<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 and 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 1998
-------------
or
[_] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from___________to___________
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 of (I.R.S. Employer
incorporation or organization) identification No.)
6053 WEST CENTURY BOULEVARD, LOS ANGELES, CA 90045
--------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (310) 417-9700
------------------------
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
----- -----
The number of shares of common stock, $.0001 par value, outstanding as of August
10, 1998, is 21,994,507 shares.
Total number of pages 13
--------
<PAGE>
LEARNING TREE INTERNATIONAL, INC.
FORM 10-Q
JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Balance Sheets.......................................... 3
Consolidated Statements of Operations................................ 4
Consolidated Statements of Cash Flows................................ 5
Notes to Consolidated Financial Statements........................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................. 8
PART II--OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 12
Item 2. Changes in Securities.................................................. 12
Item 3. Defaults Upon Senior Securities........................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.................... 12
Item 5. Other Information...................................................... 12
Item 6. Exhibits and Reports on Form 8-K....................................... 12
SIGNATURES......................................................................... 13
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
---------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 30,708,000 $ 32,441,000
Short-term interest-bearing investments........................... 27,642,000 24,330,000
Trade accounts receivable, net.................................... 17,633,000 23,201,000
Prepaid marketing expenses........................................ 278,000 1,356,000
Prepaid expenses and other........................................ 4,133,000 4,818,000
--------------- ---------------
Total current assets........................................... 80,394,000 86,146,000
--------------- ---------------
Equipment and leasehold improvement, net............................ 27,304,000 27,429,000
Long-term interest-bearing investments.............................. 10,000,000 --
Deferred income taxes............................................... 515,000 710,000
Other assets........................................................ 9,449,000 8,066,000
--------------- ---------------
Total assets................................................... $ 127,662,000 $ 122,351,000
=============== ===============
LIABILITIES
Current liabilities:
Current portion of debt and capital leases........................ $ -- $ 19,000
Trade accounts payable............................................ 12,898,000 17,993,000
Deferred revenue.................................................. 32,300,000 27,531,000
Accrued liabilities............................................... 5,966,000 5,764,000
Income taxes payable.............................................. 2,591,000 3,726,000
--------------- ---------------
Total current liabilities...................................... 53,755,000 55,033,000
Deferred facilities rent............................................ 1,368,000 1,423,000
--------------- ---------------
Total liabilities.............................................. 55,123,000 56,456,000
Commitments
STOCKHOLDERS' EQUITY
Common Stock, $.0001 par value; 75,000,000 shares authorized,
21,995,000 shares issued and outstanding........................... 2,000 2,000
Additional paid-in capital.......................................... 42,992,000 42,992,000
Notes receivable from stockholders.................................. (10,000) (14,000)
Deferred compensation--stockholders................................. (67,000) (127,000)
Cumulative foreign currency translation............................. (1,104,000) (1,066,000)
Retained earnings................................................... 30,726,000 24,108,000
--------------- ---------------
Total stockholders' equity..................................... 72,539,000 65,895,000
--------------- ---------------
Total liabilities and stockholders' equity..................... $ 127,662,000 $ 122,351,000
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues............................................ $ 47,946,000 $ 43.881,000 $ 138,130,000 $ 115,650,000
Costs of revenues................................... 20,287,000 18,468,000 59,304,000 48,258,000
------------- ------------- -------------- --------------
Gross profit..................................... 27,659,000 25,413,000 78,826,000 67,392,000
------------- ------------- -------------- --------------
Operating expenses:
Course development............................... 3,024,000 3,254,000 8,910,000 8,008,000
Sales and marketing.............................. 14,716,000 13,203,000 45,128,000 34,503,000
General and administrative....................... 5,586,000 5,268,000 16,593,000 13,168,000
------------- ------------- -------------- --------------
23,326,000 21,725,000 70,631,000 55,679,000
------------- ------------- -------------- --------------
Income from operations.............................. 4,333,000 3,688,000 8,195,000 11,713,000
------------- ------------- -------------- --------------
Other income (expense):
Interest expense................................. -- (6,000) (9,000) (23,000)
Interest income.................................. 870,000 919,000 2,400,000 2,639,000
Foreign exchange................................. (132,000) 33,000 (179,000) 50,000
Other............................................ (203,000) (33,000) (380,000) (356,000)
------------- ------------- -------------- --------------
535,000 913,000 1,832,000 2,310,000
------------- ------------- -------------- --------------
Income before provision for income taxes............ 4,868,000 4,601,000 10,027,000 14,023,000
Provision for income taxes.......................... 1,655,000 1,564,000 3,409,000 4,768,000
------------- ------------- -------------- --------------
Net income.......................................... $ 3,213,000 $ 3,037,000 $ 6,618,000 $ 9,255,000
============= ============= ============== ==============
Earnings per common share........................... $ 0.15 $ 0.14 $ 0.30 $ 0.42
============= ============= ============== ==============
Earnings per common share assuming dilution......... $ 0.15 $ 0.14 $ 0.30 $ 0.42
============= ============= ============== ==============
Weighted average number of shares outstanding....... 21,995,000 21,995,000 21,995,000 21,995,000
============= ============= ============== ==============
Diluted shares outstanding.......................... 21,995,000 22,139,000 22,022,000 22,087,000
============= ============= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Cash Flows--operating activities:
Net income...................................................................... $ 6,618,000 $ 9,255,000
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization............................................... 6,872,000 3,980,000
(Gains) losses on disposals of equipment, property and leasehold
Improvements............................................................... 409,000 350,000
Deferred facilities rent charges............................................ (56,000) (276,000)
Amortization of deferred compensation....................................... 60,000 60,000
Unrealized foreign exchange (gains) losses.................................. 223,000 (88,000)
Change in net assets and liabilities:
Trade accounts receivable................................................. 5,515,000 (5,981,000)
Prepaid marketing expenses................................................ 1,068,000 (722,000)
Prepaid expenses and other................................................ 677,000 (2,330,000)
Income taxes.............................................................. (964,000) 1,139,000
Trade accounts payable.................................................... (5,144,000) 6,826,000
Deferred revenue.......................................................... 4,824,000 9,537,000
Accrued liabilities....................................................... 244,000 (103,000)
--------------- ---------------
Net cash provided by operating activities.................................. 20,346,000 21,647,000
--------------- ---------------
Cash flows--investing activities:
Purchases of equipment, property and leasehold improvements..................... (7,899,000) (18,030,000)
Retirements of equipment, property and leasehold improvements................... 725,000 4,000
Proceeds from short-term interest-bearing investments held to maturity.......... 19,947,000 21,500,000
Proceeds from short-term interest-bearing investments held for sale............. 5,100,000 --
Purchases of short-term interest-bearing investments:
Investments held to maturity.................................................. (19,059,000) (14,899,000)
Investments held for sale..................................................... (19,217,000) (1,100,000)
Other, net...................................................................... (1,404,000) (2,148,000)
--------------- ---------------
Net cash used in investing activities...................................... (21,807,000) (14,673,000)
--------------- ---------------
Cash flows--financing activities:
Principal payments of debt and capital leases................................... (19,000) (223,000)
Collections of stockholder notes................................................ 4,000 49,000
--------------- ---------------
Net cash provided by (used in) financing activities........................... (15,000) (174,000)
--------------- ---------------
Effects of exchange rates on cash................................................. (257,000) 156,000
--------------- ---------------
Net increase (decrease) in cash and cash equivalents.............................. (1,733,000) 6,956,000
Cash and cash equivalents at the beginning of the period.......................... 32,441,000 24,541,000
--------------- ---------------
Cash and cash equivalents at the end of the period................................ $ 30,708,000 $ 31,497,000
=============== ===============
Supplemental disclosures:
Income taxes paid.......................................................... $ 3,691,000 $ 3,614,000
=============== ===============
Interest paid.............................................................. $ 2,000 $ 21,000
=============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
LEARNING TREE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Operations and Significant Accounting Policies
----------------------------------------------
The accompanying condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
regulations. Certain prior period balances have been reclassified to conform
with the current period presentation. The condensed consolidated financial
statements reflect all adjustments and disclosures which are, in the opinion of
management, necessary for a fair presentation. All such adjustments are of a
normal recurring nature. The condensed consolidated financial statements in this
Quarterly Report on Form 10-Q should be read in conjunction with the
consolidated financial statements and notes thereto for the fiscal year ended
September 30, 1997 that are contained in the Company's 1997 Annual Report on
Form 10-K.
Note 2. Computation of Net Income per Common share and Common Equivalent Share:
----------------------------------------------------------------------
The Company adopted Financial Accounting Standards No. 128 (SFAS No. 128)
"Earnings per Share" in fiscal 1998. Accordingly, the net income per common
share and common equivalent share for fiscal 1997 has been restated to reflect
the adoption of SFAS No. 128. The difference between the weighted average
number of shares outstanding and the diluted shares outstanding is due to stock
options. To calculate the number of diluted shares outstanding, the treasury
stock method was used. For the three and nine month periods ended June 30,
1998, zero shares and 27,000 shares, respectively, were added to the weighted
average number of shares outstanding. For the three and nine month periods
ended June 30, 1997, 144,000 shares and 92,000 shares, respectively, were added
to the weighted average number of shares outstanding.
Note 3. Litigation:
-----------
On April 16, 1998, a class action lawsuit was filed against certain
officers and directors of the Company in the Superior Court of the State of
California, County of Los Angeles, (Sarah v. Collins et al., Case No. BC189499),
----------------------
purportedly on behalf of persons who purchased the Company's Common Stock
between May 8, 1997 and November 3, 1997. On June 29, 1998, a second class
action lawsuit was filed by the same law firms against the same officers and
directors of the Company in the Superior Court of the State of California,
County of Los Angeles (Guthrie v. Collins et al., Case No. B0193465), also
------------------------
purportedly on behalf of persons who purchased the Company's Common Stock
between May 8, 1997 and November 3, 1997. And on August 6, 1998, a third class
action lawsuit was filed by the same law firms against the Company and certain
officers and directors of the Company in the United States District Court for
the Central District of California (Schlagal v. Learning Tree International et
------------------------------------------
al., Case No. 98-6384ABC), purportedly on behalf of persons who purchased the
- --
Company's Common Stock between May 8, 1997 and May 13, 1998. Each of the
complaints makes similar allegations of misrepresentations in certain public
disclosures by the Company. Each complaint alleges that the named officers and
directors concealed an alleged deterioration of its business in early 1997 and
realized profits by trading their shares of Company Common Stock while in
possession of the alleged material adverse information. Each complaint seeks an
unspecified amount of compensatory damages and, additionally, seeks attorneys'
and other costs, interest, and other relief. On August 10, 1998, the Superior
Court dismissed the Sarah case. Plaintiff has not indicated whether an appeal
will be filed.
While the Company has only been named in the federal suit, it has
agreements with the officers and directors under which it is indemnifying them
in each of these proceedings. The Company and the named officers and directors
have indicated that they intend to defend themselves vigorously. The Company is
unable to estimate the outcome of these matters or any potential liabilities it
may incur. The Company expects to incur legal and other defense costs as a
result of such proceedings in an amount which it cannot currently estimate.
These proceedings could involve a substantial diversion of the time of some
members of management, and an adverse determination in, or settlement of, such
litigation could involve the payment of significant amounts or could include
terms in addition to such payments, which could have an adverse impact on the
Company's business, financial condition, results of operations and cash flows.
6
<PAGE>
Note 4. Long-Term Interest-Bearing Investments
--------------------------------------
The Company's long-term interest-bearing investments of approximately
$10,000,000 have been pledged as collateral securing the Company's obligations
under a lease agreement for facilities in the United Kingdom. The Company may
substitute a letter of credit of equal amount to release the investment. The
required level of the cash collateral or letter of credit will decline in the
future, if certain financial ratios have been met.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Learning Tree International, Inc. (the "Company"), is a leading worldwide
provider of education and training for corporate 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, 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 29 IT job functions. The
Company's instructor-led 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 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 focus of this new division is on training that supports the
roll-out and use of new organization-wide information systems, tools and
applications. Its first program was for General Motors Corporation, and was
largely completed in the first quarter of fiscal 1998. The Company is currently
working on a smaller follow-on program with General Motors, which is expected to
be completed in the fourth quarter of fiscal 1998, and is seeking additional
contracts with other potential customers. Because this business depends upon
obtaining a small number of large contracts, its revenues are inherently subject
to fluctuation.
In addition to its instructor-led courses, the Company develops, produces
and markets a line of interactive computer-based training courses incorporating
audio and graphical elements ("multimedia CBT") that are designed for both
stand-alone CD-ROM and network-based delivery. The Company has been marketing
its multimedia CBT products through direct mail and telemarketing methods, which
focus on high volumes of comparatively smaller unit sales. The Company also
markets its multimedia CBT products through field sales of higher value
multimedia CBT contracts. To date, the majority of the Company's multimedia CBT
revenues have been obtained through direct mail and telemarketing.
In 1997, the Company also introduced a program of "Power Seminars," which
were multi-day conferences consisting of a number of 1-day, multimedia lecture-
style seminars in key information technologies. In November 1997, the Company
announced that it was eliminating its Power Seminars program. Operations in the
Power Seminars program ceased as of the end of the first quarter of fiscal 1998.
RESULTS OF OPERATIONS
In the third fiscal quarter ended June 30, 1998, revenues increased by
approximately $4.0 million or 9% to $47.9 million from $43.9 million for the
corresponding quarter of the prior year. Income from operations for the quarter
ended June 30, 1998 increased $645,000 or 17% to $4.3 million versus $3.7
million for the same quarter of fiscal 1997. Net income for the quarter ended
June 30, 1998 increased $176,000 or 6% to $3.2 million versus $3.0 million for
the quarter ended June 30, 1997.
For the nine-month period ended June 30, 1998, revenues increased by $22.4
million or 19% to $138.1 million from $115.7 million for the nine months ended
June 30, 1997. Income from operations for the nine months ended June 30, 1998,
decreased $3.5 million or 30% to $8.2 million versus $11.7 million for the
corresponding period of the prior year. Net income for the nine months ended
June 30, 1998 decreased $2.7 million or 28% to $6.6 million versus $9.3 million
for the corresponding period of the prior year.
The growth of revenues in the third fiscal quarter was due, in large part,
to an increase in the number of course participants in multi-day instructor-led
courses to 29,520 in the quarter ended June 30, 1998 versus 26,069 participants
in the corresponding quarter of the prior year. For the nine months ended June
30, 1998, the number of multi-day instructor-led course participants was 83,568
compared to 73,096 in the corresponding nine month period of the prior year.
The additional course participants are primarily attributable to increased
marketing and sales expenditures and an increase in the net number of
instructor-led course titles to 149 in the third quarter of fiscal 1998 compared
to 127 in the same period a year earlier. While the number of course
participants has grown over the prior year, the rate of growth has diminished
over the last three quarters. Revenues for the nine-month period ended June 30,
1998 also reflect a 3% increase in average revenue per multi-day course
participant, which resulted from increases in average course duration and
prices. The increase in revenues also reflects the growth of revenues from the
multimedia CBT product line. These increases in revenues were offset, in part,
by a decrease in revenues produced by the Company's Learning Solutions Division
under its contracts with General Motors to train General Motors' personnel and
dealers on the use and support of a new proprietary information system, GM
ACCESS, and by the elimination of revenues from the Power Seminars product line.
The initial contract with General Motors, which ran from June 1997 to November
1997, was much larger than the follow-on contract, which began in February 1998
and is expected to be completed in July 1998.
8
<PAGE>
The Company's cost of revenues for its instructor-led courses primarily
includes the costs associated with course instructors, course materials, course
equipment, freight, classroom facilities and refreshments. For multimedia CBT
courses, cost of revenues primarily includes the costs of amortized development,
manufacturing, distribution and support. For the three months ended June 30,
1998, the cost of revenues was 42.3% of revenues compared to 42.1% for the three
months ended June 30, 1997. For the nine months ended June 30, 1998, the cost of
revenues increased to 42.9% of revenues compared to 41.7% for the same period in
fiscal 1997, 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 a decline in margins on certain multimedia CBT
courses due to the amortization of development costs.
For the third quarter of fiscal 1998, cost of revenues increased $1.8
million or 10% to $20.3 million from $18.5 million for the same quarter of
fiscal 1997. For the nine months ended June 30, 1998, the Company's cost of
revenues increased by $11.0 million or 23% to $59.3 million from $48.3 million
for the corresponding period in the prior year. The increases in the cost of
revenues compared to the same periods in the prior year, are primarily the
result of a) the increased number of multi-day instructor-led course events and
b) the costs associated with the increased sales in the multimedia CBT product
line. The number of multi-day instructor-led course events increased 13% in the
quarter ended June 30, 1998 to 1,834 course events from 1,623 course events in
the quarter ended June 30, 1997. For the nine month period ended June 30, 1998,
the number of instructor-led course events increased 14% to 5,203 from 4,554 for
the corresponding period in the prior year.
Costs per multi-day instructor-led course event decreased approximately 1%
in the third quarter of fiscal 1998 compared to the third quarter of fiscal
1997. Costs per multi-day instructor-led course event have increased
approximately 3% for the first nine months of fiscal 1998 compared to the
corresponding period of the prior year, reflecting lower costs per event during
the first quarter of fiscal 1997. The costs per event of classroom facilities,
course equipment, and recruiting and training instructors have increased from
the levels incurred in the first quarter of fiscal 1997. To control the costs
of classroom facilities, the Company has increased its education center capacity
in several locations. In January 1998, the Company opened a new, larger
education center in Sweden and signed an agreement to lease a new education
center in the United Kingdom which is anticipated to be operational in early
fiscal 1999. In April 1998, the Company opened a new larger education center in
Boston and in July 1998, the Company signed a lease for a larger education
center in New York.
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 three months ended June 30, 1998, course
development expenses were 6.3% of revenues compared to 7.4% for the three months
ended June 30, 1997. For the nine months ended June 30, 1998, course
development expenses were 6.5% of revenues compared to 6.9% for the same period
in fiscal 1997. Course development expenses decreased by $230,000 or 7% to $3.0
million for the quarter ended June 30, 1998 versus $3.3 million in the quarter
ended June 30, 1997. For the nine months ended June 30, 1998, course
development expenses increased $902,000 or 11% to $8.9 million from $8.0 million
for the corresponding period in the prior year. The reduction in course
development expense during the third quarter of fiscal 1998, compared to a year
ago, reflects, in part, the elimination of development costs associated with
Power Seminars and the timing of costs for developing multi-day instructor-led
courses, since such costs are expensed as incurred.
The number of course titles reported in a given quarter reflects the net
effect of the introduction of new titles and the retirement of old titles. New
titles are added in the areas of evolving or growing technologies. Old titles
are retired when the gross profit they generate is not sufficient to justify the
ongoing cost of marketing them and maintaining their technological content.
Based upon the current trends in the introduction and evolution of technologies,
the Company expects the number of its course titles to decline somewhat in the
near term, but to remain relatively constant over the next year.
During the first quarter of fiscal 1998, the Company introduced a new web-
based engine for its multimedia CBT product line and is continuing to allocate
resources to develop new features and capabilities for this engine. All new CBT
titles are being developed using this evolving engine and resources are
continuing to be allocated to adapt existing courses based on prior engines to
the new web-based engine. Accordingly, the rates of introduction of new CBT
titles in the first three quarters were, and the expected release rate of new
courses in the next quarter is expected to be, less than during the fourth
quarter of fiscal 1997 when 24 CBT titles were released. To date, the Company
has released 113 multimedia CBT course titles.
Sales and marketing expenses include 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. For the three
months ended June 30, 1998, sales and marketing expenses were 30.7% of revenues
compared to 30.1% for the three months ended June 30, 1997. For the nine months
ended June 30, 1998, sales and marketing expenses were 32.7% of revenues
compared to 29.8% for the same period in fiscal 1997. Sales and marketing
expenses
9
<PAGE>
increased $1.5 million or 11% to $14.7 million for the quarter ended June 30,
1998 versus $13.2 million for the quarter ended June 30, 1997. For the nine
months ended June 30, 1998, sales and marketing expenses increased $10.6 million
or 31% to $45.1 million from $34.5 million for the corresponding period in the
prior year. The increase in sales and marketing expenses occurred as a result of
an increase in telemarketing and field sales staff and increased direct mail
marketing. The decrease in the rate of growth in sales and marketing expenses
during the third quarter of fiscal 1998 compared to the rate of growth in the
first half of fiscal 1998 reflects the Company's decision to better match the
level of such expenditures with the current slower growth rate of revenues. The
Company expects to continue the reduced rate of spending in sales and marketing
in the fourth quarter of fiscal 1998. The decision to reduce the growth rate of
sales and marketing expenditures in upcoming quarters is subject to reevaluation
from time to time based upon market conditions and other factors.
General and administrative expenses increased $318,000 or 6% to $5.6
million for the quarter ended June 30, 1998 compared to $5.3 million in the same
quarter of the prior year. For the nine months ended June 30, 1998, general and
administrative expenses increased $3.4 million or 26% to $16.6 million from
$13.2 million for the corresponding period in the prior year. The increase in
general and administrative expenses reflects increases in information systems
and other administrative staff and increases in facilities related costs over
the prior year. For the three months ended June 30, 1998, general and
administrative expenses were 11.7% of revenues compared to 12.0% for the three
months ended June 30, 1997. As a percentage of revenue, these costs increased
to 12.0% in the nine months ended June 30, 1998 from 11.4% in the corresponding
period of the prior year.
Other income (expense) is comprised of interest income, interest expense,
foreign currency gains and losses and other. Other income decreased $378,000 to
$535,000 for the quarter ended June 30, 1998 versus $913,000 for the
corresponding quarter in the prior year. For the nine months ended June 30,
1998, other income decreased by $478,000 to $1.8 million from $2.3 million for
the corresponding nine month period in the prior year. The decrease in net other
income for the three months ended June 30, 1998, was primarily related to a
provision for the write off of leasehold improvements in education center
facilities in the United Kingdom which are being replaced by a new facility and
foreign exchange losses. The decrease in net other income for the nine month
period ended June 30, 1998 was primarily attributable to less interest income
than in the prior year and foreign exchange losses.
The provision for income taxes was $1.7 million for the third fiscal
quarter ended June 30, 1998, compared to $1.6 million for the quarter ended June
30, 1997. For the nine months ended June 30, 1998, the provision for income
taxes decreased $1.4 million to $3.4 million from $4.8 million for the
corresponding period in the prior year. The changes in the income tax provisions
reflect the changes in taxable income.
BACKLOG
At June 30, 1998, the Company had a backlog of orders for instructor-led
courses in the amount of $29.8 million, which represented an 8% decrease
compared to the backlog of $32.5 million at June 30, 1997. The decline in the
backlog reflects the reduction in backlog associated with the Learning Solutions
business, which has nearly completed its contract with GM, and the elimination
of the Power Seminars business. These declines in the backlog were offset, only
in part, by the growth in the multi-day instructor-led course backlog. Only a
portion of the Company's backlog is funded. There can be no assurance that the
growth in the backlog will continue or that orders comprising the backlog will
be realized as revenue.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results may fluctuate based on various factors,
including the frequency of course events, the number of weeks in a quarter
during which courses can be conducted, the timing, frequency and size of, and
response to, the Company's direct mail marketing and advertising 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 results may also occur as a result of 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 historically varied significantly
from quarter to quarter due to seasonality and other 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
(October through March). This seasonality is due in part to seasonal spending
patterns of the Company's customers arising from budgetary and other business
factors as well as weather, holiday and vacation considerations. In addition,
the seasonality of the Company's operating results reflects the quarterly
differences in the frequency and size of the Company's direct mail marketing
campaigns. There can be no assurance that these seasonal factors or their
effects will remain the same in the future.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and interest-bearing investments increased to
$68.4 million at June 30, 1998 from $56.8 million at September 30, 1997,
primarily as a result of cash provided by operations. For the nine months ended
June 30, 1998, cash provided by operations was approximately $20.3 million
compared to $21.6 million during the same period in the prior year. The decrease
in cash provided by operations reflects the decrease in profits and a smaller
increase in deferred revenues arising from prepaid multi-enrollment programs.
These changes were offset in part by increased depreciation. As of June 30,
1998, the Company had a net working capital balance of $26.6 million.
During the nine months ended June 30, 1998, the Company invested $7.9
million in equipment and facilities compared to $18.0 million in the same period
of the prior year. The higher level of investment during the prior year was
primarily related to the acquisition of additional course equipment to support
the higher growth rate of course events at that time, to upgrade course
equipment capabilities and to build-out education center and office facilities.
In January 1998, the Company entered into a lease agreement for a large
education center in the United Kingdom. The Company expects to begin executing
courses in this new facility during the first fiscal quarter of 1999. The terms
of the lease will require lease payments of approximately $4.3 million per annum
and require a cash deposit to be pledged as collateral or letter of credit in
the amount of approximately $10.0 million. Any cash deposit will bear interest
to the Company and the required level of the cash deposit or letter of credit
will decline if certain financial ratios have been met. The Company expects to
purchase additional course equipment and to enter into leases for additional
facilities in other existing course cities during fiscal 1998. However, other
than the foregoing transaction, as of June 30, 1998, the Company had no material
future purchase obligations, capital commitments or debt and believes that its
cash and cash equivalents, its short-term interest-bearing investments and the
cash provided by its operations will be sufficient to meet its cash requirements
for the foreseeable future.
YEAR 2000 COMPLIANCE
The Year 2000 Compliance issue exists as a result of the use of two digit
date fields, rather than four digit date fields, by many computer systems and
software applications to define the applicable year. As the century changes,
systems which are not Year 2000 Compliant will recognize the year 2000 as 1900,
or not at all. The inability to recognize or properly treat the Year 2000 may
cause systems to process financial and operational information incorrectly. The
Company has assessed and continues to assess the impact of the Year 2000
Compliance issue on its operations. The Company believes, based upon its
internal reviews, upgrades completed to date, and other factors, that there will
be no interruption of its operations as a result of the Year 2000 issue. It is
expected that the future internal and external costs to be incurred to make the
Company's computer systems and software Year 2000 Compliant will not have a
material effect on the Company's results of operations or financial position.
Additionally, the computer software products sold by the Company are Year 2000
Compliant. However, there can be no assurance that the Company's customers or
vendors will not be affected by the Year 2000 Compliance issue or that this will
not affect the timing or amount of the Company's products and services customers
purchase or vendors provide. Further, if all of the Company's computer systems
and software are not properly upgraded to be Year 2000 compliant, the failure of
its systems would have a material adverse effect on the Company's operations.
Finally, certain commentators have indicated that they expect spending by
companies on Year 2000 Compliance has and will reduce spending on IT training
and on new software investment (another key factor in IT training needs) for the
next year and a half. Although the Company cannot ascertain the exact impact of
this issue on its revenues, the Company has noted a slowing in its growth rate
over recent periods.
FORWARD-LOOKING INFORMATION
Except for historical information contained herein, the matters discussed
in this Form 10-Q are forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those set forth in such forward-looking statements. Such risks and
uncertainties include, without limitation, the Company's dependence on the
timely development, introduction and customer acceptance of new courses and
products, the impact of competition and downward pricing pressures, the effect
of changing economic conditions, the Company's ability to attract and retain key
management and other personnel, risks in technology development, the risks
involved in currency fluctuations, and the other risks and uncertainties
detailed from time to time in the Company's filings with the Securities and
Exchange Commission, including the Company's 1997 Annual Report on Form 10-K.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1: LEGAL PROCEEDINGS
On April 16, 1998, a class action lawsuit was filed against certain
officers and directors of the Company in the Superior Court of the
State of California, County of Los Angeles, (Sarah v. Collins et al.,
----------------------
Case No. BC189499), purportedly on behalf of persons who purchased the
Company's Common Stock between May 8, 1997 and November 3, 1997. On
June 29, 1998, a second class action lawsuit was filed by the same law
firms against the same officers and directors of the Company in the
Superior Court of the State of California, County of Los Angeles
(Guthrie v. Collins et al., Case No. B0193465), also purportedly on
-------------------------
behalf of persons who purchased the Company's Common Stock between May
8, 1997 and November 3, 1997. And on August 6, 1998, a third class
action lawsuit was filed by the same law firms against the Company and
certain officers and directors of the Company in the United States
District Court for the Central District of California (Schlagal v.
-----------
Learning Tree International et al., Case No. 98-6384ABC), purportedly
---------------------------------
on behalf of persons who purchased the Company's Common Stock between
May 8, 1997 and May 13, 1998. Each of the complaints makes similar
allegations of misrepresentations in certain public disclosures by the
Company. Each complaint alleges that the named officers and directors
concealed an alleged deterioration of its business in early 1997 and
realized profits by trading their shares of Company Common Stock while
in possession of the alleged material adverse information. Each
complaint seeks an unspecified amount of compensatory damages and,
additionally, seeks attorneys' and other costs, interest, and other
relief. On August 10, 1998, the Superior Court dismissed the Sarah
case. Plaintiff has not indicated whether an appeal will be filed.
While the Company has only been named in the federal suit, it has
agreements with such officers and directors under which it is
indemnifying them in each of these proceedings. The Company and the
named officers and directors have indicated that they intend to defend
themselves vigorously. The Company is unable to estimate the outcome
of these matters or any potential liabilities it may incur. The
Company expects to incur legal and other defense costs as a result of
such proceedings in an amount which it cannot currently estimate.
These proceedings could involve a substantial diversion of the time of
some members of management, and an adverse determination in, or
settlement of, such litigation could involve the payment of
significant amounts or could include terms in addition to such
payments, which could have an adverse impact on the Company's
business, financial condition, results of operations and cash flows.
Item 2: CHANGES IN SECURITIES - Not Applicable
Item 3: DEFAULTS UPON SENIOR SECURITIES - Not Applicable
Item 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - None
Item 5: OTHER INFORMATION - Not Applicable
Item 6: EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
June 30, 1998.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEARNING TREE INTERNATIONAL, INC.
Dated: August 13, 1998 By: /s/ Gary R. Wright
---------------------------------
Gary R. Wright
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 30,708,000
<SECURITIES> 27,642,000
<RECEIVABLES> 17,633,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 80,394,000
<PP&E> 27,304,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 127,662,000
<CURRENT-LIABILITIES> 53,755,000
<BONDS> 0
2,000
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 127,662,000
<SALES> 138,130,000
<TOTAL-REVENUES> 138,130,000
<CGS> 59,304,000
<TOTAL-COSTS> 59,304,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,000
<INCOME-PRETAX> 10,027,000
<INCOME-TAX> 3,409,000
<INCOME-CONTINUING> 6,618,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,618,000
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
