The choice of training delivery formats and providers
generally is made by individual IT professionals or their immediate managers,
even in large organizations. When choosing an IT training provider, IT
professionals and their managers seek a provider who can respond to demanding
requirements, including: (i) high quality training; (ii) course titles that
cover a broad range of topics and skill levels; (iii) the ability to deliver an
integrated training program through multiple delivery formats; (iv) the
willingness and ability to tailor the training to the customer's particular
needs; (v) timeliness of the delivery of course events; (vi) qualified,
technically current instructors; (vii) the willingness to deliver training at
convenient locations, including the customer's business site; (viii) course
titles covering areas undergoing rapid technological change; (ix) an effective
training methodology, which delivers the maximum amount of practical information
in the minimum amount of time; (x)training which is vendor-independent; (xi) the
ability to provide testing and certification of technical competency; and (xii)
training that covers global implementation of networks and other IT
applications.
IT training is primarily delivered by classroom instructors, video, CBT and
printed means. According to IDC, instructor-led classroom training continues to
dominate the worldwide IT training market comprising approximately 80% of the
market. The Company believes that instructor-led training will continue to
dominate the market because course participants value the personalized
interaction and problem-solving with their instructor and fellow participants
concerning their specific projects and applications as well as the insulation
from workplace interruptions afforded by classroom instruction. However, the use
of desktop-based multimedia and CBT is gaining acceptance in the IT training
market. IDC projects that the market for technology-based IT education and
training formats, and the multimedia CBT format in particular, will grow at a
faster rate than instructor-led classroom training.
THE LEARNING TREE APPROACH
The Company develops, markets and delivers proprietary course titles covering
a broad range of topics that it believes are designed to meet the continually
evolving training needs of IT professionals worldwide. The Company develops
course titles in an instructor-led format and in a multimedia CBT format.
Its instructor-led course events take place at the Company's Education
Centers, in hotel and conference facilities, and at customer sites. As of
September 30, 1997, Learning Tree had 139 multi-day instructor-led course
titles. These course titles are regularly presented worldwide and cover IT
topics such as client/server systems, intranet/Internet technologies, computer
networks, operating systems, databases, programming languages, graphical user
interfaces, object-oriented technology, IT management and related topics.
During 1997, the Company expanded the breadth of its instructor-led training
activities through the introduction of its Learning Solutions Division. The new
Learning Solutions Division provides custom developed training programs for
larger clients who need to train large numbers of their IT professionals and
end-users. The initial focus of this new division is on training that supports
the roll-out and use of new organization-wide information systems, tools and
applications. In 1997, the Company also introduced a program of "Power Seminars"
which were multi-day conferences comprised of a number of 1-day, multimedia
lecture-style seminars in key information technologies. In November 1997, the
Company announced that it was no longer going to offer its Power Seminars.
The Company's courses provide participants with skills and knowledge that they
can immediately apply in their jobs. The instructor-led course events include
extensive hands-on, interactive exercises using networked classroom computers.
Learning Tree's multi-day course events typically deliver the equivalent of two
semester hours of college credit in an intensive four-day format, thus
minimizing participants' time away from the job.
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As of September 30, 1997, the Company had 746 course instructors. These
instructors are IT professionals possessing expert knowledge and practical
experience. They work in a variety of industries applying the IT skills and
knowledge that are the subjects of the courses they teach. On average, they
teach approximately eight to nine Learning Tree course events each year on an
"as needed" basis.
Learning Tree places particular emphasis on the quality of its course
offerings. The Company employs a rigorous course development process designed to
ensure that each course title represents multiple points of view concerning the
application of the technology, provides information on different uses of the
technology throughout the world, and provides training that is relevant to
course participants working in diverse applications in a broad range of
industries. Learning Tree also maintains a centralized and ongoing program of
updating its proprietary course titles to maintain the courses' quality and
relevance. The Company tailors its instructor-led courses for customer-site
presentation as appropriate, and the Company's instructors further adapt the
course material to participants' needs based on feedback received in the
classroom.
Learning Tree meets customer demands for scheduling flexibility by holding
course events frequently at multiple locations around the world and by
delivering customer-site course events as required on short notice. The Company
believes that it has the resources to provide a rapid and flexible response to
its customers' needs by utilizing its large team of instructors, its course
development and customization processes, its team of customer support
specialists, its logistics team and its hundreds of classroom computer
workstations. In fiscal 1997, Learning Tree presented over 6,200 course events
worldwide.
The Company tests and certifies IT professionals in 21 IT job functions. Since
this program's inception in 1993, over 79,000 participants have completed one or
more certification examinations. In addition, the American Council on Education
recommends Learning Tree course events for college credit to more than 1,500
North American universities and colleges. See "Business--Learning Tree's
Products." In the United Kingdom, participation in some Learning Tree course
events may be applied toward post-graduate level university credit.
In response to the decentralized nature of IT training decision making, the
Company has developed a sophisticated direct mail marketing and telemarketing
capability, which it supplements by direct sales to corporations and government
organizations. The Company's direct mail marketing utilizes its proprietary list
of over 1,200,000 IT professionals and managers as well as rented lists. This
capability enables the Company to reach individual professionals and managers in
larger organizations and provides a cost-effective channel to reach IT personnel
in smaller organizations as well. The Company also uses its Internet Web site
(http://www.learningtree.com) to market and communicate with prospective
participants. Information contained in the Company's Web site shall not be
deemed to be part of this Annual Report on Form 10-K.
In addition to its instructor-led business, the Company introduced a line of
multimedia CBT course titles in 1996. The Company is continuing to expand its
multimedia CBT library and as of September 30, 1997, had developed 72 multimedia
CBT course titles. The Company's multimedia CBT courses can be delivered to the
workstation either by CD-ROM or over a customer's local area or wide area
network. The content and instructional design of the Company's multimedia CBT
course titles capitalize on its library of computer-based classroom course
content.
LEARNING TREE'S STRATEGY
The Company's objective is to strengthen its position as one of the leading
providers of IT training worldwide. To achieve this goal, the Company employs
the following key strategies:
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Continue Expanding its Library of Proprietary Instructor-led Course Titles.
The Company intends to continue developing additional course titles and
certification programs in order to increase sales to its existing customer base
and to attract new customers. The Company expanded its multi-day course library
from 72 titles at September 30, 1994 to 139 titles as of September 30, 1997. The
new multi-day course titles introduced during fiscal 1997 cover rapidly
developing areas such as intranet/Internet technologies, computer networking,
Java, Windows NT, programming languages and databases.
Provide Flexible Training Solutions. The Company intends to continue its
strategy of providing training when, where and in the manner desired by the
customer. Participants can attend any of Learning Tree's 139 multi-day courses
which, on average, are presented approximately once per week around the world.
The Company also presents standard or customized courses on demand at its
customers' facilities. Through the Learning Solutions Division, customized
courses are offered to customers whenever and wherever they desire. In addition,
the Company offers its own line of multimedia CBT courses which allow users the
flexibility of learning by using the multimedia CBT courses on their own desktop
or notebook computers.
Expansion of Multimedia CBT Course Titles. Learning Tree is leveraging its
highly interactive instructor-led educational model through the expansion of its
line of multimedia CBT software. The Company believes that it can leverage its
existing instructor-led course business by (i) developing its multimedia CBT
courses based upon the content of its hands-on classroom courses, (ii)
"piggybacking" the marketing and sales of its multimedia CBT products on its
existing marketing and sales programs, and (iii) providing its customers with
the flexibility to tailor a cost-effective combination of multimedia CBT and
classroom training to meet their needs. The Company also intends to continue to
explore the delivery of its multimedia CBT courses via on-line computer services
and over the Internet.
Leverage its Integrated Marketing and Sales Programs. The Company uses an
integrated strategy of marketing both to individual IT professionals through its
extensive direct mail marketing and Internet capability and to their employers
through its direct sales force. These efforts are supplemented by its
telemarketing sales force. The Company intends to continue increasing the size
of its direct mail marketing campaigns and its sales force to reach a greater
proportion of IT professionals and managers in both large and small
organizations. The Company also intends to leverage its marketing investment by
advertising an increasing number of instructor-led and multimedia CBT course
titles in each direct mail package at a relatively small incremental cost per
title.
Build Continuing Relationships. The Company seeks to build continuing
relationships both with its individual course participants and its corporate
customers. The Company expands demand for its course events by motivating
individual IT professionals to purchase a series of course events through its
Training Passport, Professional Certification and College Credit Programs. In
addition to increasing revenues directly, the long-term relationships built by
these programs encourage participants to recommend the Company's course events
to their colleagues. The Company also seeks to create ongoing relationships with
its largest U.S. and international customers through its Training Advantage
Program. These annually renewable agreements allow all the employees of Training
Advantage customers to receive training and special services at negotiated
prices.
Leverage International Operations. The Company maintains offices and education
centers in six countries outside the United States, and in fiscal 1997 presented
course events at its education centers and third-party and customer sites in a
total of 27 countries. In fiscal 1997, international revenues represented
approximately 45% of the Company's revenues. Learning Tree intends, on an
ongoing basis, to seek ways to expand its international operations and expects
that revenues derived from international sources will continue to account for a
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significant portion of its revenues. The Company's centrally-developed course
titles currently are translated into French, Swedish and Japanese and sold
through its operations in Great Britain, France, Canada, Sweden, Japan and Hong
Kong to customers in those and other countries. The Company intends to open
Education Centers in additional territories as justified by increases in local
demand. Inherent risks represented by the Company's international operations
include currency fluctuations, potential difficulties in translating course
subject matter into foreign languages, varying political and economic
conditions, unanticipated changes in regulation, trade barriers, staffing
problems and adverse tax consequences. There can be no assurance that such
factors will not have a material adverse effect on the Company in the future.
LEARNING TREE'S PRODUCTS
Learning Tree courses are designed to be highly interactive. Most of its
instructor-led, classroom courses involve "hands-on" training on networked
Pentium-based workstations, which allow participants to practice and better
assimilate the skills being taught. Participants spend a significant portion of
each course working on computer-based exercises and participating in group
workshops. Each participant typically receives extensive course materials that
facilitate learning and serve as a post-course reference. The Company's line of
multimedia CBT products are also designed to teach students through interaction,
and its multimedia CBT course titles incorporate interactive "learn-by-doing"
activities based on the Company's existing classroom courses.
Instructor-led Courses. Learning Tree strives to build job-related curricula
by developing a sequence of course titles that create a cohesive program which
imparts the skills and knowledge required to perform particular job functions.
Each job-related curriculum is comprised of course titles that proceed from
introductory to advanced, and cover the breadth and depth of skills and
knowledge required for a particular job. At September 30, 1997, Learning Tree's
multi-day course library included 139 proprietary course titles comprising over
3,200 hours of classroom instruction. This course library is recommended for
over 250 semester hours of undergraduate and graduate level college credit in
information systems by the American Council on Education (the "ACE"). In the
Company's experience, the final decision of each college or university to grant
or deny credit for the Company's courses as recommended by the ACE is made on a
case-by-case basis, taking into account a variety of factors such as the
academic standing of the student making the request, the requirements of the
particular degree program and limits on the number of credits that may be
obtained outside of the college or university. Subject to these rules generally
applicable to transfer credits, the Company believes that its course
participants have generally been granted credit upon application.
The following chart presents the Company's 139 proprietary multi-day course
titles as of September 30, 1997:
<TABLE>
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CURRICULUM COURSES
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Client/Server Introduction to Open Systems
Introduction to Client/Server Computing
Distributing Data in Client/Server Systems
Client/Server Application Development--Hands-On
Client/Server Systems: Analysis and Design
Managing and Supporting Client/Server Systems--Hands-On
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Intranet/Internet
Technologies Internet and System Security
Deploying Internet and Intranet Firewalls--Hands-On
Internet for Business Applications--Hands-On
Internet E-Mail with UNIX Sendmail--Hands-On
Developing a Web Site--Hands-On
Java Programming--Hands-On
Advanced Java Programming--Hands-On
Java for Multimedia Applications Development--Hands-On
VBScript--Hands-On
VRML--Hands-On
</TABLE>
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<TABLE>
<CAPTION>
CURRICULUM COURSES
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<S> <C>
Intranet/Internet
Technologies
(cont.) Developing an Intranet Site--Hands-On
Netscape Servers for Intranet/Internet Development--Hands-On
Visual J++--Hands-On
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Windows Windows Networking--Hands-On
Windows Configuration--Hands-On
Windows 95 Support and Networking--Hands-On
Windows NT Workstation and Server--Hands-On
Windows NT 4.0 Workstation and Server--Hands-On
Windows NT Optimization and Troubleshooting--Hands-On
Integrating Microsoft Office 97--Hands-On
TCP/IP Internetworking on Windows NT--Hands-On
Microsoft System Management Server--Hands-On
Microsoft Exchange--Hands-On
UNIX and Windows NT Integration--Hands-On
Netware to Windows NT Migration--Hands-On
Implementing Windows NT Security--Hands-On
Implementing Microsoft SNA Server 3--Hands-On
Microsoft Exchange 5 Server Administration--Hands-On
Microsoft Internet Information Server--Hands-On
Microsoft SQL Server Introduction--Hands-On
Microsoft SQL Server System Administration--Hands-On
Developing SQL Server Applications with Visual Basic 5--Hands-On
Optimizing SQL Server Database and Application Performance--Hands-On
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Local Area Networks Local Area Networks
PC Networking--Hands-On
LAN Troubleshooting--Hands-On
High-Performance Cabling Systems
High-Performance Ethernet--Hands-On
Fast LAN Technologies
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NetWare NetWare 4.x Administration--Hands-On
NetWare 4.x Advanced Administration--Hands-On
NetWare 4.x Installation & Configuration--Hands-On
NetWare 4.x Design and Implementation--Hands-On
NetWare 4.x Service and Support--Hands-On
Networking Technologies
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Wide Area Networks Introduction to Datacomm and Networks
Network Planning, Support and Management
Computer Network Architectures and Protocols
X.25--Hands-On
Wide Area Networks Troubleshooting--Hands-On
SNMP--Hands-On
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Internetworking Multivendor Networking
Internetworking: Bridges and Routers
Data Network Design and Optimization
Routers--Hands-On
Cisco Routers: A Comprehensive Introduction--Hands-On
Configuring Cisco Routers: Advanced Workshop--Hands-On
Migrating to IPv6--Hands-On
Introduction to TCP/IP--Hands-On
Internetworking with TCP/IP--Hands-On
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Operating Systems X Window System Programming--Hands-On
TCP/IP Programming--Hands-On
UNIX Programming--Hands-On
UNIX--Hands-On
UNIX Tools and Utilities--Hands-On
UNIX System and Network Security--Hands-On
UNIX Workstation Administration--Hands-On
UNIX Server Administration--Hands-On
KornShell Programming--Hands-On
OS/2 Warp--Hands-On
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Telecommunications Telecommunications and Wide Area Networking
ISDN for Data Communications--Hands-On
Introduction to ISDN
Implementing Computer Telephony Integration
Wireless Networks
High-Speed Wide Area Networks
Implementing Fiber-Optic Communications
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Database Systems Relational Databases
Sybase SQL Server--Hands-On
DB2 for Client/Server--Hands-On
</TABLE>
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<TABLE>
<CAPTION>
CURRICULUM COURSES
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<S> <C>
Database Systems (cont.) Building a Data Warehouse--Hands-On
Oracle7--Hands-On
Oracle7 for Database Administrators--Hands-On
Oracle7 for Application Developers--Hands-On
Tuning Oracle7 Applications--Hands-On
Complex SQL Queries--Hands-On
PowerBuilder 5 and Oracle 7--Hands-On
Oracle Developer/2000--Hands-On
Building Oracle WebServer Applications--Hands-On
Lotus Notes Application Development--Hands-On
Lotus Notes System Administration--Hands-On
Lotus Notes R4.5 A Comprehensive Introduction--Hands-On
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PC Support PC Configuration and Troubleshooting--Hands-On
Advanced PC Configuration--Hands-On
Macintosh Troubleshooting--Hands-On
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Graphical User Inter-
faces and Programming Windows Programming--Hands-On
Microsoft Exchange Applications Development--Hands-On
Visual C++--Hands-On
Introduction to Programming--Hands-On
Client/Server and System Programming for Windows--Hands-On
Advanced Windows Programming With MFC--Hands-On
Porting Applications from UNIX to Windows NT--Hands-On
Windows Open Services Architecture--Hands-On
Visual Basic--Hands-On
Microsoft Access--Hands-On
Microsoft Access Programming--Hands-On
Delphi Application Development--Hands-On
Integrating MS Office Applications--Hands-On
PowerBuilder--Hands-On
Perl Programming--Hands-On
Visual Basic 4 for Enterprise Applications--Hands-On
Visual FoxPro Applications Development--Hands-On
C Programming--Hands-On
C Advanced Programming--Hands-On
C++ Object-Oriented Programming--Hands-On
Advanced C++ Programming--Hands-On
C++ for Non-C Programmers--Hands-On
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Software Development
Methods Object-Oriented Analysis and Design
Introduction to Object Technology
Implementing the Year 2000 Conversion--Hands-On
Software Quality Assurance
Identifying User Requirements
Practical Software Testing Methods
Software Systems Analysis and Design
Software Project Planning and Management
Software Configuration Management
Systems Engineering
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IT Soft Skills Business Process Re-engineering
Effective Skills for Technical Managers
Effective Communication Skills for IT Professionals
Teambuilding Skills for IT Professionals
Project Management--Hands-On
Influence Skills
</TABLE>
In addition to the foregoing course titles, the Company also modifies the
content of its courses for presentation at customer sites and, through its
Learning Solutions Division, develops custom course titles for its clients. All
of these courses typically are customized to cover particular topics and
applications requested by the customer. Learning Tree typically provides all of
the software, hardware and networking systems required for use in customer-site
courses.
The Company presents its classroom courses at Learning Tree Education Centers
in Boston, Los Angeles, New York, Washington D.C., Toronto, Ottawa, London,
Paris and Stockholm, as well as in rented hotel or conference centers in other
cities worldwide. The Company's Education Centers include 85 classrooms that
have been custom-designed to accommodate the technical demands of Learning
Tree's computer-based courses, including electronic projection of computer
screens, local area networks within the classroom and multimedia presentation
capability.
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Multimedia CBT Courses. Learning Tree continues to expand its line of
multimedia CBT course titles based on the interactive content of its computer-
based classroom courses. The Company believes that the adaptation of its
classroom courses to the multimedia CBT format can be accelerated by the
incorporation of the proven hands-on exercises from its classroom courses, its
accumulated experience with course participants and by utilizing its large
instructor team as subject matter experts to support the process. The Company
designed its multimedia CBT courses to be interactive using a common interface
across all course titles. In addition, the Company structures its multimedia CBT
courses to complement its classroom-based offerings, thereby providing IT
professionals with the flexibility to learn and reinforce a given set of skills
and knowledge, from introductory to advanced levels, through a combination of
multimedia CBT and hands-on classroom-based training. The Company's multimedia
CBT courses are delivered to the workstation either by CD-ROM or over the
customer's local area network.
The Company has also developed LearnTrack, a CBT management software package
that provides training administrators with the capability to install and
distribute Learning Tree and third-party CBT courses, enroll participants in the
courses, monitor usage and print reports on course utilization, learner progress
and course completion.
As of September 30, 1997, the Company had released 72 CBT course titles. The
Company began the initial marketing of its multimedia CBT product line in
January 1996, and has expanded and intends to continue expanding these sales and
marketing activities commensurate with the growth of titles in its multimedia
CBT library. The actual number of titles which the Company will produce and
their delivery dates are subject to a number of factors such as the hiring and
training of additional staff, continued refinements in the development and
production process and the availability of subject matter experts who are also
responsible for developing and teaching the Company's instructor-led courses.
The following chart presents the Company's 72 multimedia CBT course titles as
of September 30, 1997:
<TABLE>
<CAPTION>
CURRICULUM COURSES
- ---------- -------
<S> <C>
Client/Server Client/Server Concepts and Architecture
Client/Server Connectivity and Implementation
Client/Server Analysis and Design
- --------------------------------------------------------------------------------
Intranet/Internet
Technologies Using the Internet and Intranets
Internet and System Security
Developing a Web Site
Configuring and Securing IIS Web Services
Introduction to Java Programming
Java Database Programming with JDBC
Introduction to Programming in Visual J++
- --------------------------------------------------------------------------------
Local Area Networks Local Area Networks
Introduction to PC Networking
LAN Troubleshooting
Improving LAN Performance
- --------------------------------------------------------------------------------
Wide Area Networks Introduction to Datacomm and Networks
Introduction to SNMP
- --------------------------------------------------------------------------------
Internetworking Introduction to Internetworking
Internetworking with Routers
Introduction to TCP/IP
Configuring TCP/IP Networks
- --------------------------------------------------------------------------------
Microsoft Windows and
Windows NT Introduction to Windows NT 4
Administering Windows NT 4
Windows NT 4 Server Management
Windows NT 4 Policies, Profiles and Registry
Introduction to TCP/IP on Windows NT 4
Introduction to Windows NT 4 Optimization
Installing and Using Windows 95
Networking with Windows 95
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
CURRICULUM COURSES
- ---------- -------
<S> <C>
Microsoft Windows and
Windows NT (cont.) Systems Management Server
SQL Server 6.5 Using Transact-SQL
- --------------------------------------------------------------------------------
Graphical User Interfaces
and Programming Introduction to C++ for Non-C Programmers
C++ Classes and Inheritance
Windows Programming with Visual C++ and MFC
User Interfaces with Visual C++ and MFC
Visual C++ and MFC: Controls, Forms and ODBC
Introduction to Visual Basic 4
Visual Basic 4 Application Development
Introduction to Visual Basic 5
Visual Basic 5 Application Development
Microsoft Access Application Development
Access 7 Applications Using VBA
- --------------------------------------------------------------------------------
Software Development
Methods Introduction to Object-Oriented Analysis
Object-Oriented Design
- --------------------------------------------------------------------------------
Operating Systems UNIX Basic Concepts and Usage
UNIX Utilities and Shell Scripts
Introduction to UNIX Korn Shell
Introduction to UNIX Filters and Shell Programming
UNIX Server Administration: Network Services
- --------------------------------------------------------------------------------
Telecommunications ISDN for Data Networks
- --------------------------------------------------------------------------------
Database Systems Relational Databases: A Comprehensive Introduction
Oracle7 SQL
Building an Oracle7 Database
Oracle7 PL/SQL
Oracle7 Database Administration
Oracle7 Database Resources
Oracle7 Database Backup and Recovery
Oracle7 Database Tuning
Oracle7 Server Programming
Oracle7 Server Development Techniques
Oracle7 Application Tuning
Oracle7 Query Optimization
Advanced Queries for Oracle7
Developer/2000 Forms
Developer/2000 Advanced Forms
Developer/2000 Reports
Developer/2000 Graphics
Introduction to Oracle WebServer
Integrating Web Sites with Oracle Databases
Integrating Java with Oracle WebServer
- --------------------------------------------------------------------------------
PC Support PC Configuration and Troubleshooting
PC Diagnostics
Configuring PC Devices
</TABLE>
DEVELOPMENT OF COURSES
Instructor-Led Courses. Learning Tree endeavors to identify and develop course
titles that satisfy a large market demand. Learning Tree seeks to accomplish
this by (i) building close working relationships with the development groups of
leading IT vendors in order to obtain information on upcoming products, (ii)
canvassing its expert instructors to identify general market trends and specific
topics within existing course titles that can be expanded to serve as new
courses, (iii) holding periodic discussions with its Training Advantage
customers to determine their upcoming project plans and training requirements,
and (iv) conducting market surveys of the Company's course participants.
Moreover, the members of executive management of the Company have strong IT
educational and professional backgrounds and stay closely involved with the
course selection and development process. See "Management--Executive Officers
and Directors."
Each Learning Tree course title is developed by a team comprised of a product
manager who manages the project and instructional design process, a product
marketing manager, and three subject matter experts who generally are selected
11
<PAGE>
from the Learning Tree author and instructor team. Learning Tree endeavors to
select a group of experts from different countries and industries and with
complementary applications backgrounds. The Company believes that its use of a
team of experts provides multiple points of view concerning the application of
the subject technology, information on different uses of that technology
throughout the world and training that is relevant to course participants
working in diverse applications in a broad range of industries worldwide. The
result is a set of proprietary course materials and several hundred pages of
presentation graphics for each course. To ensure its courses meet the needs of
the market place and provide a high quality of instruction, the Company requests
that each course participant complete an evaluation of the course and the
instructor. Learning Tree course titles are updated regularly to incorporate new
technology and to improve their educational effectiveness. Learning Tree courses
currently are translated into French, Japanese and Swedish and are taught by
nationals in the local language in the Company's United States, Canadian, United
Kingdom, French, Swedish Japanese and Hong Kong subsidiaries.
The Company's development of new course titles, or enhancements to existing
course titles, must anticipate and keep pace with the introduction in the
marketplace of new hardware, software and networking technology. The need to
respond to technological changes may require the Company to make substantial,
unanticipated expenditures in order to develop new course titles and acquire
additional equipment in order to deliver such new course titles. There can be no
assurance that the Company will be able to respond successfully to technological
change. If, because of financial, technological or other constraints, the
Company could not adequately anticipate or respond to changes in computer
platforms, customer preferences and/or software technology, the Company's
business and results of operations would be materially adversely affected.
Multimedia CBT Courses. Learning Tree develops each multimedia CBT title using
its internal staff of project managers, instructional designers, programmers,
computer graphic artists, multimedia producers and testing personnel. The
Company develops its multimedia CBT courses based upon the proprietary content
of its hands-on, instructor-led courses and uses subject matter experts selected
from the Learning Tree instructor team as its CBT course authors. The Company
believes that this approach for developing its multimedia CBT courses can reduce
development time while enhancing the technical content, structure and
educational benefit of its CBT products.
LEARNING TREE INSTRUCTORS
The Company believes that its instructors are vital to its success. Learning
Tree instructors work either full-time for other companies or as independent
consultants in a variety of industries applying the IT skills and knowledge that
are the subjects of the courses they teach. On average, the Company's
instructors teach eight to nine Learning Tree courses each year as needed. At
September 30, 1997, the Company had 746 instructors.
The Company's future success will also depend on its ability to attract and
retain highly-skilled instructors. Each Learning Tree subsidiary has an
Instructor Resources Department that follows a formal process to recruit, train,
coach and manage its instructor team. The Company identifies new instructor
candidates primarily through referrals from its existing instructors. Instructor
candidates undergo a rigorous technical evaluation prior to participating in
Learning Tree's proprietary instructor training program. The Company believes
that its instructor force is relatively stable, and its recruitment and training
program focuses primarily on expanding the Company's instructor staff to meet
growing market demand. There can be no assurance that the Company will be
successful in these recruitment and training efforts.
12
<PAGE>
CUSTOMERS
Learning Tree has developed a broad customer base focusing on Fortune 1000-
level companies and their international equivalents and government organizations
worldwide. In fiscal 1997, the Company trained over 101,000 multi-day course
participants who were employed by over 12,000 organizations. In fiscal 1997, the
Company derived approximately 55% of its revenues in the United States and 45%
of its revenues internationally.
The Company's customers generally operate in the computer, communications,
electronics, systems integration, finance, aerospace, military, manufacturing
and energy sectors, and a number of the customers are government organizations.
The Company had over 200 customers worldwide that purchased over $100,000 of
Learning Tree training in fiscal 1997. Generally, each customer purchased this
training throughout the year in individual purchase decisions ranging from
$2,000 to $20,000 rather than through a single contract. No customer accounted
for 10% or more of the Company's fiscal 1997 revenues.
MARKETING AND SALES
Direct Mail Marketing and Advertising. Learning Tree markets its courses
primarily through direct mail marketing to its proprietary mail list of over
1,200,000 individuals (including course participants, their immediate
supervisors, department managers, training managers and other people who have
inquired about the Company's courses) as well as to rented mailing lists of IT
professionals. The Company has leveraged its direct mail program by including
promotional materials for its multimedia CBT product line in its mailing package
which can be accomplished at a relatively low incremental cost. The Company also
advertises in industry trade magazines and periodicals.
The Company believes that it achieves economies of scale by producing its
marketing materials centrally. Its centralized marketing department develops the
Company's catalogs, brochures and advertisements using color desktop publishing
and electronic pre-press technology to create the files used to produce direct
full-color film for plate-making. This in-house capability enables the Company
to make quick improvements to its marketing materials in order to feature the
latest technological developments and address market opportunities in a timely
manner.
The Company has built a strong brand image through the frequent and prominent
use of its trademarks in its marketing materials and course materials. These
trademarks include the Learning Tree and professional certification logos, its
name, and its trademarks, including EDUCATION IS OUR BUSINESS(R), EDUCATION YOU
CAN TRUST(R), WE BRING EDUCATION TO LIFE(R), PRODUCTIVITY THROUGH EDUCATION(R),
Alumni Gold(TM), TRAINING YOU CAN TRUST(TM), learningtree.com(TM),
LearnTrack(TM), Training Passport(R), Training Advantage(R), 800-THE-TREE(R),
800-LRN-TREE(R) and 888-CBT-TREE(TM).
Internet Marketing. The Company maintains a web site for marketing its
products and services over the Internet.(http://www.learningtree.com)
Information contained in the Company's Web site shall not be deemed to be part
of this Annual Report on Form 10-K. The Company believes that the Internet will
become an increasingly significant marketing channel to prospective IT course
participants in the future.
Telemarketing Sales Force. At September 30, 1997, Learning Tree's
telemarketing sales force consisted of over 110 people who were responsible for
responding to phone, e-mail, Web site and facsimile orders and inquiries
received by the Company and pursuing sales opportunities. These telemarketers
sell both to individual prospective course participants and to line managers and
training directors in assigned accounts. The Company has developed a proprietary
automated system which is integrated with its customer and course operations
databases and provides its telemarketers with on-line information that
facilitates rapid response to inbound callers, provides targeted lists for
outbound calling, records the results of
13
<PAGE>
calls and automates the sales follow-up process. The Company believes its
telemarketing sales force has been instrumental to the Company's success in
selling its multiple-enrollment Training Passport programs.
Field Sales Force. The Learning Tree field sales force, which consisted of
over 60 sales people at September 30, 1997, generates a significant portion of
the Company's revenues. The field sales force concentrates its attention on the
Company's larger customers to sell multiple course customer-site training
programs, Learning Solutions programs and to sign Training Advantage Agreements
covering all formats of Learning Tree training. The Company's Training Advantage
Agreements provide its nationwide and international customers with negotiated
pricing and special services.
The field sales force is assisted by the Company's Customer Support Group
which provides the administration and logistics support necessary to ensure the
successful presentation, at the customer's site, of Learning Tree's hands-on,
computer-based classroom courses. For large contracts requiring customization,
the customer support staff serve as team leaders to coordinate rapid and
effective cooperation between the instructor(s) which modify and teach the
courses, the internal development team who implements the changes, the Company's
technical support group which modifies the course hardware and software as
needed, and the logistics staff which assembles and ships course equipment and
materials for each course event.
Multiple Enrollment Programs. The Company markets its Training Passport
program to encourage course participants to enroll in multiple courses, and
thereby increase the average attendance in its Learning Tree-site courses.
Generally, the holder of a Learning Tree Training Passport may attend up to 8
courses (10 in the United Kingdom and France) during a 12-month period. The list
price for such Training Passports is approximately three times the list price
for an individual four-day course. During fiscal 1997, the Company expanded the
Training Passport program in its European subsidiaries by offering a 4 course
Passport which is priced at approximately twice the list price for an individual
four-day course.
The Company has also developed the Learning Tree Professional Certification
Programs for certifying IT professionals in 21 job functions in the areas of the
Company's focus. Professional certification is important to many participants in
Learning Tree courses as it provides documentation of their qualifications. Each
professional certification program requires completion of a series of five
Learning Tree courses and an examination associated with each course. Since this
program's inception in fiscal 1993, over 79,000 participants have completed one
or more certification examinations.
COMPETITION
The IT education and training market is highly fragmented, with low barriers
to entry and no single competitor accounting for a dominant market share. The
Company's competitors are primarily company internal training departments,
independent education and training companies, technology manufacturers, systems
integrators and others. Some of these competitors offer course titles and
programs similar to those of the Company at lower prices. In addition, some
competitors have greater financial and other resources than the Company.
Internal Training Departments. Internal IT training departments generally
provide companies with the most control over the method and content of training,
enabling them to tailor the training to their specific needs. However, the
Company believes that industry trends toward downsizing and outsourcing continue
to reduce the size of IT training departments and increase the percentage of IT
training delivered by external providers. Because internal trainers find it
increasingly difficult to keep pace with new technologies, lack the hands-on
experience needed to teach the latest technological developments and lack the
capacity to meet demand, organizations increasingly supplement their internal
training resources with externally supplied training in order to meet their
requirements.
14
<PAGE>
Other Independent Education and Training Providers. The Company believes that
the majority of independent training providers are smaller organizations, which
often provide training as one of several services or product lines. Many are
"Authorized Training Centers" which present courses utilizing materials prepared
by computer hardware and software vendors such as Novell and Microsoft. The
Company differentiates itself from these providers based on its size; scope and
quality of its proprietary course offerings; worldwide delivery capability;
number, quality and experience of its instructors; and vendor independence.
Computer Hardware and Software Vendors. Many hardware and software vendors
supply training bundled in the prices of their product. In addition, their
knowledge of upcoming developments in their products is likely to be better than
that of other training providers. Learning Tree differentiates itself from
computer systems manufacturers and software vendors by maintaining a vendor-
independent posture and providing cross-platform training solutions.
CBT Providers. The market for IT education and training historically has
consisted primarily of instructor-led training. Multimedia and computer-based IT
training currently account for a small portion of the overall IT training
market, but according to IDC, CBT is growing at a faster rate than instructor-
led training. To capitalize on this opportunity, the Company introduced a line
of multimedia CBT products in fiscal 1996. During fiscal 1997, the Company was
continuing to develop and expand its multimedia CBT library and, as a result, a
substantial majority of the its revenue in fiscal 1997 was derived from its
instructor-led, hands-on training courses. Accordingly, the Company's future
success will depend upon, among other factors, the extent to which the market
continues to accept instructor-led training as a method of delivery for IT
training, the Company's ability to develop and market instructor-led courses
that compete effectively against CBT courses offered by others and the Company's
ability to develop its own curriculum of competitive multimedia CBT course
titles.
In the CBT market, many of the Company's current and potential competitors
have substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition in the CBT area than the Company.
In addition, the CBT area is characterized by significant price competition. As
a greater number of CBT providers enter the field, the Company anticipates that
it will face price pressure from competitors. The Company differentiates itself
from other CBT providers based on its field sales, telemarketing and direct mail
sales and marketing channels, its reputation for providing quality training, the
content of its multimedia CBT courses, the frequent feedback the Company
receives about its course content and teaching methods from its established
customer base and its ability to provide users with the flexibility to acquire a
given set of skills and knowledge through either multimedia CBT or classroom-
based training or an integrated combination of the two. However, there can be no
assurance that the Company's products will be more favorably viewed by the
marketplace than other interactive training software or that competitive
pressures will not require the Company to reduce its prices significantly.
INTELLECTUAL PROPERTY AND LICENSES
The Company regards its course development process and its course titles as
proprietary and relies primarily on a combination of statutory and common law
copyright, trademark and trade secret laws, customer licensing agreements,
employee and third-party nondisclosure agreements and other methods to protect
its proprietary rights. Notwithstanding the foregoing, a third party or parties
could copy or otherwise obtain and use the Company's course materials in an
unauthorized manner or use these materials to develop course titles which are
substantially similar to those of the Company. In addition, the Company operates
in countries that do not provide protection of proprietary rights to the same
extent as the United States. The Company's course materials generally do not
include any mechanisms to prohibit or prevent unauthorized use. If substantial
unauthorized
15
<PAGE>
use of the Company's products were to occur, the Company's business and results
of operations could be materially adversely affected. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar course
titles or delivery methods. Additionally, there can be no assurance that third
parties will not claim that the Company's current or future courses infringe on
the proprietary rights of others. The Company expects that it will be
increasingly subject to such claims as the number of products and competitors
increases in the future. Any such claim could result in a material adverse
effect on the Company's business.
REGULATORY ENVIRONMENT
Many federal, state and international governmental authorities assert
authority to regulate providers of educational programs. Generally, the Company
is exempt from such regulation because the Company contracts with the employer
of the course participants and does not participate in any federal or state
student aid/loan programs. However, state laws and regulations affect the
Company's operations and may limit the ability of the Company to obtain
authorization to operate in certain states. If the Company were required to
comply with, or found to be in violation of, a state's current or future
licensing or regulatory requirements, it could be subject to civil or criminal
sanctions, including monetary penalties, and could be barred from providing
educational services in that state.
EMPLOYEES
As of September 30, 1997, the Company had a total of 645 full-time equivalent
employees, of whom 190 were employed outside the United States. The Company also
utilized the services of 746 instructors to teach its courses. The Company
considers its relations with its employees and its instructors to be good.
16
<PAGE>
Item 2. PROPERTIES
As of September 30, 1997, all of Learning Tree's education center classroom
facilities were leased by the Company. The leases expire at various dates over
the next ten years. The Company owns a 38,500 square foot office facility which
is used to house the sales, administrative and operations groups of its U.S.
subsidiary. The Company's Swedish subsidiary has entered into a lease agreement
to replace its present education center facility with a new 22,600 square foot
facility. This new facility is expected to open in January 1998. The Company
intends to lease additional facilities for a number of its subsidiaries in the
foreseeable future. The Company has and expects to continue to supplement its
education center classroom facilities through the use of rented hotel and
conference facilities as needed.
The Company's headquarters is located at 6053 West Century Boulevard, Los
Angeles, California 90045. The table below sets forth certain information
regarding Learning Tree's facilities, comprised of classroom sites and offices
as of September 30, 1997:
<TABLE>
<CAPTION>
LOCATION NO. OF AREA IN
(METROPOLITAN AREA) CLASSROOMS SQUARE FEET
- ----------------------------- ---------- -----------
<S> <C> <C>
Boston, MA.................... 2 5,555
Los Angeles, CA............... 3 45,687
New York, NY.................. 5 7,715
Washington, DC metropolitan
area (4 sites)............... 36 130,690
Miscellaneous other U.S....... N/A 2,000
Paris, France................. 13 36,814
London, England (2 sites)..... 13 31,902
Ottawa, Canada................ 4 13,895
Toronto, Canada............... 5 10,830
Stockholm, Sweden............. 4 9,462
Tokyo, Japan.................. N/A 646
Hong Kong..................... N/A 574
</TABLE>
Item 3. LEGAL PROCEEDINGS
The Company is not involved in any pending or threatened legal proceedings
that the Company believes could reasonably be expected to have a material
adverse effect on the Company's financial condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997, through the solicitation of proxies or otherwise.
17
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading publicly on the Nasdaq National
Market under the symbol LTRE effective December 6, 1995. The following table
sets forth, for the periods indicated, the range of high and low sales prices
for the Common Stock on the Nasdaq National Market since December 6, 1995:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1996
First Quarter (from December 6, 1995)..................... $11 1/2 $ 9 5/32
Second Quarter............................................ 13 1/2 8 27/32
Third Quarter............................................. 21 3/32 13 11/32
Fourth Quarter............................................ 24 27/32 13 11/32
Fiscal 1997
First Quarter............................................. 32 24
Second Quarter............................................ 40 3/4 23 1/4
Third Quarter............................................. 45 1/4 27 1/2
Fourth Quarter............................................ 48 3/8 24 1/2
</TABLE>
As of December 16, 1997 there were approximately 900 holders of record of the
Common Stock.
VOLATILITY OF STOCK PRICE
The Company's initial public offering was completed in December 1995 and a
secondary public offering was completed in September 1996. There can be no
assurance that a viable public market for the Common Stock will be sustained.
The market price of the Common Stock has fluctuated significantly since the
initial public offering. The Company believes that factors such as announcements
of developments related to the Company's business, announcements of new products
or enhancements by the Company or its competitors, sales of the Common Stock
into the public market, developments in the Company's relationships with its
customers, shortfalls or changes in revenues, gross margins, earnings or losses
or other financial results which differ from public market analysts'
expectations, fluctuations in results of operations and general conditions in
the Company's market or the markets served by the Company's customers or the
economy could cause the price of the Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general, and the
market for shares of technology-related stocks in particular, have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. There can be no assurance that the market
price of the Common Stock will not continue to experience significant
fluctuations in the future, including fluctuations that are unrelated to the
Company's performance.
DIVIDENDS
In December 1996, the Company declared a stock split which was effected in the
form of a 50% stock dividend to all holders of its Common Stock. To date, the
Company has not paid any cash dividends on its Common Stock and the Company
anticipates that it will not pay cash dividends on the Common Stock for the
foreseeable future and that it will retain any earnings for use in the operation
of its business. The declaration and payment of dividends by the Company are
subject to the discretion of its Board of Directors and to compliance with
applicable laws. Any determination as to the payment of dividends in the future
will depend upon, among other things, general business conditions, the effect of
such payment on the Company's financial condition and other factors the
Company's Board of Directors may in the future consider to be relevant.
18
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company is qualified
by reference to and should be read in conjunction with the consolidated
financial statements and notes thereto and other financial data included
elsewhere in this Annual Report on Form 10-K. The statement of operations data
set forth below for each of the three years in the period ended September 30,
1997 and the balance sheet data as of September 30, 1996 and 1997, are derived
from the Company's consolidated financial statements for those years which have
been audited by Arthur Andersen LLP, independent public accountants, whose
report thereon is included elsewhere herein. The statement of operations data
for each of the two years in the period ended September 30, 1994 and the balance
sheet data at September 30, 1993, 1994 and 1995 are derived from audited
financial statements of the Company not included herein. These historical
results are not necessarily indicative of the results to be expected in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $49,329 $58,466 $78,818 $103,575 $164,483
Cost of revenues............................ 19,754 23,665 30,731 40,879 70,439
------- ------- ------- -------- --------
Gross profit............................. 29,575 34,801 48,087 62,696 94,044
------- ------- ------- -------- --------
Operating expenses:
Course development......................... 3,387 3,978 4,954 6,248 11,048
Sales and marketing........................ 17,923 21,243 22,883 31,245 51,284
General and administrative................. 9,625 9,945 12,176 12,850 19,228
------- ------- ------- -------- --------
Total operating expenses................. 30,935 35,166 40,013 50,343 81,560
------- ------- ------- -------- --------
Income (loss) from operations............... (1,360) (365) 8,074 12,353 12,484
Other income (expense), net................. 406 12 272 1,798 3,066
------- ------- ------- -------- --------
Income (loss) before provision
(credit) for income taxes.................. (954) (353) 8,346 14,151 15,550
Provision (credit) for income taxes......... (77) 90 1,866 4,033 5,058
------- ------- ------- -------- --------
Net income (loss)........................... $ (877) $ (443) $ 6,480 $ 10,118 $ 10,492
======= ======= ======= ======== ========
Net income (loss) per common share
and common equivalent share................ $ (0.05) $ (0.03) $ 0.38 $ 0.49 $ 0.47
======= ======= ======= ======== ========
Weighted average number of common
and common equivalent shares
outstanding................................ 17,217 17,268 17,046 20,609 22,099
======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 1,770 $ 2,774 $10,029 $ 24,541 $ 32,441
Total current assets........................ 9,210 10,772 21,336 77,610 86,146
Total assets................................ 14,135 16,306 28,427 91,529 122,351
Total current liabilities................... 12,871 16,425 22,843 34,247 55,033
Long-term debt and capital leases,
net of current portion..................... 714 446 272 134 --
Total stockholders' equity (deficit)........ (2,171) (3,054) 3,305 55,506 65,895
</TABLE>
19
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below, elsewhere herein and in the caption "Risk Factors" in the
Company's Registration Statement on Form S-1 filed on September 20, 1996.
OVERVIEW
Learning Tree International, Inc. (the "Company"), is a leading worldwide
provider of education and training for information technology ("IT")
professionals in business and government organizations. The Company's customers
are the companies and government agencies which pay for their employees to
attend the Company's course events. The Company develops, markets and delivers a
broad, proprietary library of instructor-led course titles which are focused on
client/server systems, intranet/Internet technologies, computer networks,
operating systems, databases, programming languages, graphical user interfaces,
object-oriented technology and IT management. The Company also tests and
certifies IT professionals in 21 IT job functions. The Company's courses are
recommended for college credit by the American Council on Education.
During 1997, the Company expanded the breadth of its instructor-led training
activities through the introduction of its Learning Solutions Division. The new
Learning Solutions Division provides custom developed training programs for
larger clients who need to train large numbers of their IT professionals and
end-users. The initial focus of this new division is on training that supports
the roll-out and use of new organization-wide information systems, tools and
applications. In 1997, the Company also introduced a program of "Power
Seminars," which were multi-day conferences comprised of a number of 1-day,
multimedia lecture-style seminars in key information technologies. In November
1997, the Company announced that it was no longer going to offer its Power
Seminars.
In addition to its instructor-led courses, the Company is continuing to expand
its line of interactive computer-based training courses incorporating audio and
graphical elements ("CBT") that are designed for both stand-alone CD-ROM and
network-based delivery.
The Company has historically focused on instructor-led IT training in multi-
vendor, multi-platform computer systems ("open systems") emphasizing computer
technologies such as internetworking, operating systems and advanced programming
languages. Until the early 1990's, these technologies were used almost
exclusively by IT professionals involved in research, development and
engineering. Beginning in the early 1990's and accelerating through the present,
management information systems ("MIS") departments began shifting from legacy
mainframe systems to new client/server technologies, thus expanding the market
for training of MIS personnel in areas covered by the Company's courses. These
technologies have contributed significantly to the increased use of computer
systems by businesses and government organizations.
Beginning in fiscal 1993, in order to increase its market share, the Company
introduced a new marketing initiative by creating multiple enrollment programs,
such as its Training Passport, College Credit and Professional Certification
Programs, which give participants an incentive to enroll in a series of Learning
Tree course events. See "Business--Marketing and Sales." Additionally at that
time and continuing through the present, the Company has increased both its
sales and marketing expenditures and its course development expenditures.
Through its increased investment in course development, the Company has expanded
its curriculum of course titles in client/server technology, networks and
databases covering additional topics relevant to the training market for MIS
professionals.
20
<PAGE>
In management's view, these new course titles provided an expanded role for the
Company in the IT training market by attracting MIS participants both to its new
and existing course titles.
The Company's revenues grew to record levels in fiscal 1997, increasing by 59%
over fiscal 1996. In response to the growth in course participants, the Company
has and plans to continue its accelerated rate of development of new course
titles, has expanded its future direct mailing plans to capture additional
market share and has taken steps to expand the number of classrooms in its
education centers. However, there can be no assurance that the Company will be
able to achieve an increase in market share after making such expenditures or
will maintain its growth in revenues, profitability or market share in the
future. The Company's revenues and profitability are subject to general economic
conditions and a significant portion of the Company's revenues are derived from
Fortune 1000-level companies and their international equivalents. Such companies
have historically adjusted their expenditures for external IT training during
economic downturns. Should the economy weaken in any future period, these
companies may not increase or may reduce their expenditures on external IT
training, which would have an adverse impact on the Company.
The Company's instructor-led course events are taught in classrooms and
include extensive, hands-on exercises under the guidance of expert instructors.
The Company has structured its business so that the majority of its instructor-
led course costs depend upon the number of course events it conducts. The
Company schedules its multi-day course events throughout the year as appropriate
to meet demand. Since the Company's instructors typically work full-time in the
IT industry and teach an average of eight to nine Learning Tree course events
each year, as needed, the Company's instructor-related costs are largely
variable. In addition, although the expenses associated with its own Education
Centers are fixed, the Company can impact its overall facility expenses by
varying its use of rented hotel and conference facilities. Because the cost for
each course event does not increase significantly as additional participants are
included, the Company utilizes a variety of techniques to maximize the number of
participants per course event, up to limits designed to preserve the quality of
each course event. These techniques include adding additional events for a
popular course title, combining two or more undersubscribed events into one
course event and adding an assistant instructor to increase the maximum number
of students that can be effectively taught in a course event. The extent to
which these techniques are used is subject to a number of factors within a
particular market segment.
BACKLOG
At September 30, 1997, the Company had a backlog of orders for courses in the
amount of $30.0 million, which represented a 28% increase over the backlog of
$23.5 million at September 30, 1996. Only a portion of the Company's backlog is
funded. There can be no assurance that the growth in the backlog experienced in
fiscal 1997 over fiscal 1996 will continue or that orders comprising the backlog
will be realized as revenue.
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's consolidated statements of operations as a percentage of revenues:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Revenues........................... 100% 100% 100%
Cost of revenues................... 39 39 43
--- --- ---
Gross profit..................... 61 61 57
Operating expenses:
Course development............... 6 6 7
Sales and marketing.............. 29 30 31
General and administrative....... 16 13 12
--- --- ---
Total operating expenses...... 51 49 50
--- --- ---
Income from operations............. 10 12 7
Other income (expense), net........ 0 2 2
--- --- ---
Income before provision for
income taxes...................... 10 14 9
Provision for income taxes......... 2 4 3
--- --- ---
Net income......................... 8% 10% 6%
=== === ===
</TABLE>
FISCAL 1997 COMPARED WITH FISCAL 1996
For the fiscal year ended September 30, 1997, revenues increased by $60.9
million or 59% to $164.5 million from $103.6 million for the fiscal year ended
September 30, 1996. The growth of revenues is due, in part, to an increase in
the number of multi-day course participants to 101,141 compared to 71,792 in the
corresponding prior year. The additional course participants are primarily
attributable to increased sales and marketing activities and an increase in the
number of multi-day course titles. The number of multi-day course titles
increased to 139 as of September 30, 1997, compared to 110 a year earlier.
Revenues for fiscal 1997 also reflect a 4% increase in average revenue per
multi-day course participant. The increase in the average revenues per course
participant is attributable to an increase in the average course duration and
increases in prices. The increase in revenues also reflects increased revenues
from the multimedia CBT product line as well as revenues from the Company's new
Learning Solutions Division and, to a lesser extent, from its Power Seminars. A
significant portion of the Company's revenues are denominated in foreign
currencies which have been translated into dollars based upon the exchange rates
prevailing when the revenues were earned. Exchange rate changes during the year
reduced revenues by approximately $375,000 in fiscal 1997 compared to the
exchange rates prevailing during fiscal 1996.
The Company's cost of revenues primarily includes the costs associated with
the course instructor, course materials and equipment, freight, classroom
facilities and refreshments. For the fiscal year ended September 30, 1997, the
cost of revenues increased $29.5 million or 72% to $70.4 million from $40.9
million for the previous fiscal year. The increase in the cost of revenues is
primarily the result of the increased number of course events as well as costs
associated with the increased sales in the multimedia CBT product line, the
costs of delivering Learning Solutions courses and Power Seminars. The number of
multi-day course events increased 39% in fiscal 1997 to 6,278 from 4,512 course
events in fiscal 1996. Costs per multi-day course event increased by
approximately 11% in fiscal 1997 compared to fiscal 1996. The change in the
average cost per course event primarily reflects a 4% increase in the average
course duration, the higher costs
22
<PAGE>
of conducting more course events at sites other than education centers due to
education center capacity constraints and the cost of training new instructors.
To accommodate the growth in course enrollments, the Company added additional
education center facilities during fiscal 1997 and is seeking additional
education center facilities in certain locations.
The cost of revenues increased to 43 percent of revenues in fiscal 1997
compared to 39 percent in fiscal 1996, largely because of lower gross margins in
the Power Seminars and Learning Solutions product lines compared with the
Company's traditional multi-day instructor-led courses and multimedia CBT
courses, and also because of the increased cost per multi-day instructor-led
course event as described above.
Course development expense includes the costs of developing new course titles
and updating the Company's existing course library. The principal costs are for
internal product development staff and independent consultants who serve as
subject matter experts. For the fiscal year ended September 30, 1997, course
development expenses increased by $4.8 million or 77% to $11.0 million from $6.2
million for fiscal 1996. This increase reflects the costs associated with the
Company's strategy of rapidly expanding its multimedia CBT and multi-day
instructor-led course libraries to meet its customers' growing technology
training needs, updating and maintaining the growing course title libraries, and
developing courses for Learning Solutions and Power Seminars.
The number of multi-day course titles increased to 139 as of September 30,
1997, compared to 110 a year earlier. The number of multimedia CBT course titles
increased to 72 as of September 30, 1997 compared to 12 a year ago. The Company
plans to continue its strategy of rapidly growing both its instructor-led course
library and its multimedia CBT library, including additional titles in the areas
of intranet/Internet technologies, computer networking, Java, Windows NT,
programming languages and databases. As a result, the amount of course
development expenses are expected to continue to increase in fiscal 1998. The
actual number of instructor-led and multimedia CBT course titles which the
Company will produce and their delivery dates are subject to a number of factors
such as the hiring and training of additional staff, continued refinements in
the CBT development and production process and the availability of subject
matter experts who are also responsible for teaching the Company's instructor-
led courses.
Sales and marketing expense consists of salaries, commissions and travel-
related costs for sales and marketing personnel, the costs of designing,
producing and distributing direct mail marketing and media advertisements, and
the costs of information systems to support these activities. Sales and
marketing expenses increased $20.1 million or 64% to $51.3 million in fiscal
1997 from $31.2 million in fiscal 1996. The increase in sales and marketing
expenses is due to an increase in direct mail marketing to a broader range of
potential multi-day instructor-led customers and to potential Power Seminar
customers, increased telemarketing to support the multi-day instructor-led
courses and Power Seminars and increased field sales staff for multi-day
instructor-led courses and multimedia CBT. Sales and marketing expenses for
fiscal 1997 increased as a percentage of revenues to 31% compared to 30% in
fiscal 1996.
In fiscal 1997, general and administrative expenses increased $6.3 million or
50% to $19.2 million from $12.9 million for fiscal 1996. The increase in general
and administrative expenses reflects increases in information systems and other
administrative staff and facilities which were necessary to support the growth
in revenues. As a percentage of revenue, general and administrative expenses
declined to 12% from 13% in the prior year.
Other income (expense) is primarily comprised of interest income, interest
expense and foreign currency gains and losses. For fiscal 1997, other income
increased $1.3 million to $3.1 million from $1.8 million for fiscal 1996. This
increase was primarily attributable to additional interest income arising from
23
<PAGE>
higher average cash balances during the year. In fiscal 1997, the Company
recorded foreign exchange losses of $9,000 compared to $186,000 of foreign
exchange losses in fiscal 1996. These transaction gains and losses arose from
receivables and payables denominated in currencies other than the functional
currencies of the Company's foreign subsidiaries.
Although the Company's consolidated financial statements are stated in U.S.
dollars, several of the Company's subsidiaries have functional currencies other
than the U.S. dollar. Gains and losses arising from the translation of the
balance sheets of the Company's subsidiaries from the functional currencies to
U.S. dollars are reported as an adjustment to stockholders' equity. However,
fluctuations in exchange rates may have an effect on the Company's results of
operations, particularly its revenues and operating income, when translating the
income statements to dollars. The impact of future exchange rates on the
Company's results of operations cannot be accurately predicted. To date, the
Company has not sought to hedge the risks associated with fluctuations in
exchange rates and therefore continues to be subject to such risks. In the
future, the Company may undertake such transactions. There can be no assurance
that any hedging techniques implemented by the Company would be successful in
eliminating or reducing the effects of currency fluctuations.
For fiscal 1997, the provision for income taxes increased by $1.1 million to
$5.1 million from $4.0 million for fiscal 1996. This increase, in part, reflects
an increase in income before taxes in fiscal 1997 compared to fiscal 1996. In
addition, in fiscal 1996, certain of the Company's subsidiaries utilized tax
loss carryforwards to offset a portion of their taxable income for the year
whereas there were no loss carryforwards available in fiscal 1997. Learning Tree
International, Inc. operates as a holding company with operating subsidiaries in
several countries, and each subsidiary is taxed based on the laws of the
jurisdiction in which it operates. Since taxes are incurred at the subsidiary
level, and one subsidiary's tax losses cannot offset the taxable income of
subsidiaries in other tax jurisdictions, the Company's consolidated effective
tax rate may vary. Accordingly, the Company's consolidated effective tax rate
may increase in the future. See Note 3 of the Notes to Consolidated Financial
Statements.
The increase in revenues in fiscal 1997 compared to fiscal 1996 were greatest
in the Company's largest geographic segments, the United States and Europe. All
of the Company's geographic segments were profitable in fiscal 1997. The
European segment recording operating income of $10.8 million in fiscal 1997
compared to operating income of $7.6 million in fiscal 1996 as a result of
revenue increases primarily in the United Kingdom and Sweden. The operating
income of the United States segment, which includes the results of the Corporate
headquarters, declined by $3.2 million to a break-even level. This reflects
losses incurred in the Company's Power Seminars activity as well as increased
Corporate costs. See Note 9 of Notes to Consolidated Financial Statements.
In 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share,"
SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." The Company does not
believe that these pronouncements will have a material effect on its reported
financial position or results of operations, and, as permitted by the FASB, will
adopt these new standards in future years.
FISCAL 1996 COMPARED WITH FISCAL 1995
For the fiscal year ended September 30, 1996, revenues increased by $24.8
million or 31% to $103.6 million from $78.8 million for the fiscal year ended
September 30, 1995. The growth of revenues is due, in part, to an increase in
the number of course participants to 71,792 compared to 60,461 in the
corresponding prior year. The additional course participants are primarily
attributable to
24
<PAGE>
increased direct mail marketing and an increase in the number of course titles
to 110 as of September 30, 1996, compared to 87 a year earlier. In addition, the
growth in the number of course participants is attributable to the expansion of
the number of Learning Tree-site course events which the Company held at sites
other than its education centers in order to broaden its customer base. Revenues
for fiscal 1996 also reflect higher average revenues per course participant. The
increase in the average revenues per course participant is attributable to the
increase in the proportion of higher-paying single course event participants
over those attending under the discounted Passport Program, increased revenue
per Passport attendee and increased prices for customer-site course events. A
significant portion of the Company's revenues are denominated in foreign
currencies which have been translated into dollars based upon the exchange rates
prevailing when the revenues were earned. Exchange rate changes during the year
reduced revenues by approximately $455,000 in fiscal 1996 compared to what they
would have been if they were translated at the exchange rates prevailing during
fiscal 1995.
For the fiscal year ended September 30, 1996, the cost of revenues increased
$10.2 million or 33% to $40.9 million from $30.7 million for the previous fiscal
year. The increase in the cost of revenues is primarily the result of an
increased number of course events. The number of course events increased 22% in
fiscal 1996 to 4,512 from 3,688 course events in fiscal 1995. Costs per course
event increased by approximately 7% in fiscal 1996 compared to fiscal 1995. The
change in the average cost per course event primarily reflects an increase in
the number of Learning Tree-site courses compared to those held at customer
sites, the higher costs of conducting more course events at sites other than
education centers due to education center capacity constraints and an increase
in the number of courses held in cities where the Company had not established an
education center.
For the fiscal year ended September 30, 1996, course development expenses
increased by $1.2 million or 26% to $6.2 million from $5.0 million for fiscal
1995. This increase reflected the costs associated with the Company's strategy
of expanding its course library to meet its customers' growing technology
training needs, updating and maintaining a growing course title library and
developing a multimedia CBT product line.
In fiscal 1996, the Company introduced its first multimedia CBT course titles.
To obtain greater control over the multimedia CBT development process, course
quality and costs of development, the Company expanded its in-house multimedia
CBT development team and discontinued the use of outside CBT course developers.
As of September 30, 1996, the Company had released 12 CBT course titles and had
an additional 16 titles under development. The Company began the initial
marketing of its multimedia CBT product line in January 1996.
Sales and marketing expenses increased $8.4 million or 37% to $31.2 million in
fiscal 1996 from $22.9 million in fiscal 1995. The increase in sales and
marketing expenses was due to an increase in telemarketing and field sales staff
and direct mail marketing intended to reach a broader range of potential
customers, to expand business with current customers, to expand the Company's
presence in certain U.S. cities and to communicate the availability of new
course titles. Accordingly, sales and marketing expenses for fiscal 1996
increased as a percentage of revenues to 30% compared to 29% in fiscal 1995.
In fiscal 1996, general and administrative expenses increased $674,000 or 6%
to $12.9 million from $12.2 million for fiscal 1995. As a percentage of revenue,
general and administrative expenses declined to 13% from 16% in the prior year
as a result of increased leveraging of the Company's infrastructure to support a
higher sales volume.
For fiscal 1996, other income increased $1.5 million to $1.8 million from
$272,000 for fiscal 1995. This increase was primarily attributable to additional
interest income arising from higher cash balances which were generated by
25
<PAGE>
operations and from the proceeds of the Company's initial and secondary public
stock offerings. The increase in interest income was partially offset by foreign
exchange losses of $186,000 in fiscal 1996, compared to foreign exchange gains
of $30,000 in fiscal 1995.
For fiscal 1996, the provision for income taxes increased by $2.2 million to
$4.0 million from $1.9 million for fiscal 1995. This increase reflects an
increase in income before taxes as well as the effect of utilizing tax loss
carryforwards. In fiscal 1996, certain of the Company's subsidiaries utilized
the last of their tax loss carryforwards to offset a portion of their taxable
income for the year whereas they were able to offset a greater portion of their
taxable income in 1995.
The Company's revenues in fiscal 1996 increased in each geographical segment
compared to fiscal 1995. The increases were greatest in the Company's largest
geographic segments, the United States and Europe. All of the Company's
geographic segments were profitable in fiscal 1996. The European segment
recorded operating income of $7.6 million in fiscal 1996 compared to operating
income of $4.1 million in fiscal 1995 as a result of revenue increases primarily
in the United Kingdom and Sweden. In fiscal 1996, the U.S. and Corporate segment
recorded operating income of $3.2 million compared to $3.4 million in fiscal
1995 as a result of increased Corporate costs. See Note 9 of Notes to
Consolidated Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly financial data for each of
the eight consecutive fiscal quarters ended September 30, 1997, including such
data expressed as a percentage of the Company's revenues. The Company believes
that this information includes all adjustments (which consisted solely of normal
recurring adjustments) necessary for a fair presentation of such quarterly
information when read in conjunction with the consolidated financial statements
included elsewhere herein. The operating results for any quarter are not
necessarily indicative of the results for any future period.
26
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues..................... $23,178 $22,712 $27,714 $29,971 $36,010 $35,759 $43,881 $48,833
Cost of revenues............. 9,232 8,969 10,297 12,381 14,342 15,448 18,468 22,181
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 13,946 13,743 17,417 17,590 21,668 20,311 25,413 26,652
Operating expenses
Course development.......... 1,242 1,432 1,746 1,828 2,382 2,372 3,254 3,040
Sales and marketing......... 6,208 7,936 7,659 9,442 9,891 11,409 13,203 16,781
General and
administrative............. 3,343 2,810 3,306 3,391 3,749 4,151 5,268 6,060
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses................... 10,793 12,178 12,711 14,661 16,022 17,932 21,725 25,881
------- ------- ------- ------- ------- ------- ------- -------
Income from operations....... 3,153 1,565 4,706 2,929 5,646 2,379 3,688 771
Other income (expense)....... 157 470 541 630 587 810 913 756
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes............ 3,310 2,035 5,247 3,559 6,233 3,189 4,601 1,527
Provision for income
taxes....................... 943 634 1,547 909 2,119 1,085 1,564 290
------- ------- ------- ------- ------- ------- ------- -------
Net income................... $ 2,367 $ 1,401 $ 3,700 $ 2,650 $ 4,114 $ 2,104 $ 3,037 $ 1,237
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF
REVENUES:
Revenues..................... 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues............. 40 40 37 41 40 43 42 45
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................ 60 60 63 59 60 57 58 55
Operating Expenses
Course development.......... 5 6 6 6 7 7 7 6
Sales and marketing......... 27 35 28 32 27 32 30 35
General and
administrative............. 14 12 12 11 10 11 12 12
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses................... 46 53 46 49 44 50 49 53
------- ------- ------- ------- ------- ------- ------- -------
Income from operations....... 14 7 17 10 16 7 9 2
Other income (expense)....... 0 2 2 2 1 2 2 1
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes............ 14 9 19 12 17 9 11 3
Provision for income
taxes....................... 4 3 6 3 6 3 4 1
------- ------- ------- ------- ------- ------- ------- -------
Net income................... 10% 6% 13% 9% 11% 6% 7% 2%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company has in the past experienced fluctuations in its quarterly
operating results and expects such fluctuations to continue in the future. The
Company's course development and sales and marketing expenses are incurred based
on its expectations regarding future market conditions and there can be no
assurance that the attendant revenues will occur. Specifically, the Company
intends to increase the amount of its expenditures for course development and
sales and marketing in the future. The Company may be unable to adjust its
expenditures in a timely manner to compensate for any unexpected revenue
shortfall. Any significant revenue shortfall would therefore have a material
adverse effect on the Company's results of operations. In addition, the
Company's operating results may fluctuate based on other factors including: the
frequency and availability of course events; the number of weeks in a quarter
during which courses can be conducted; the frequency, size of and response to
the Company's direct mail marketing campaigns; the timing of the introduction of
new course titles and alternate delivery methods; the mix between customer-site
course events and Learning Tree-site course events; competitive forces within
the current and anticipated future markets served by the Company; the spending
patterns of its customers; currency fluctuations; inclement weather; and general
economic conditions. Fluctuations in quarter-to-quarter
27
<PAGE>
results may also occur depending on differences in the timing of, and the time
period between, the Company's expenditures on the development and marketing of
its courses and the receipt of revenues.
The Company's revenues and income have also varied significantly from quarter
to quarter due to seasonal factors. The Company generally has greater revenue
and operating income in the second half of its fiscal year (April through
September) than in the first half of its fiscal year. This seasonality is due in
part to seasonal spending patterns of the Company's customers, and in part to
quarterly differences in the frequency and size of the Company's direct mail
marketing campaigns, as well as weather, holiday and vacation patterns. There
can be no assurance that these seasonal effects will remain the same in the
future.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $32.4 million at September 30, 1997
from $24.5 million at September 30, 1996. In addition, the Company had $24.3
million of short-term interest-bearing investments at September 30, 1997
compared to $37.0 million at September 30, 1996. The change in the combined
total of cash, cash equivalents and short-term interest-bearing investments in
fiscal 1997 primarily reflects the cash provided by operations and cash used for
additions to equipment, property and leasehold improvements.
For fiscal 1997, cash provided by operations was approximately $23.9 million
compared to $20.2 million during fiscal 1996. The increase in cash provided by
operations reflects the increase in profitability and increases in deferred
revenues arising from prepaid multi-enrollment programs. At September 30, 1997,
the Company had working capital of $31.1 million.
During fiscal 1997, the Company invested $22.2 million in equipment, property
and leasehold improvements compared to $9.2 million in fiscal 1996. This
increase is primarily related to additional course equipment to support the
growth in the number of course events and to upgrade course equipment
capabilities, the build-out of new education center and office facilities and
the purchase of office computer equipment. Although the Company expects to
continue to invest in additional equipment and facilities in fiscal 1998, as of
September 30, 1997, the Company had no material future purchase obligations,
capital commitments or debt. Accordingly, management believes that its cash,
cash equivalents and short-term interest-bearing investments together with the
cash provided by operations will be sufficient to meet the Company's cash
requirements at least until the end of fiscal 1998.
It is contemplated that part of the Company's cash, cash equivalents and
short-term interest-bearing investments may be used for acquisitions. While the
Company has no current agreements in place or negotiations underway with respect
to any acquisition, the Company plans to regularly evaluate acquisition
opportunities that fit within its business plan. Acquisitions involve numerous
risks, including potential difficulties in the assimilation of acquired
operations, diversion of management's attention away from normal operating
activities, negative financial impacts based on the amortization of acquired
intangible assets, the dilutive effects of the issuance of Common Stock in
connection with an acquisition, and potential loss of key employees of the
acquired operation. The Company has had no experience in executing and
implementing acquisitions and no assurance can be given as to the success of the
Company in executing and implementing acquisitions in the future.
The Company has not paid any cash dividends since its inception and does not
anticipate paying cash dividends in the foreseeable future.
28
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. 30
Consolidated Balance Sheets at September 30, 1996 and 1997................ 31
Consolidated Statements of Operations for the fiscal years ended
September 30, 1995, 1996 and 1997....................................... 32
Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended September 30, 1995, 1996 and 1997.................... 33
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 1995, 1996 and 1997....................................... 34
Notes to Consolidated Financial Statements................................ 35
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Learning Tree International, Inc.:
We have audited the accompanying consolidated balance sheets of Learning
Tree International, Inc. (a Delaware corporation) and subsidiaries as of
September 30, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Learning
Tree International, Inc. and subsidiaries as of September 30, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
November 20, 1997
30
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 24,541,000 $ 32,441,000
Short-term interest-bearing investments........... 37,000,000 24,330,000
Trade accounts receivable, less allowances of
$254,000 and $312,000, respectively.............. 12,652,000 23,201,000
Prepaid marketing expenses........................ 1,084,000 1,356,000
Prepaid expenses and other........................ 2,333,000 4,818,000
------------ ------------
Total current assets........................... 77,610,000 86,146,000
------------ ------------
Equipment, property and leasehold improvements:
Education and office equipment.................... 18,721,000 33,299,000
Transportation equipment.......................... 65,000 110,000
Property and leasehold improvements............... 4,287,000 9,858,000
------------ ------------
23,073,000 43,267,000
Less: accumulated depreciation and amortization... (11,427,000) (15,838,000)
------------ ------------
11,646,000 27,429,000
Deferred income taxes............................... 279,000 710,000
Other assets........................................ 1,994,000 8,066,000
------------ ------------
Total assets................................... $ 91,529,000 $122,351,000
============ ============
LIABILITIES
Current liabilities:
Current portion of debt and capital leases........ $ 125,000 $ 19,000
Trade accounts payable............................ 10,599,000 17,993,000
Deferred revenue.................................. 15,611,000 27,531,000
Accrued payroll, benefits and related taxes....... 2,149,000 3,250,000
Other accrued liabilities......................... 3,563,000 2,514,000
Income taxes payable.............................. 2,200,000 3,726,000
------------ ------------
Total current liabilities...................... 34,247,000 55,033,000
Long-term debt and capital leases, net of current
portion............................................ 134,000 --
Deferred facilities rent............................ 1,642,000 1,423,000
------------ ------------
Total liabilities.............................. 36,023,000 56,456,000
------------ ------------
Commitments
STOCKHOLDERS' EQUITY
Common Stock, $.0001 par value, 75,000,000
shares authorized, 21,995,000 and 21,995,000
shares issued and outstanding, respectively...... 2,000 2,000
Additional paid-in capital........................ 42,992,000 42,992,000
Notes receivable from stockholders................ (144,000) (14,000)
Deferred compensation--stockholders............... (207,000) (127,000)
Cumulative foreign currency translation........... (753,000) (1,066,000)
Retained earnings................................. 13,616,000 24,108,000
------------ ------------
Total stockholders' equity..................... 55,506,000 65,895,000
------------ ------------
Total liabilities and stockholders' equity..... $ 91,529,000 $122,351,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
---------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Revenues....................................... $78,818,000 $103,575,000 $164,483,000
Costs of revenues.............................. 30,731,000 40,879,000 70,439,000
----------- ------------ ------------
Gross profit................................. 48,087,000 62,696,000 94,044,000
----------- ------------ ------------
Operating expenses:
Course development........................... 4,954,000 6,248,000 11,048,000
Sales and marketing.......................... 22,883,000 31,245,000 51,284,000
General and administrative................... 12,176,000 12,850,000 19,228,000
----------- ------------ ------------
40,013,000 50,343,000 81,560,000
----------- ------------ ------------
Income from operations......................... 8,074,000 12,353,000 12,484,000
----------- ------------ ------------
Other income (expense):
Interest expense............................. (84,000) (45,000) (27,000)
Interest income.............................. 331,000 2,058,000 3,477,000
Foreign exchange............................. 30,000 (186,000) (9,000)
Other........................................ (5,000) (29,000) (375,000)
----------- ------------ ------------
272,000 1,798,000 3,066,000
----------- ------------ ------------
Income before provision for income taxes....... 8,346,000 14,151,000 15,550,000
Provision for income taxes..................... 1,866,000 4,033,000 5,058,000
----------- ------------ ------------
Net income..................................... $ 6,480,000 $ 10,118,000 $ 10,492,000
=========== ============ ============
Net income per common share and common
equivalent share.............................. $ 0.38 $ 0.49 $ 0.47
=========== ============ ============
Weighted average number of common and common
equivalent shares outstanding................. 17,046,000 20,609,000 22,099,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
CLASS A CLASS B ADDITIONAL RECEIVABLE
COMMON COMMON COMMON PAID-IN FROM
STOCK STOCK STOCK* CAPITAL STOCKHOLDERS
------ ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1994........................... $ -- $ 2,000 $ -- $ 322,000 $ (155,000)
FISCAL YEAR 1995:
Sales of Common Stock................................. -- -- -- 942,000 (579,000)
Repurchase of Common Stock............................ -- -- -- (48,000) 23,000
Net income............................................ -- -- -- -- --
Amortization of deferred compensation................. -- -- -- -- --
Foreign currency adjustments.......................... -- -- -- -- --
Collections on notes receivable from stockholders..... -- -- -- -- 32,000
------ ------- ------- ----------- ------------
Balance, September 30, 1995........................... -- 2,000 -- 1,216,000 (679,000)
FISCAL YEAR 1996:
Conversion of Class A and B Common Stock.............. 2,000 (2,000) -- -- --
Sales of Common Stock................................. -- -- -- 41,816,000 --
Repurchase of Common Stock............................ -- -- -- (40,000) 446,000
Net income............................................ -- -- -- -- --
Amortization of deferred compensation................. -- -- -- -- --
Foreign currency adjustments.......................... -- -- -- -- --
Collections on notes receivable from stockholders..... -- -- -- -- 89,000
------ ------- ------- ----------- ------------
Balance, September 30, 1996.......................... 2,000 -- -- 42,992,000 (144,000)
FISCAL YEAR 1997:
Net income............................................ -- -- -- -- --
Amortization of deferred compensation................. -- -- -- -- --
Foreign currency adjustments.......................... -- -- -- -- --
Collections on notes receivable from stockholders..... -- -- -- -- 130,000
------ ------- ------- ----------- ------------
Balance, September 30, 1997.......................... $2,000 $ -- $ -- $42,992,000 $ (14,000)
====== ======= ======= =========== ============
</TABLE>
<TABLE>
<CAPTION>
FOREIGN
CURRENCY TOTAL
DEFERRED TRANSLATION RETAINED STOCKHOLDERS'
COMPENSATION ADJUSTMENT EARNINGS EQUITY
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, September 30, 1994........................... $ -- $ (849,000) $(2,374,000) $ (3,054,000)
FISCAL YEAR 1995:
Sales of Common Stock................................. (321,000) -- -- 42,000
Repurchase of Common Stock............................ -- -- (171,000) (196,000)
Net income............................................ -- -- 6,480,000 6,480,000
Amortization of deferred compensation................. 34,000 -- -- 34,000
Foreign currency adjustments.......................... -- (33,000) -- (33,000)
Collections on notes receivable from stockholders..... -- -- -- 32,000
------------ ----------- ----------- -------------
Balance, September 30, 1995........................... (287,000) (882,000) 3,935,000 3,305,000
FISCAL YEAR 1996:
Conversion of Class A and B Common Stock.............. -- -- -- --
Sales of Common Stock................................. -- -- -- 41,816,000
Repurchase of Common Stock............................ -- -- (437,000) (31,000)
Net income............................................ -- -- 10,118,000 10,118,000
Amortization of deferred compensation................. 80,000 -- -- 80,000
Foreign currency adjustments.......................... -- 129,000 -- 129,000
Collections on notes receivable from stockholders..... -- -- -- 89,000
------------ ----------- ----------- -------------
Balance, September 30, 1996.......................... (207,000) (753,000) 13,616,000 55,506,000
FISCAL YEAR 1997:
Net income............................................ -- -- 10,492,000 10,492,000
Amortization of deferred compensation................. 80,000 -- -- 80,000
Foreign currency adjustments.......................... -- (313,000) -- (313,000)
Collections on notes receivable from stockholders..... -- -- -- 130,000
------------ ----------- ----------- -------------
Balance, September 30, 1997.......................... $ (127,000) $(1,066,000) $24,108,000 $ 65,895,000
============ =========== =========== =============
</TABLE>
* Par value amounts round to less than one thousand dollars.
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows--operating activities:
Net income.................................................................... $ 6,480,000 $ 10,118,000 $ 10,492,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................................... 2,146,000 3,187,000 6,015,000
Deferred facilities rent charges............................................ (481,000) (358,000) (227,000)
Amortization of deferred compensation....................................... 34,000 80,000 80,000
Unrealized foreign exchange (gains) losses.................................. (77,000) 154,000 (53,000)
Losses on retirements of equipment.......................................... 20,000 25,000 345,000
Change in net assets and liabilities:
Trade accounts receivable.................................................. (2,195,000) (4,120,000) (10,834,000)
Prepaid marketing expenses................................................. (335,000) (387,000) (291,000)
Prepaid expenses and other................................................. (692,000) (408,000) (2,438,000)
Income taxes............................................................... 960,000 1,270,000 1,128,000
Trade accounts payable..................................................... 1,155,000 3,797,000 7,432,000
Deferred revenue........................................................... 3,378,000 5,352,000 12,079,000
Accrued payroll, benefits and related taxes................................ 1,025,000 (528,000) 1,287,000
Other accrued liabilities.................................................. (21,000) 2,021,000 (1,108,000)
----------- ------------ ------------
Net cash provided by operating activities................................... 11,397,000 20,203,000 23,907,000
----------- ------------ ------------
Cash flows--investing activities:
Purchases of equipment, property and leasehold
improvements................................................................. (3,629,000) (9,169,000) (22,248,000)
Retirements of equipment...................................................... 61,000 31,000 23,000
Sales of investments held to maturity......................................... -- -- 36,001,000
Purchases of short-term interest-bearing investments:
Investments held to maturity................................................ -- (12,500,000) (22,132,000)
Investments held for sale................................................... -- (24,500,000) (1,200,000)
Other, net.................................................................... 62,000 (1,159,000) (6,126,000)
----------- ------------ ------------
Net cash used in investing activities....................................... (3,506,000) (47,297,000) (15,682,000)
----------- ------------ ------------
Cash flows--financing activities:
Principal payments of debt and capital leases................................. (799,000) (185,000) (240,000)
Proceeds from additional debt................................................. 255,000 -- --
Sales of Common Stock......................................................... 42,000 41,816,000 --
Repurchase of Common Stock.................................................... (196,000) (31,000) --
Collections of stockholder notes.............................................. 32,000 71,000 130,000
----------- ------------ ------------
Net cash provided by (used in) financing activities......................... (666,000) 41,671,000 (110,000)
----------- ------------ ------------
Effects of exchange rates on cash.............................................. 30,000 (65,000) (215,000)
----------- ------------ ------------
Net increase in cash and cash equivalents...................................... 7,255,000 14,512,000 7,900,000
Cash and cash equivalents at the beginning of the period....................... 2,774,000 10,029,000 24,541,000
----------- ------------ ------------
Cash and cash equivalents at the end of the period............................. $10,029,000 $ 24,541,000 $ 32,441,000
=========== ============ ============
Supplemental disclosures:
Income taxes paid............................................................. $ 1,036,000 $ 2,960,000 $ 3,558,000
=========== ============ ============
Interest paid................................................................. $ 119,000 $ 44,000 $ 23,000
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. Nature of the Business:
Learning Tree International, Inc. and subsidiaries (the "Company") develop,
publish and deliver advanced technology training courses covering a broad range
of topics which are designed to meet the training needs of information
technology ("IT") professionals worldwide. These courses are delivered primarily
at the Company's leased Education Centers located in the United States, England,
Canada, France and Sweden. Such course events are also conducted in hotel and
conference facilities, and at customer sites throughout the world. The Company
provides courses that are regularly presented worldwide and cover such IT topics
as client/server systems, Internet/intranet technologies, computer networks,
operating systems, database systems, programming languages, graphical user
interfaces, object-oriented technology, IT management and related topics. In
addition to its instructor-led courses, the Company has developed and is
expanding a line of multimedia CBT versions of its courses designed for both
stand-alone CD-ROM and network-based delivery.
b. Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
Learning Tree International, Inc. and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Minority interests
in certain subsidiaries are not significant. Following is a summary of the
subsidiaries of the Company:
Learning Tree International USA, Inc. (U.S.)
Learning Tree International, K.K. (Japan)
Learning Tree International Ltd. (United Kingdom)
Learning Tree International S.A. (France)
Learning Tree International AB (Sweden)
Learning Tree Publishing AB (Sweden)
Learning Tree International Inc. (Canada)
Learning Tree International Ltd. (Hong Kong)
Advanced Technology Marketing, Inc. (U.S.)
Systems for Business and Industry, Inc. (U.S.)
Technology for Business and Industry, Inc. (U.S.)
c. Reincorporation and Capital Stock:
In September 1995, the Company reincorporated in Delaware. In March 1997, the
Company increased the authorized number of shares of Common Stock, $.0001 par
value ("Common Stock"), from 25,000,000 to 75,000,000 shares. In addition, the
Company's authorized capital stock includes an additional 10,000,000 shares of
preferred stock, $.0001 par value ("Preferred Stock"). No shares of Preferred
Stock have been issued nor have the terms, conditions or preferences for such
Preferred Stock been established.
d. Stock Dividend and Stock Split:
In December 1996, the Company declared a stock split which was effected in the
form of a 50% stock dividend to all holders of its Common Stock. This dividend
was accounted for as a large stock dividend and, accordingly, all share and per
share amounts in the accompanying financial statements and footnotes have been
retroactively restated to reflect the stock dividend.
35
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In October 1995, the Company effected a 3.66 for 1 split of the Company's Class
A and Class B Common Stock. All share and per share amounts in the accompanying
financial statements and footnotes have been retroactively restated to reflect
the stock split.
e. Revenue Recognition - Instructor-Led Courses:
The Company's revenues are received from corporate and governmental agencies
for the training of their employees. Course events range from two to five days
with an average of approximately four days. For individual course enrollments,
the Company recognizes revenues and the related direct costs of course events
upon commencement of each course event which, for each period presented,
approximates the amount recognized on a straight-line basis over the duration of
the course.
The Company offers a sales discount program referred to as the Passport
Program. The Passport Program allows an individual passport holder to attend up
to a specified number of courses held by the Company over a one year period for
a fixed price. Under the Passport Program, the amount of revenue recognized for
each attendance in one of the Company's courses is based upon the selling price
of the Passport and the estimated average number of courses passport holders
will actually attend. Upon expiration of a Passport, the Company records the
differences, if any, between the revenues previously recognized and the Passport
selling price. The estimated attendance rate is based upon the historical
experience of the average actual number of course events Passport holders have
been attending. The average of the actual attendance rate for all expired
Passports has closely approximated the estimated rate utilized by the Company.
If the Passport attendance rate changes, based upon this historical data, the
Company adjusts the revenue recognition rate for all active Passports and for
all Passports sold thereafter. Although the Company has seen no material changes
in the historical rates as its number of course titles has increased, it
monitors such potential effects. In general, determining the estimated average
number of course events that will be attended by a Passport holder is based on
historical trends that may not continue in the future. These estimates could
differ in the near term from amounts used in arriving at the reported revenue.
f. Revenue Recognition - Multimedia CBT Courses:
The Company derives its revenues from its multimedia computer based training
("CBT") products under license agreements under which customers license the
usage of products for periods of one, two or three years. On each anniversary
date during the term of multi-year license agreements, customers are allowed to
exchange any or all of the licensed course titles for an equal number of new
course titles. The first year license fee is generally recognized as revenue at
the time of delivery, provided there are no significant vendor obligations
remaining. Subsequent annual license fees are recognized on each anniversary
date, provided there are no significant vendor obligations remaining. If
significant vendor obligations exist at the time of delivery, revenue is
deferred and recognized ratably over the term of the license agreement. The cost
of satisfying any insignificant vendor obligations is accrued at the time
revenue is recognized. Unearned license revenues are recorded as deferred
revenues.
g. Deferred Revenues:
Deferred revenues primarily relate to unearned revenues associated with the
Passport Program, refundable advance payments received from customers for course
events to be held in the future and unearned revenues associated with multi-year
license agreements for multimedia CBT courses.
36
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
h. Prepaid Marketing Expenses:
Prepaid marketing expenses primarily include the external costs associated
with the design, printing, postage and handling of direct mail advertising
materials to be mailed in the future. These costs are expensed in the month in
which the advertising materials are mailed since the benefit period for such
costs is short and the amount of such future benefit is not practically
measurable. Marketing expenses for the years ended September 30, 1995, 1996 and
1997 were $14,850,000, $21,612,000 and $33,852,000, respectively.
i. Course Development Costs:
Instructor-led IT training course development costs are charged to operations
in the period incurred. Multimedia CBT development costs are accounted for in
accordance with Statement of Financial Accounting Standards No. 86 (SFAS No. 86)
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed". SFAS No. 86 requires capitalization of certain software development
costs upon the establishment of technological feasibility. Based on the
Company's multimedia CBT product development process, technological feasibility
is established upon the completion of a working model or a detail course design.
For the fiscal years ended September 30, 1995, 1996 and 1997, $234,000, $723,000
and $1,993,000 of multimedia CBT product development costs, respectively, were
charged to course development expense in the accompanying consolidated
statements of operations. Multimedia CBT development costs which were
capitalized as of September 30, 1996 and 1997 were approximately $1,202,000 and
$6,160,000, respectively. Capitalized multimedia CBT development costs are
recorded as other assets in the consolidated balance sheets. Capitalized
multimedia CBT product development costs are amortized on a product-by-product
basis at the greater of the amount computed using (a) the ratio of current
revenues for a product to the total of current and anticipated future revenues
or (b) the straight-line method over the estimated economic life of the product
which is 24 months.
j. Foreign Currency:
The Company translates the financial statements of its foreign subsidiaries
from the local (functional) currencies to United States dollars in accordance
with SFAS No. 52. The rates of exchange at each fiscal year end are used for
translating the balance sheets and the average monthly rates of exchange for
each year are used for the statements of operations. Gains or losses arising
from the translation of the foreign subsidiaries' financial statements are
included in the accompanying consolidated balance sheets as a separate component
of stockholders' equity. Gains or losses resulting from foreign currency
transactions are included in the consolidated statements of operations.
To date, the Company has not sought to hedge the risk associated with
fluctuations in currency exchange rates, and therefore continues to be subject
to such risk.
k. Equipment, Property and Leasehold Improvements:
Equipment, property and leasehold improvements are recorded at cost and
depreciated or amortized using the straight-line method over the following
useful lives:
<TABLE>
<S> <C>
Education and office equipment.............. 3 to 5 years
Transportation equipment.................... 4 years
Leasehold improvements...................... 10 years or the life of the lease, if shorter
Property.................................... 30 years
</TABLE>
37
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Costs of normal maintenance and repairs and minor replacements are charged to
expense as incurred. The costs of assets sold or retired are eliminated from the
accounts along with the related accumulated depreciation or amortization and any
resulting gain or loss is included in income. Capitalized equipment leases are
recorded at the lower of the present value of the minimum lease payments or the
fair market value of the equipment at the beginning of the lease term.
l. Facilities Leases:
The Company leases its facilities under various operating lease agreements.
Certain provisions of these leases provide for cash incentives, graduated rent
payments and other inducements. The Company recognizes rent expense on a
straight-line basis which more closely reflects the benefits received. The value
of any lease incentives or inducements, along with the excess of rent expense
recognized over rentals paid is recorded as deferred facilities rent charges in
the accompanying consolidated financial statements.
m. Computation of Net Income per Common Share and Common Equivalent Share:
Net income per common share and common equivalent share is computed using the
weighted average number of shares of Common Stock outstanding during the period
after giving retroactive effect to the 50% stock dividend paid in December 1996
and the 3.66 to 1 stock split that occurred in October 1995. For fiscal 1995,
common stock and common stock equivalents issued by the Company during the
twelve months preceding the Company's initial public offering, at prices below
the initial public offering price (654,000 shares), were included in the
calculation of the shares outstanding by using the treasury stock method.
In 1997, Statement of Financial Accounting Standards No. 128 (SFAS No. 128)
"Earnings per Share" was issued. SFAS No. 128 establishes new standards for
computing and presenting earnings per share and will be adopted by the Company
in fiscal 1998. The Company does not believe that SFAS No. 128 will have a
material effect on the reported income per common share and common equivalent
share.
n. Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
2. PREPAID EXPENSES AND OTHER:
Prepaid expenses and other current assets at September 30, 1996 and 1997
consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Prepaid rent..................... $ 363,000 $ 653,000
GST and VAT on advance billings... 695,000 914,000
Miscellaneous receivables......... 213,000 856,000
Supplier deposits................. 32,000 56,000
Interest receivable............... 223,000 207,000
Other............................. 807,000 2,132,000
---------- ---------
$2,333,000 $4,818,000
========== ==========
</TABLE>
38
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INCOME TAXES:
The Company files a consolidated U.S. Federal income tax return which includes
substantially all of its domestic operations. The Company files separate tax
returns for each of its foreign subsidiaries in the countries in which they
reside.
Income before provision for income taxes consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Domestic..................................... $3,645,000 $ 4,577,000 $ 2,441,000
Foreign...................................... 4,701,000 9,574,000 13,109,000
---------- ----------- -----------
Total....................................... $8,346,000 $14,151,000 $15,550,000
========== =========== ===========
</TABLE>
For the years ended September 30, 1995, 1996 and 1997, the provision for
income taxes was comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Current tax provision:
U.S. Federal................................ $ 732,000 $ 1,167,000 $ 498,000
State....................................... 208,000 247,000 254,000
Foreign..................................... 1,063,000 2,420,000 4,746,000
---------- ----------- -----------
2,003,000 3,834,000 5,498,000
---------- ----------- -----------
Deferred tax provision:
U.S. Federal................................ (181,000) 153,000 (404,000)
State....................................... 20,000 9,000 (35,000)
Foreign..................................... 24,000 37,000 (1,000)
---------- ----------- -----------
(137,000) 199,000 (440,000)
---------- ----------- -----------
Total provision for income taxes............. $1,866,000 $ 4,033,000 $ 5,058,000
========== =========== ===========
</TABLE>
The following is a reconciliation of the provision for income taxes and the
credit for income taxes computed by applying the U.S. Federal statutory rate to
the income before taxes:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes at the statutory rate........ $2,837,000 $4,811,000 $5,342,000
Permanent differences..................... (88,000) (192,000) (283,000)
Change in valuation allowance............. (923,000) (577,000) (429,000)
Effect of current and foreign losses...... (23,000) (131,000) --
Effect of foreign taxes and tax credits... (133,000) (42,000) 260,000
State income taxes........................ 208,000 164,000 168,000
Other, net................................ (12,000) -- --
---------- ---------- ----------
Total provision for income taxes.......... $1,866,000 $4,033,000 $5,058,000
========== ========== ==========
</TABLE>
39
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under Statement of Financial Accounting Standards No. 109 "Accounting for
Income Taxes," deferred income tax assets and liabilities arise from
carryforwards and from temporary differences between the tax basis of assets and
liabilities and the book basis of such assets and liabilities as reported in the
financial statements. A valuation allowance was provided with respect to certain
deferred tax assets as of September 30, 1996, to reduce the deferred tax asset
to a level which, more likely than not, would be realized. The net deferred tax
asset reflects management's estimates of the amount which will be realized from
the future profitability which can be predicted with reasonable certainty.
The following is a summary of the tax effect of carryforwards and temporary
differences which give rise to deferred tax assets and liabilities:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Domestic operations:
Deferred tax assets:
Deferred facilities rent charges... $ 430,000 $ 389,000
Foreign tax credit carryforwards... 353,000 435,000
Other.............................. 147,000 230,000
Deferred tax liabilities:
Depreciation and amortization...... (246,000) (368,000)
Other.............................. (17,000) (18,000)
--------- ---------
Net domestic deferred tax assets... 667,000 668,000
--------- ---------
Foreign operations:
Deferred tax assets:
Depreciation and other............. 41,000 42,000
--------- ---------
Net foreign deferred tax assets.... 41,000 42,000
--------- ---------
Valuation allowance.................... (429,000) --
--------- ---------
Net deferred tax assets................ $ 279,000 $ 710,000
========= =========
</TABLE>
At September 30, 1997, the Company had approximately $435,000 of foreign
tax credit carryforwards available to offset U.S. Federal income taxes in future
years. The foreign tax credit carryforwards expire in 2002.
4. DEBT AND CAPITAL LEASES:
The following is a summary of obligations under debt and capital leases as of
September 30, 1996 and 1997, respectively:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1996 1997
--------- --------
<S> <C> <C>
Notes payable to former employees with various
maturities through 2001 bearing interest at 5 to
8 percent (See note 6)............................. $ 170,000 $ --
Capital lease obligations, due through 1998......... 89,000 19,000
--------- --------
259,000 19,000
Less--current portion............................... (125,000) (19,000)
--------- --------
$ 134,000 $ --
========= ========
</TABLE>
40
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
One of the Company's foreign subsidiaries has established a line of credit
with a local bank. The amount available under this facility as of September 30,
1997, was $338,000. At September 30, 1997, there were no borrowings against this
line. Interest on borrowings under this facility would be payable monthly at a
variable rate which was 9.3 percent as of September 30, 1997.
The Company leases certain equipment costing approximately $261,000 under
capital lease agreements. The following summarizes the future minimum lease
payments under capitalized leases together with the present value of the future
minimum lease payments:
<TABLE>
<S> <C>
1998.............................................. $20,000
Less--amount representing interest................ (1,000)
-------
$19,000
=======
</TABLE>
5. COMMITMENTS:
The Company leases its facilities and certain equipment under various
operating lease agreements. The minimum future rental payments for all operating
leases are as follows:
<TABLE>
<S> <C>
1998.............................................. $ 4,885,000
1999.............................................. 4,714,000
2000.............................................. 4,220,000
2001.............................................. 3,685,000
2002.............................................. 3,273,000
Thereafter........................................ 10,848,000
-----------
$31,625,000
===========
</TABLE>
For the years ended September 30, 1995, 1996 and 1997, rent expense was
$3,486,000, $3,985,000 and $4,573,000, respectively. The agreements generally
require the payment of property taxes, insurance and maintenance in addition to
the minimum base rent.
6. STOCKHOLDERS' EQUITY:
Common Stock Sold to Employees--
Prior to December 6, 1995, the Company's Common Stock was divided into two
classes: Class A Voting (Class A Stock) and Class B Non-Voting Common Stock
(Class B Stock). During fiscal years 1994 and 1995, the Company sold
approximately 121,000 shares and 1,104,000 shares of Class B Stock,
respectively, to certain employees. The purchase price of these shares was
determined based on the formula as defined in the stock purchase agreements.
Proceeds from the sales of these shares of Class B Stock included cash and full
recourse notes. Effective as of the closing of the initial public offering on
December 6, 1995, each outstanding share of Class B Stock was converted into one
fully paid and non-assessable share of Class A Stock. Thereafter, the Common
Stock ceased being divided into series and has since consisted of a single
class. There were 2,125,000 shares of Class B Stock outstanding at September 30,
1995.
41
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of September 30, 1997, approximately 393,000 shares of the Common Stock
sold in fiscal 1995 are subject to repurchase options. The repurchase option
terms stipulate that the Company, at its sole option, may repurchase these
shares from the stockholder in the event the stockholder leaves the employment
of the Company for any reason. The Company can repurchase the shares at an
amount equal to the initial issue price plus seven percent per annum. These
repurchase options expire over a four-year period at a rate of 25 percent per
year.
The Company recorded deferred compensation of $321,000, which represented the
excess of the appraised value of $0.94 per share in January 1995 and $1.26 per
share in June 1995 (as determined by an independent appraisal) over the initial
issue price of $.63 per share of 654,000 shares of the Class B Stock sold to
certain employees during fiscal 1995. The deferred compensation is reflected as
a reduction of stockholders' equity in the accompanying financial statements and
is being amortized as additional compensation expense over the four-year term of
the repurchase options. During the fiscal years ended September 30, 1995, 1996
and 1997, the Company recorded $34,000, $80,000 and $80,000 of additional
compensation expense relating the amortization of the deferred compensation,
respectively.
During the fiscal year ended September 30, 1995, the Company repurchased
229,000 shares of Class B Stock under the terms of the repurchase agreements.
The aggregate repurchase prices of these shares was $219,000. The settlement of
these stock repurchases was completed through the cancellation of notes
receivable from the selling stockholders, cash payments and the issuance of
notes payable by the Company of $195,000. (See Note 4.)
In March 1996, the Company repurchased 39,590 shares of Common Stock from
employees for the cancellation of notes receivable from such stockholders in the
amount of $446,000. In addition, during March 1996, notes receivable from
stockholders in the amount of $19,000 were offset against the equivalent amount
of notes payable to such stockholders. In June 1996, the Company repurchased
49,333 shares from a former employee for $31,000 in cash under the terms of a
repurchase agreement.
Initial Public Offering--
In December 1995, 4,500,000 shares of the Company's Common Stock were sold in
an initial public offering, of which 3,750,000 shares were sold by the Company
and 750,000 shares were sold by certain stockholders of the Company. The Company
did not receive any proceeds from the sale of shares by its stockholders. In
January 1996, an additional 675,000 shares of Common Stock were sold by the
Company pursuant to a purchase option granted to the underwriters at the time of
the initial public offering to cover over allotments. The Company received
proceeds of approximately $30.8 million, net of expenses of approximately $4.6
million, from its sale of shares in the initial public offering.
42
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Secondary Public Offering--
In September 1996, the Company completed a secondary public offering whereby
3,899,000 shares of its Common Stock were sold to the public. The Company sold
600,000 shares and 3,299,000 shares were sold by certain stockholders of the
Company. The Company did not receive any of the proceeds from the sale of shares
by its stockholders. The Company received approximately $11.0 million from its
sale of shares in the secondary public offering after deducting underwriters'
commissions and its share of other stock issuance costs which aggregated
approximately $1.0 million.
Stock Options--
During the fiscal years ended September 30, 1989 and September 30, 1994, the
Company entered into agreements with certain employees to sell an aggregate of
450,000 shares of Class B common stock at the contractual formula value
(estimated fair market value) ranging from $0.19 to $0.63 per share. During
fiscal 1995, all of these options were exercised and the shares were issued.
7. EMPLOYEE STOCK OPTION PLAN:
In October 1995, the Company and its stockholders adopted the 1995 Stock
Option Plan (the "Stock Option Plan"), which provides for the issuance of
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code and non-qualified stock options to purchase an aggregate of up to
2,250,000 shares of the Common Stock of the Company. The Stock Option Plan
permits the grant of options to officers, employees and directors of the
Company. The exercise price of incentive stock options granted will be greater
than or equal to the fair market value of the Common Stock at the date of grant
and the maximum term of the options may not exceed ten years. The vesting
schedule and the period required for full exercisability of the stock options
are at the discretion of the Board of Directors but in no event can it be less
than six months.
No options were granted under the Stock Option Plan during fiscal 1996.
During the year ended September 30, 1997, non-qualified options were granted
under the Stock Option Plan to substantially all employees with at least one
year of service with the Company. The exercise price of options granted was
equal to the fair market value of the Common Stock at the date of grant and the
terms of the options are five years. The options are subject to a four year
vesting schedule at 25 percent per year on each anniversary date. Following is
a summary of the options granted under the Stock Option Plan:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
Outstanding at September 30, 1996 -- $ --
Options Granted 901,000 25.66
Exercised during the year -- --
Forfeited during the year (65,000) 26.51
------- ------
Outstanding at September 30, 1997 836,000 $25.60
======= ======
Exercisable at September 30, 1997 --
=======
</TABLE>
The Company applies APB Opinion No. 25 in accounting for the Stock Option
Plan. Accordingly, no compensation cost has been recognized for options granted
during fiscal 1997. Had compensation cost for the options granted been
determined based upon the estimated fair value at the grant dates in accordance
with Statement of
43
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," the Company's net income and net income per common share and
common equivalent share would have been reduced to the pro forma amounts below:
<TABLE>
<S> <C> <C>
Net Income As reported $10,492,000
Pro forma 10,014,000
Income per share As reported $ 0.47
Pro forma 0.45
</TABLE>
The foregoing pro forma amounts have been calculated using the Black-Scholes
option-pricing model to estimate the fair value of the options granted during
the year ended September 30, 1997 with the following assumptions: a risk-free
interest rate of 6.2 percent; a dividend yield of zero; an expected life of two
and one-half years; and a volatility of 38 percent. Based upon these
assumptions, the pro forma weighted average fair value of the options granted
during fiscal 1997 was $7.62.
8. EMPLOYEE BENEFIT PLAN:
The Company has adopted a defined contribution plan for the benefit of its
domestic employees who have met the eligibility requirements. The Learning Tree
International, Inc. Profit-Sharing and Deferred Savings Plan (the Plan) is a
profit-sharing plan qualifying under Section 401(k) of the Internal Revenue
Code.
Qualified employees may elect to contribute up to 15 percent of their
compensation to the Plan on a pre-tax basis, subject to statutory limitations.
During fiscal 1995 and 1996, the Company made matching contributions at a rate
of 25 percent of elective contributions up to one and one-half percent of the
compensation of such contributors. Additionally, the Company made qualified
nonelective contributions to the Plan on an annual basis. The qualified
nonelective contributions were equivalent to one and one-half percent of the
annual compensation of the qualified participants. As of October 1, 1996, the
Plan was amended such that the Company makes contributions at a rate of 75
percent of elective contributions up to four and one-half percent of the
compensation of such contributors. The annual qualified nonelective
contributions to the Plan have been eliminated. The Company contributed
$129,000, $225,000 and $540,000 to the Plan for the fiscal years ended September
30, 1995, 1996 and 1997, respectively.
The Company has adopted similar plans for the benefit of its employees in
certain of its foreign subsidiaries. Contributions to these plans are subject to
various age, length of service and compensation level criteria as well as
certain limitations. For the fiscal years ended September 30, 1995, 1996 and
1997, the cost to the Company of these plans was approximately $110,000,
$162,000 and $195,000, respectively.
9. BUSINESS SEGMENT DATA:
The Company's sole business segment is the design and delivery of IT education
courses. There were no sales to any individual customers that accounted for 10%
or more of revenue in fiscal 1995, 1996 or 1997.
44
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Information about the Company's operations in different geographic locations
for the years ended September 30, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
United States and Corporate.............................. $35,390,000 $ 49,790,000 $ 90,371,000
Canada................................................... 6,102,000 7,748,000 10,936,000
Europe................................................... 35,637,000 43,746,000 61,214,000
Asia..................................................... 1,689,000 2,291,000 1,962,000
----------- ------------ ------------
Consolidated revenues................................... $78,818,000 $103,575,000 $164,483,000
=========== ============ ============
Income from operations:
United States and Corporate.............................. $ 3,375,000 $ 3,173,000 $ 9,000
Canada................................................... 342,000 958,000 1,466,000
Europe................................................... 4,056,000 7,636,000 10,781,000
Asia..................................................... 301,000 586,000 228,000
----------- ------------ ------------
Consolidated income from operations..................... $ 8,074,000 $ 12,353,000 $ 12,484,000
=========== ============ ============
Identifiable assets:
United States and Corporate.............................. $14,657,000 $ 69,568,000 $ 89,433,000
Canada................................................... 1,189,000 2,634,000 4,891,000
Europe................................................... 12,428,000 18,916,000 27,652,000
Asia..................................................... 153,000 411,000 375,000
----------- ------------ ------------
Consolidated assets..................................... $28,427,000 $ 91,529,000 $122,351,000
=========== ============ ============
</TABLE>
10. VALUATION AND QUALIFYING ACCOUNTS:
For the years ended September 30, 1995, 1996 and 1997, activity with respect
to the Company's allowance for doubtful accounts receivable is summarized as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------
1995 1996 1997
-------- --------- ----------
<S> <C> <C> <C>
Beginning balance...................................... $197,000 $ 259,000 $ 254,000
Charged to expense..................................... 107,000 101,000 280,000
Amounts written off.................................... (45,000) (106,000) (222,000)
-------- --------- ----------
Ending balance......................................... $259,000 $ 254,000 $ 312,000
======== ========= =========
</TABLE>
11. CASH, CASH EQUIVALENTS AND SHORT-TERM INTEREST-BEARING INVESTMENTS:
Cash Equivalents--
The Company considers highly liquid investments with original maturities of 90
days or less to be cash equivalents.
Short-Term Interest-Bearing Investments--
Investments held to maturity mature between one and twelve months. Investments
held for sale mature after ten years but are subject to put options, at par
value, every 28 days. Cost approximates market value for all classifications of
cash and short-term interest-bearing investments. There were no material
realized or unrealized gains or losses on such investments.
45
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Following is a summary of the Company's short-term interest-bearing
investments as of September 30, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Investments held to maturity:
Commercial paper................................ $12,620,000 $13,419,000
U.S. government agency debt..................... 5,000,000 --
----------- -----------
17,620,000 13,419,000
Less investments included in cash equivalents... 5,120,000 4,589,000
----------- -----------
Total held to maturity.......................... 12,500,000 8,830,000
Investments held for sale:
State and local government debt................. 24,500,000 15,500,000
----------- -----------
Total interest-bearing investments............... $37,000,000 $24,330,000
=========== ===========
</TABLE>
Cash Flow Information--
The Company purchased Class B Stock from employees for cancellation of notes
receivable of $23,000 and $446,000 during the years ended September 30, 1995 and
1996, respectively. In addition, during March 1996, notes receivable from
stockholders in the amount of $19,000 were offset against the equivalent amount
of notes payable to such stockholders. The Company sold Class B Stock to
employees and received promissory notes of $579,000 as partial consideration
therefor during the fiscal year ended September 30, 1995.
12. RELATED PARTY TRANSACTIONS:
Consulting Agreements--
In January 1995, the Company and M. Kane & Company, Inc. ("MKC") entered into
an agreement pursuant to which MKC agreed to provide financial advice and
assistance. In consideration for such services, MKC received 1.875% of the gross
proceeds of the initial public offering. This agreement terminated upon the
settlement date of the initial public offering. The president of MKC is a
Director of the Company.
In July 1996, the Company and MKC entered into a second agreement pursuant to
which MKC agreed to provide financial advice and assistance. As consideration
for such services, MKC received 1.805% of the gross proceeds of the secondary
public offering. In addition, MKC received approximately $5,000 for
reimbursement of nonaccountable expenses. This agreement terminated at the
completion of the secondary public offering.
Employment Agreements--
In October 1995, the Company entered into employment agreements with the Chief
Executive Officer and President of the Company, each for a minimum period of
three years, which may be extended for additional periods of three years at the
option of the officer involved.
46
<PAGE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides biographical information regarding the directors
and executive officers of the Company as of September 30, 1997. All other
information regarding directors and executive officers of the Company required
by this item is incorporated by reference to the section entitled "Executive
Officers of the Registrant" of the Company's definitive Proxy Statement to be
delivered to shareholders in connection with the 1998 Annual Meeting of
Shareholders.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
David C. Collins(1)............... 57 Chairman of the Board of Directors and Chief
Executive Officer
Eric R. Garen..................... 50 President and Director
Max S. Shevitz.................... 42 Executive Vice President and Director
Gary R. Wright.................... 40 Vice President, Finance, Chief Financial Officer
and Secretary
Mary C. Adams..................... 41 Vice President, Administration, Investor Relations
and Assistant Secretary
W. Mathew Juechter(1)............. 64 Director
Michael W. Kane(1)................ 46 Director
Alan B. Salisbury................. 60 Director and President and General Manager, Learning
Tree International USA, Inc.
</TABLE>
- --------
(1) Member of the Audit Committee and the Compensation Committee.
Dr. Collins, a co-founder of the Company, has been Chairman of the Board and
Chief Executive Officer since the Company's business began in 1974 (under the
name Integrated Computer Systems Publishing Co., Inc.). Dr. Collins has a
Bachelor of Science degree (with distinction) in Electrical Engineering from
Stanford University, and Masters and Ph.D. degrees in Electrical Engineering
from the University of Southern California.
Mr. Garen, a co-founder of the Company, has served first as Executive Vice
President and then as President of the Company since the Company's business
began in 1974. Mr. Garen holds a Bachelors degree in Electrical Engineering from
the California Institute of Technology and a Masters degree in Computer Science
from the University of Southern California, both with honors.
Mr. Shevitz has been Executive Vice President of the Company since July 1994,
and was General Manager of Learning Tree International U.S.A., Inc., a
subsidiary of the Company, from September 1988 to December 1993. From January to
July 1994, Mr. Shevitz was Executive Vice President at Sigma International,
Inc., a customer service training company. From 1986 to 1988, Mr. Shevitz was
the founder and President of MD Technology, Inc., a medical diagnostic equipment
company. Mr. Shevitz holds a Masters degree in Business Administration with
honors from the University of Virginia.
Mr. Wright has been Vice President, Finance and Chief Financial Officer of the
Company since January 1995, and from January 1990 to that time he was Corporate
Controller of the Company. From April 1983 to January 1990, Mr. Wright was
employed by The Flying Tiger Line Inc. and its parent company, Tiger
International, Inc., a publicly-held transportation company, where he held a
variety of financial executive positions, including Assistant Controller and
Director of Financial Reporting. Prior to April 1983, Mr. Wright worked at the
public accounting firm of Arthur Andersen LLP. Mr. Wright is a certified public
accountant.
47
<PAGE>
Ms. Adams has served as Vice President, Administration since September 1995.
She began her association with the Company in September 1975 and has held a
variety of positions in the Company. Ms. Adams is also the President of Advanced
Technology Marketing, Inc., a wholly-owned subsidiary of the Company, and
manages the Company's Investor Relations Department.
Mr. Juechter has been a director of the Company since June 1987. Since 1991,
he has been the Chief Executive Officer of ARC International Ltd., a management
consulting and training company. From 1986 to 1991, Mr. Juechter was Managing
Director of IRA, Inc. in St. Paul, Minnesota, a management consulting company.
Mr. Juechter was President and Chief Executive Officer of Wilson Learning Corp.,
a multi-national training organization, from 1977 to 1986. From 1989 to 1997,
Mr. Juechter served as President of the Board of Governors of the American
Society for Training and Development (ASTD).
Dr. Kane has served as a director of the Company since February 1995. Since
1991, he has been President and Chief Executive Officer of M. Kane & Company,
Inc., an investment banking firm focusing primarily on technology companies.
From 1987 to 1988, he was an investment banker with L.F. Rothschild & Co., Inc.
and from 1988 to 1991 was an investment banker with Oppenheimer & Co., Inc. From
1984 to 1987, he practiced primarily corporate and securities law with the law
firm of Irell & Manella, and prior to that he was a Project Leader in the
Systems Sciences Department of The Rand Corporation and was an independent
consultant to the satellite telecommunications industry. Dr. Kane has a Bachelor
of Arts degree in Political Science from the University of Wisconsin--Madison
and a Master's degree in International Relations, a Ph.D. degree in Political
Science and a J.D. degree from the University of California, Los Angeles.
Dr. Salisbury has been President and General Manager of Learning Tree
International USA, Inc., the Company's operating subsidiary in the United
States, since April 1993. From 1991 until he joined the Company in 1993, Dr.
Salisbury was Chief Operating Officer of Microelectronics and Computer
Technology Corporation (MCC), an organization involved in the research and
development of IT products located in Austin, Texas; and from 1987 to 1991, he
was President of the Contel Technology Center, the research and development
group of an independent telephone company located in Chantilly, Virginia. Dr.
Salisbury is a director of Sybase, Inc., a database software developer, Template
Software, a vertical applications software provider and Telepad Corporation, a
computer manufacturer. The author of numerous books and articles related to
information technology and education, Dr. Salisbury served in the United States
Army from 1958 to 1987, when he retired as Commanding General of the U.S. Army
Information Systems Engineering Command. He holds a Bachelor of Science degree
(with distinction) from the U.S. Military Academy, and Masters and Ph.D. degrees
in Electrical Engineering and Computer Science from Stanford University.
David C. Collins and Mary C. Adams are married. There are no other family
relationships among any of the directors or executive officers of the Company.
Item 11. EXECUTIVE COMPENSATION
The information regarding compensation of executive officers of the Company
required by this item is incorporated by reference to the section entitled
"Executive Compensation" of the Company's definitive Proxy Statement to be
delivered to shareholders in connection with the 1998 Annual Meeting of
Shareholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information regarding the security ownership of certain beneficial owners
and management required by this item is incorporated by reference to the section
48
<PAGE>
entitled "Security Ownership of Certain Beneficial Owners and Management" of the
Company's definitive Proxy Statement to be delivered to shareholders in
connection with the 1998 Annual Meeting of Shareholders.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and related transactions
required by this item is incorporated by reference to the section entitled
"Certain Transactions" of the Company's definitive Proxy Statement to be
delivered to shareholders in connection with the 1998 Annual Meeting of
Shareholders.
49
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Schedules
The financial statements of Learning Tree International, Inc. as set forth
under item 8 are filed as part of this report.
All Schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are omitted because
such schedules are not required under the related instructions, are not
applicable or the required information is given in the financial
statements.
(b) Reports on Form 8-K
There were no reports on Form 8-K during the three month period ended
September 30, 1997.
(c) Exhibit index
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Registrant*
3.2 By-Laws of the Registrant*
4.1 Specimen of Common Stock Certificate**
10.1 Employment Agreement dated as of October 1, 1995 between Learning
Tree International, Inc. and Dr. David C. Collins**
10.2 Employment Agreement dated as of October 1, 1995 between Learning
Tree International, Inc. and Eric R. Garen**
10.3 Employment Agreement dated as of April 19, 1993 between Learning
Tree International (USA), Inc. and Alan B Salisbury*
10.4 Employment Agreement dated as of February 1978, as amended, between
Learning Tree International, Inc. and Mary C. Adams**
10.5 Employment Agreement dated as of July 18,1994, as amended, between
Learning Tree International, Inc. and Max S. Shevitz*
10.6 Employment Agreement dated as of January 8, 1990, as amended, between
Learning Tree International, Inc. and Gary R. Wright**
10.7 Form of Training Advantage Agreement*
10.8 1995 Stock Option Plan dated as of September 29, 1995**
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
</TABLE>
- --------
* Previously filed on October 6, 1995.
** Previously filed on November 13, 1995.
50
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, THE REGISTRANT, LEARNING TREE INTERNATIONAL, INC., A
CORPORATION ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE, HAS
DULY CAUSED THIS ANNUAL REPORT ON FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF
CALIFORNIA, ON THE 23RD DAY OF DECEMBER, 1997.
Learning Tree International, Inc.
By: /s/ David C. Collins, Ph.D.
___________________________________
Name: DAVID C. COLLINS, PH.D.
Title: Chairman of the Board of
Directors and Chief
Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
THIS ANNUAL REPORT ON FORM 10-K HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ David C. Collins, Ph.D. Chairman of the Board December 23, 1997
- ----------------------------------- and chief Executive
DAVID C. COLLINS, PH.D. Officer (principal
executive officer)
/s/ Eric R. Garen President and Director December 23, 1997
- -----------------------------------
ERIC R. GAREN
/s/ Max S. Shevitz Executive Vice December 23, 1997
- ----------------------------------- President and Director
MAX S. SHEVITZ
/s/ Gary R. Wright Vice President, December 23, 1997
- ----------------------------------- Finance, Chief
GARY R. WRIGHT Financial Officer and
Secretary (principal
financial officer and
principal accounting
officer)
Director December , 1997
- -----------------------------------
W. MATHEW JUECHTER
/s/ Alan B. Salisbury, Ph.D. Director December 23, 1997
- -----------------------------------
ALAN B. SALISBURY, PH.D.
/s/ Michael W. Kane, Ph.D. Director December 23, 1997
- -----------------------------------
MICHAEL W. KANE, PH.D.
</TABLE>
51
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<S> <C>
Learning Tree International USA, Inc. (U.S.)
Learning Tree International, K.K. (Japan)
Learning Tree International Ltd. (United Kingdom)
Learning Tree International S.A. (France)
Learning Tree International AB (Sweden)
Learning Tree Publishing AB (Sweden)
Learning Tree International Inc. (Canada)
Learning Tree International Ltd. (Hong Kong)
Advanced Technology Marketing, Inc. (U.S.)
Systems for Business and Industry, Inc. (U.S.)
Technology for Business and Industry, Inc. (U.S. Virgin Islands)
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 (No. 333-41325), pertaining to the Company's
1995 Stock Option Plan, filed on December 1, 1997 with the Securities and
Exchange Commission under the Securities Act of 1933.
ARTHUR ANDERSEN LLP
Los Angeles, California
November 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 32,441,000
<SECURITIES> 24,330,000
<RECEIVABLES> 23,201,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 86,146,000
<PP&E> 43,267,000
<DEPRECIATION> 15,838,000
<TOTAL-ASSETS> 122,351,000
<CURRENT-LIABILITIES> 55,033,000
<BONDS> 0
0
0
<COMMON> 2,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 122,351,000
<SALES> 164,483,000
<TOTAL-REVENUES> 164,483,000
<CGS> 70,439,000
<TOTAL-COSTS> 70,439,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,000
<INCOME-PRETAX> 15,550,000
<INCOME-TAX> 5,058,000
<INCOME-CONTINUING> 10,492,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,492,000
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
</TABLE>
