<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, 1999
-------------
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
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Learning Tree International, Inc.
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(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
6, 1999, is 21,645,707 shares.
Total number of pages 15
----
<PAGE>
LEARNING TREE INTERNATIONAL, INC.
FORM 10-Q
June 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I Financial Statements Page
----
<S> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets....................... 3
Condensed Consolidated Statements of Operations............. 4
Condensed Consolidated Statements of Stockholders' Equity... 5
Condensed Consolidated Statements of Cash Flows............. 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 9
Part II--Other Information
Item 1. Legal Proceedings............................................. 13
Item 2. Changes in Securities......................................... 14
Item 3. Defaults Upon Senior Securities............................... 14
Item 4. Submission of Matters to a Vote of Security Holders........... 14
Item 5. Other Information............................................. 14
Item 6. Exhibits and Reports on Form 8-K.............................. 14
Signatures................................................................. 15
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 39,243,000 $ 36,055,000
Short-term interest-bearing investments....................... 42,591,000 31,136,000
Trade accounts receivable, net................................ 16,791,000 18,265,000
Prepaid marketing expenses.................................... 1,444,000 1,154,000
Prepaid expenses and other.................................... 4,103,000 3,691,000
------------ ------------
Total current assets..................................... 104,172,000 90,301,000
------------ ------------
Equipment and leasehold improvements, net.......................... 26,196,000 27,235,000
Long-term interest-bearing investments............................. 9,524,000 10,169,000
Other assets....................................................... 1,262,000 9,685,000
------------ ------------
Total assets............................................. $141,154,000 $137,390,000
============ ============
LIABILITIES
Current liabilities:
Trade accounts payable........................................ $ 13,333,000 $ 14,618,000
Deferred revenue.............................................. 35,753,000 33,357,000
Accrued liabilities........................................... 6,926,000 7,234,000
Income taxes payable.......................................... 2,117,000 4,071,000
------------ ------------
Total current liabilities................................ 58,129,000 59,280,000
Deferred income taxes.............................................. 639,000 17,000
Deferred facilities rent........................................... 2,883,000 1,265,000
------------ ------------
Total liabilities........................................ 61,651,000 60,562,000
------------ ------------
Commitments
STOCKHOLDERS' EQUITY
Common Stock, $.0001 par value; 75,000,000 shares authorized
21,646,000 and 21,995,000 shares issued and outstanding....... 2,000 2,000
Additional paid-in capital......................................... 40,024,000 42,992,000
Notes receivable from stockholders................................. (7,000) (9,000)
Deferred compensation--stockholders................................ -- (47,000)
Cumulative foreign currency translation............................ (1,892,000) (752,000)
Retained earnings.................................................. 41,376,000 34,642,000
------------ ------------
Total stockholders' equity............................... 79,503,000 76,828,000
------------ ------------
Total liabilities and stockholders' equity............... $141,154,000 $137,390,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues............................................ $49,129,000 $47,946,000 $140,801,000 $138,130,000
Costs of revenues................................... 19,418,000 20,287,000 58,718,000 59,304,000
------------ ------------ ------------ ------------
Gross profit.................................. 29,711,000 27,659,000 82,083,000 78,826,000
------------ ------------ ------------ ------------
Operating expenses:
Course development............................ 9,139,000 3,024,000 16,237,000 8,910,000
Sales and marketing........................... 13,503,000 14,716,000 40,817,000 45,128,000
General and administrative.................... 5,902,000 5,586,000 17,595,000 16,593,000
------------ ------------ ------------ ------------
28,544,000 23,326,000 74,649,000 70,631,000
------------ ------------ ------------ ------------
Income from operations.............................. 1,167,000 4,333,000 7,434,000 8,195,000
------------ ------------ ------------ ------------
Other income (expense):
Interest expense.............................. (2,000) -- (6,000) (9,000)
Interest income............................... 1,005,000 870,000 3,011,000 2,400,000
Foreign exchange.............................. 20,000 (132,000) 107,000 (179,000)
Other......................................... (193,000) (203,000) (343,000) (380,000)
------------ ------------ ------------ ------------
830,000 535,000 2,769,000 1,832,000
------------ ------------ ------------ ------------
Income before provision for income taxes............ 1,997,000 4,868,000 10,203,000 10,027,000
Provision for income taxes.......................... 679,000 1,655,000 3,469,000 3,409,000
------------ ------------ ------------ ------------
Net income.......................................... $ 1,318,000 $ 3,213,000 $ 6,734,000 $ 6,618,000
============ ============ ============ ============
Earnings per common share........................... $ 0.06 $ 0.15 $ 0.31 $ 0.30
------------ ------------ ------------ ------------
Earnings per common share assuming dilution......... $ 0.06 $ 0.15 $ 0.31 $ 0.30
------------ ------------ ------------ ------------
Weighted average number of shares outstanding....... 21,723,000 21,995,000 21,896,000 21,995,000
------------ ------------ ------------ ------------
Diluted shares outstanding.......................... 21,799,000 21,995,000 21,923,000 22,022,000
------------ ------------ ------------ ------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Notes Foreign
Additional Receivable Currency Total
Common Paid-In From Deferred Translation Retained Stockholders'
Stock Capital Stockholders Compensation Adjustment Earnings Equity
------- ----------- ------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1997............ $2,000 $42,992,000 $(14,000) $(127,000) $(1,066,000) $24,108,000 $65,895,000
Comprehensive income:
Net income.................... -- -- -- -- -- 6,618,000 6,618,000
Foreign currency
translation................. -- -- -- -- (38,000) -- (38,000)
------------
Comprehensive income............. 6,580,000
Amortization of deferred
compensation.................. -- -- -- 60,000 -- -- 60,000
Collection of notes
receivable.................... -- -- 4,000 -- -- -- 4,000
------- ----------- ------------ ------------ ------------- ----------- ------------
Balance at
June 30, 1998.................. $2,000 $42,992,000 $(10,000) $ (67,000) $(1,104,000) $30,726,000 $72,539,000
======= =========== ============ ============ ============= =========== ============
Balance,
September 30, 1998.............. $2,000 $42,992,000 $ (9,000) $ (47,000) $ (752,000) $34,642,000 $76,828,000
Comprehensive income:
Net income.................... -- -- -- -- -- 6,734,000 6,734,000
Foreign currency
translation................. -- -- -- -- (1,140,000) -- (1,140,000)
------------
Comprehensive income............. 5,594,000
Amortization of deferred
compensation.................. -- -- -- 47,000 -- -- 47,000
Repurchase of common
stock......................... -- (2,968,000) -- -- -- -- (2,968,000)
Collection of notes
receivable.................... -- -- 2,000 -- -- -- 2,000
------- ----------- ------------ ------------ ------------- ----------- ------------
Balance at
June 30, 1999.................. $2,000 $40,024,000 $ (7,000) $ -- $(1,892,000) $41,376,000 $79,503,000
======= =========== ============ ============ ============= =========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows--operating activities:
Net income......................................................................... $ 6,734,000 $ 6,618,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization............................................ 10,500,000 9,352,000
Write-off of deferred CBT development costs.............................. 5,893,000 --
Losses on disposals of equipment and leasehold
improvements........................................................... 337,000 409,000
Deferred facilities rent charges......................................... 1,663,000 (56,000)
Amortization of deferred compensation.................................... 47,000 60,000
Unrealized foreign exchange (gains) losses............................... (155,000) 223,000
Change in net assets and liabilities:
Trade accounts receivable.............................................. 803,000 5,515,000
Prepaid marketing expenses............................................. (305,000) 1,068,000
Prepaid expenses and other............................................. (593,000) 677,000
Income taxes........................................................... (995,000) (964,000)
Trade accounts payable................................................. (809,000) (5,144,000)
Deferred revenue....................................................... 3,234,000 4,824,000
Accrued liabilities.................................................... (141,000) 244,000
------------ ------------
Net cash provided by operating activities................................ 26,213,000 22,826,000
------------ ------------
Cash flows--investing activities:
Purchases of equipment and leasehold improvements.................................. (6,960,000) (7,899,000)
Retirements of equipment and leasehold improvements................................ (63,000) 725,000
Proceeds from short-term interest-bearing investments:
Investments held to maturity................................................... 31,603,000 19,947,000
Investments held for sale...................................................... 4,400,000 5,100,000
Purchases of short-term interest-bearing investments:
Investments held to maturity................................................... (42,258,000) (19,059,000)
Investments held for sale...................................................... (5,200,000) (19,217,000)
Other, net......................................................................... (713,000) (3,884,000)
------------ ------------
Net cash used in investing activities.................................... (19,191,000) (24,287,000)
------------ ------------
Cash flows--financing activities:
Principal payments of debt and capital leases...................................... -- (19,000)
Repurchase of Common Stock......................................................... (2,968,000) --
Collections of stockholder notes receivable........................................ 2,000 4,000
------------ ------------
Net cash used in financing activities.................................... (2,966,000) (15,000)
------------ ------------
Effects of exchange rates on cash...................................................... (868,000) (257,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents................................... 3,188,000 (1,733,000)
Cash and cash equivalents at the beginning of the period............................... 36,055,000 32,441,000
------------ ------------
Cash and cash equivalents at the end of the period..................................... $ 39,243,000 $ 30,708,000
============ ============
Supplemental disclosures:
Income taxes paid............................................................ $ 3,865,000 $ 3,691,000
============ ============
Interest paid................................................................ $ 2,000 $ 2,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
LEARNING TREE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED 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, 1998 that are contained in the Company's 1998 Annual Report on
Form 10-K.
Note 2. Computation of Earnings per Common Share and Earnings per Common Share
----------------------------------------------------------------------
Assuming Dilution:
------------------
Earnings per common share and earnings per common share assuming
dilution are computed using the weighted average number of shares of Common
Stock outstanding during the period. Earnings per common share assuming dilution
are computed by including the dilutive effect, if any, of all outstanding
options to purchase Common Stock using the treasury stock method. To calculate
the number of diluted shares outstanding, 76,000 shares and 27,000 shares were
added to the weighted average number of shares outstanding for the three and
nine month periods ended June 30, 1999, respectively. Approximately zero shares
and 27,000 shares were added to the weighted average number of shares
outstanding for the three and nine month periods ended June 30, 1998,
respectively.
Note 3. Comprehensive Income:
--------------------
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income" as of October 1, 1998. SFAS
No. 130 requires disclosure of total non-stockholder changes in equity in
interim periods and additional disclosures of the components of non-stockholder
changes in equity on an annual basis. Total non-stockholder changes in equity
include all changes in equity during a period except those resulting from
investments by and distributions to stockholders. For the three and nine month
periods ended June 30, 1999 and 1998, the only non-stockholder changes in equity
were related to the translation of balance sheets which were denominated in
foreign currencies. The Company has restated the information for the prior
periods included in the accompanying Statements of Stockholders' Equity.
Note 4. Write-off of Deferred CBT Development Costs:
-------------------------------------------
On July 13, 1999 the Company announced that it intended to shift its
focus in technology-based training from CD-ROM based products to other distance
learning methodologies using the Internet. As a result, the Company discontinued
new development of its current computer-based training ("CBT") products
delivered on CD-ROM, and expects to substantially reduce its CBT sales efforts
during the first quarter of fiscal 2000, depending on customer demand.
As a result of this decision, for the quarter ending June 30, 1999, the
Company wrote-off approximately $5,893,000 related to deferred development
costs. Earlier in the fiscal year, the Company wrote-off deferred development
costs in the amount of $1,211,000 which were estimated to be non-realizable as
well as for costs for certain CBT courses which were terminated while still
under development. During the nine months ended June 30, 1999, the Company
wrote-off a total of $7,104,000 of deferred development costs. These costs are
included in course development expense.
For the fourth quarter of fiscal 1999, the Company expects to report a
charge of approximately $300,000 for severance related costs as a result of
layoffs caused by the decision to discontinue new development of CBT products.
The decision is expected to reduce future costs and revenues associated with the
Company's CD-ROM based CBT products.
7
<PAGE>
LEARNING TREE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5. 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. BO193465), also
------------------------
purportedly on behalf of persons who purchased the Company's Common Stock
between May 8, 1997 and November 3, 1997. 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. 95-6384ABC), purportedly on behalf of persons who purchased the
- ---
Company's Common Stock between May 8, 1997 and May 13, 1998. On August 10, 1998,
the Superior Court dismissed the Sarah case. On April 15, 1999, the Court of
-----
Appeals reversed the dismissal of Sarah.
-----
On August 27, 1998, plaintiffs amended the Guthrie action to add the
Company and two additional officers as defendants and to expand the proposed
class period to include 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 made by the Company at various times during the
class period. Each complaint also alleges that the Company and the defendant
officers and directors concealed an alleged deterioration of business early in
1997 and that several of the officers and directors realized profits by trading
their shares of Company Stock while in possession of allegedly concealed
material adverse information. Each complaint seeks an unspecified amount of
compensatory damages and, additionally, seeks attorneys' fees and other costs,
interest, and other relief.
The Company has agreements with officers and directors under which it
is indemnifying them in each of these proceedings. The Company is unable to
estimate the outcome of these matters or any potential liabilities it may incur.
The Company may incur legal and other defense costs as a result of such
proceedings in an amount which it can not currently estimate. These proceedings
could involve a substantial diversion of the time of some of the 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.
Note 6. Repurchase of Company Stock:
----------------------------
On March 8, 1999, the Board of Directors of the Company authorized the
management of the Company to repurchase up to 1,000,000 shares of the Common
Stock of the Company. During the nine month period ended June 30, 1999, the
Company repurchased approximately 349,000 shares of its Common Stock on the open
market at a total cost of approximately $2,968,000. The Company may repurchase
additional shares in the future depending upon market conditions and subject to
Rule 10b-18 of the Securities Exchange Act of 1934.
Note 7. Stock Option Plan:
------------------
At the Company's Annual Shareholder meeting, held on March 5, 1999, the
shareholders approved the Learning Tree International, Inc. 1999 Stock Option
Plan (the "1999 Stock Option Plan"). The 1999 Stock Option Plan 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 1,500,000 shares of the Common Stock of the Company. The 1999 Stock
Option Plan permits the grant of options to officers, employees, directors and
consultants of the Company. The exercise price of incentive stock options
granted will be greater than or equal to their fair market value at the date of
grant, and the maximum term of all options may not exceed ten years. The vesting
schedule and the period required for full exercisability of the stock options is
at the discretion of the Board of Directors.
8
<PAGE>
Item. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
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 31 IT job
functions. The Company's instructor-led courses are recommended for college
credit by the American Council on Education. The Company's Learning Solutions
program provides custom developed training for larger clients who need to train
large numbers of their IT professionals and end-users. Additionally, during
fiscal 1998, the Company began to provide its customers with a skills assessment
service through its SkillsTree program. The Company believes there is a demand
for skills assessment services, but there can be no assurances that it will be
able to develop a profitable market for the SkillsTree programs.
In addition, the Company has developed, produced and marketed a line of
interactive computer-based training courses incorporating audio and graphical
elements ("multimedia CBT") designed for both stand-alone CD-ROM and network-
based delivery. On July 13, 1999, the Company announced that it intended to
shift its focus in technology-based training from CD-ROM based products to other
distance learning methodologies using the Internet. As a result, the Company has
discontinued new development of its computer-based training ("CBT") products
delivered on CD-ROM, and expects to substantially reduce its CBT sales efforts
during the first quarter of fiscal 2000, depending on customer demand. The
Company intends to continue providing technical support to its CBT customers.
The Company's core instructor-led training activities are unaffected by this
decision and will continue to represent the vast majority of the Company's
revenues.
The Company believes that the content from its instructor-led courses
can also be delivered to customers through a variety of technology-based
training methods. The Company's decision was made after an evaluation of the
market viability and methodologies for the potential Internet delivery of its
current generation of CBT courses. The migration of the Company's current CBT
courses to an Internet delivery platform would have required a significant
investment. In view of the rapid changes in available technologies, the Company
intends to continue exploring other Internet distance learning approaches and
technologies and to implement them based on its assessment of customer reaction
and market viability. However, there can be no assurance that the Company will
be able to successfully develop or to profitably implement distance learning
strategies.
The Company's shift in focus for technology-based training was
influenced by several factors. In developing and marketing its products,
including its CD-ROM based CBT products, the Company has emphasized educational
quality and features. That philosophy notwithstanding, many purchasers of CD-ROM
based CBT products, particularly those making larger library purchases, have
continued to place more emphasis on pricing and the total number of CBT titles
available than on quality. Furthermore, competition in the CBT market has
continued to intensify, with significant pressure on both pricing and margins.
Finally, the Company believes that, as new technologies and instructional
approaches continue to be introduced, technology-based training methods are
likely to shift over time from delivery on CD-ROM to delivery over the Internet,
which could be more effective and compatible with the Company's instructor-led
training expertise.
As a result of this decision, for the quarter ending June 30, 1999, the
Company wrote-off approximately $6.0 million dollars related to capitalized
development costs and equipment. In addition, for the fourth quarter of fiscal
1999, the Company expects to report a charge of approximately $0.3 million for
severance related costs as a result of layoffs caused by this decision. The
decision is expected to reduce future costs and revenues associated with the
Company's CD-ROM based CBT products.
Results of Operations
In the third fiscal quarter ended June 30, 1999, revenues increased by
$1.2 million or 2% to $49.1 million from $47.9 million for the corresponding
quarter of the prior year. For the nine month period ended June 30, 1999,
revenues increased by $2.7 million or 2% to $140.8 million from $138.1 million
for the nine months ended June 30, 1998.
The decision to discontinue development of CBT products and to write-
off the capitalized development and equipment costs had an adverse effect on
income from operations and net income for the three and nine months ended June
30, 1999. As a result of the write-off of the deferred CBT development costs,
income from operations for the quarter ended June 30, 1999 decreased $3.1
million or 73% to $1.2 million versus $4.3 million for the same quarter of
fiscal 1998. Net income for the quarter ended June 30, 1999 decreased $1.9
million or 59% to $1.3 million from $3.2 million for the same period last year.
Excluding the effect of this write-off, when comparing the three months ended
June 30, 1999 with the same quarter of the prior year, income from operations
increased by $2.8
9
<PAGE>
million or 63% to $7.1 million from $4.3 million and net
income increased $2.1 million or 64% to $5.3 million ($0.24 per share) from $3.2
million ($0.15 per share).
As a result of the write-off of the deferred CBT development costs,
income from oper ations for the nine months ended June 30, 1999, decreased
$761,000 or 9% to $7.4 million versus $8.2 million for the corresponding period
of the prior year. Net income for the nine months ended June 30, 1999 increased
$116,000 or 2% to $6.7 million versus $6.6 million for the corresponding period
of the prior year. Excluding the effect of this write-off, when comparing the
nine months ended June 30, 1999 with the same period of the prior year, income
from operations increased by $5.1 million or 63% to $13.3 million from $8.2
million and net income increased $4.1 million or 62% to $10.7 million ($0.49 per
share) from $6.6 million ($0.30 per share).
The modest growth in revenues in the third fiscal quarter was primarily
the result of a 2% increase in average revenue per multi-day course participant
and a 3% increase in participants in multi-day instructor-led courses to 30,341
from 29,520, for the same period a year ago. These increases were partially
offset by a decline in revenues from the multimedia CBT product line.
The increase in revenues for the nine months ended June 30, 1999
resulted primarily from a 2% increase in average revenue per multi-day course
participant and a 2% increase in participants in multi-day instructor-led
courses to 84,841 from 83,568 for the same period a year ago. This was offset,
in part, by a decrease in revenues from the Company's Learning Solutions
contracts with General Motors to train General Motors' personnel and dealers on
the use and support of a new proprietary information system. In fiscal 1999,
revenues from the Learning Solutions program were primarily from a small third
phase of the General Motors contract.
The Company believes that the low growth rate of course participants
may be due to a number of causes, including the pace of introduction of major
new software technologies, the effect of our clients' Year 2000 ("Y2K")
Compliance programs, and other possible factors. Certain independent as well as
internal market surveys have and continue to indicate that companies have
reduced their spending on IT training and on new software and hardware
investments while working to overcome their Y2K problems. There can be no
assurance that the Company's revenues will increase as more companies complete
their Y2K Compliance projects. The increase in average revenue per multi-day
course participant is attributable to an increase in the average course
duration, increases in prices, and the introduction and expansion of
the 4-course Passport program.
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. The cost of revenues decreased to 39.5%
of revenues in the third quarter of fiscal 1999 compared to 42.3% in the third
quarter of fiscal 1998. For the nine months ended June 30, 1999, the cost of
revenues decreased to 41.7% of revenues compared to 42.9% for the same period in
fiscal 1998. The improvements in both the three and nine month periods primarily
reflect higher margins in the Company's multi-day instructor-led courses, which
were offset in part by lower margins in the multimedia CBT and Learning
Solutions product lines.
For the third quarter of fiscal 1999, the cost of revenues decreased
$869,000 or 4% to $19.4 million from $20.3 million for the same quarter of
fiscal 1998. For the nine months ended June 30, 1999, the Company's cost of
revenues decreased by $586,000 or 1% to $58.7 million from $59.3 million for the
corresponding period in the prior year. The decreases in the cost of revenues
compared to the same periods in the prior year primarily reflect lower costs per
event in multi-day instructor-led courses. These savings were partially offset
by the increase in the number of multi-day instructor-led course events and
lower margins in the Company's multimedia CBT product line, due to the
amortization of deferred development costs. During the third fiscal quarter
ended June 30, 1999, the number of multi-day instructor-led courses was 1,892
compared to 1,834 during the same period last year. For the nine months ended
June 30, 1999, the number of multi-day instructor-led courses was 5,328 compared
to 5,203 for the corresponding period in fiscal 1998.
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. Course development expenses increased by $6.1 million
or 202% to $9.1 million for the quarter ended June 30, 1999 versus $3.0 million
in the quarter ended June 30, 1998. For the nine months ended June 30, 1999,
course development expenses increased $7.3 million or 82% to $16.2 million from
$8.9 million for the corresponding period in the prior year. The increased costs
reflect the write-off of deferred development costs of $5.9 million and $7.1
million in the three and nine month periods ending June 30, 1999, respectively.
These write-offs include deferred development costs estimated to be non-
realizable as well as costs for certain CBT courses which were terminated while
still under development.
The number of multi-day instructor-led course titles was 138 as of June
30, 1999, compared to 149 a year earlier. The change in size of the multi-day
instructor-led course library reflects the net effect of the introduction of new
titles and the retirement of old titles. Old titles are retired when the profits
they generate are not sufficient to justify the ongoing costs of marketing them
and
10
<PAGE>
maintaining their technological content. There can be no assurance that the
Company will develop more titles than it retires in any period.
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. Sales and
marketing expenses decreased $1.2 million or 8% to $13.5 million for the quarter
ended June 30, 1999 versus $14.7 million for the quarter ended June 30, 1998.
For the nine months ended June 30, 1999, sales and marketing expenses decreased
$4.3 million or 10% to $40.8 million from $45.1 million for the corresponding
period in the prior year. The decrease in sales and marketing expenses occurred
primarily as a result of a decrease in direct mail marketing costs per piece and
reductions in other marketing costs and sales personnel costs.
The Company seeks to adjust its marketing activities to correspond with
its expected growth rate in course participants. As discussed above, the rate of
growth in the number of course participants has declined from earlier periods.
Accordingly, the Company has reduced its marketing expenditures during the third
quarter of fiscal 1999 and for the fiscal year to date, compared to the same
periods of fiscal 1998. Sales and marketing expenses for the third quarter of
fiscal 1999 decreased as a percentage of revenues to 27.5% compared to 30.7% in
the third quarter of 1998. Sales and marketing expenses for the nine months
ended June 30, 1999 decreased to 29.0% as a percentage of revenues compared to
32.7% for the same period last year.
General and administrative expenses increased $316,000 or 6% to $5.9
million for the quarter ended June 30, 1999 compared to $5.6 million in the same
quarter of the prior year. For the nine months ended June 30, 1999, general and
administrative expenses increased $1.0 million or 6% to $17.6 million from $16.6
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 related costs and increases in facilities related costs
over the prior year. As a percentage of revenue, these costs increased to 12.5%
in the nine months ended June 30, 1999 from 12.0% 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 increased
$295,000 to $830,000 for the quarter ended June 30, 1999 versus $535,000 for the
corresponding quarter in the prior year. For the nine months ended June 30,
1999, other income increased by $937,000 to $2.8 million from $1.8 million for
the corresponding nine month period in the prior year. The increases in net
other income are primarily attributable to additional interest income and
foreign exchange gains as compared with the same periods a year ago.
The provision for income taxes decreased $976,000 to $679,000 for the
quarter ended June 30, 1999 compared to $1.7 million for the same quarter of the
prior year. For the nine months ended June 30, 1999, the provision for income
taxes increased $60,000 to $3.5 million from $3.4 million for the same period a
year ago. The changes in the income tax provisions reflect the changes in
taxable income.
Backlog
At June 30, 1999, the Company had a backlog of orders for instructor-
led courses of $26.9 million, which represented a 10% decline compared to the
backlog of $29.8 million at June 30, 1998. At July 31, 1999, the backlog of
orders for instructor-led courses had improved to $29.2 million, which
represented a 5% decline compared to the backlog of $30.7 million at July 31,
1998. A trend has developed in recent months in which participants have enrolled
in courses closer to the date of the courses they are taking, which has
contributed to the reduction in backlog from the prior year. Only a portion of
the Company's backlog is funded. There can be no assurance that orders
comprising the backlog will be realized as revenue.
Fluctuations in Quarterly Results
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 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.
11
<PAGE>
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.
Liquidity and Capital Resources
Cash and cash equivalents and short-term interest-bearing investments
increased to $81.8 million at June 30, 1999 from $67.2 million at September 30,
1998, primarily as a result of cash provided by operations offset by property
additions and stock repurchases. For the nine months ended June 30, 1999, cash
provided by operations was approximately $26.2 million compared to $22.8 million
during the same period in the prior year. The increase in cash provided by
operations primarily reflects the increase in net income excluding the non-cash
write-off of the deferred CBT development costs. As of June 30, 1999, the
Company had working capital of $46.1 million.
In March 1999, the Company announced that the Board of Directors had
authorized it to repurchase up to 1,000,000 shares of Common Stock. Through June
30, 1999, the Company had repurchased approximately 349,000 shares of Common
Stock for approximately $2,968,000. The Company expects to make additional
purchases through open-market transactions based upon market conditions and
subject to Rule 10b-18 of the Securities Exchange Act of 1934. There can be no
assurance that the Company will acquire all of the shares that it has been
authorized to repurchase. The Board of Directors may authorize additional
repurchases of Common Stock in the future, but there can be no assurance that
the Board of Directors will do so.
For the nine months ended June 30, 1999, the Company invested $7.0
million in equipment and facilities compared to $7.9 million in the same period
of the prior year. The level of investment during the current year reflects the
build-out of education center facilities in New York and London during the first
quarter, and the continuing upgrade of course equipment. As of June 30, 1999,
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 Problem. The Year 2000 ("Y2K") problem arose because many
existing computer programs use only the last two digits to recognize a year.
Therefore, when the year 2000 arrives, these programs may not properly recognize
a year beginning with "20" instead of the familiar "19". The Y2K problem may
result in the improper processing of dates and date-sensitive calculations by
computers and other microprocessor-controlled equipment as the year 2000 is
approached and reached.
State of Readiness. The Company has divided its review of Y2K problems
into three major areas: (1) internal information systems, (2) Company products,
including components supplied by outside vendors, and (3) potential Y2K problems
associated with outside vendors.
The Company has focused most of its efforts on internal systems because
it believes this area could be its primary source of Y2K problems. The Company's
internal computer systems are the foundation for its business operations and
include such critical functions as order entry, shipping, purchasing, inventory
control, manufacturing, accounts receivable, accounts payable and general
ledger. The Company completed a review of these critical systems and determined
that they were not Y2K complaint. The Company has completed the installation of
the upgrades it believes are necessary to make the internally developed systems
Y2K compliant. These systems are supported by software obtained from third
parties. The Company's software vendors have updates available, at reasonable
prices, which the vendors have said will make their software Y2K compliant. The
Company expects to complete the installation and implementation of these updates
by September 30, 1999. However, there can be no assurance that this schedule
will not be delayed. The Company also reviewed other equipment containing date-
sensitive information and other internal systems and has not uncovered a risk of
a material effect on its operations from Y2K problems in this area.
The Company has reviewed its products and believes that they are Y2K
compliant.
12
<PAGE>
The Company also completed a review to identify any potential Y2K
problems from outside vendors whose systems interface with the Company's
internal systems. The Company does not presently plan a general review of other
outside vendors, such as banks, utilities, telephone companies, airlines and
shipping companies, and is relying on general industry pressure to ensure Y2K
compliance by these vendors. Based on the review of the Y2K problems associated
with outside vendors, the Company does not expect this issue to have a material
adverse effect on its operations. However, since third-party Y2K compliance is
not within the Company's control, the Company cannot be sure that Y2K problems
affecting the systems of other companies on which the Company's systems rely
will not have a material adverse effect on the Company's operations. For
example, any significant disruption in the banking system, public utilities,
local or long distance telephone service, airplane travel, mail and other common
carriers, or other external systems could severely impact the Company.
Costs to Address the Y2K Issue. Costs to address the Y2K problem
include hardware, software and implementation costs paid to outside consultants.
These costs to date have totaled less than $100,000, the majority of which have
been expensed. The Company expects to incur additional costs totaling less than
$100,000 to upgrade its internal systems.
Risks Presented by the Year 2000 Issue. To date, the Company has not
identified any Y2K problem that it believes could materially adversely affect
the Company or for which a suitable solution cannot be timely implemented.
However, even though the Company has completed its review of interfaces with
other outside vendors, it is possible that Y2K problems may be identified that
could result in a material adverse effect on its operations. Furthermore, no
assessment program can guarantee identification of all potential issues.
Contingency Plans. Although the Company has not formulated a
contingency plan to date, the Company intends to continue to assess its Y2K
risks to determine whether it needs to do so. The Company will have to develop a
contingency plan if its implementation of internal systems or ongoing review of
other outside vendors identify a Y2K problem that poses a significant risk to
its business operation.
Possible Impact on Revenues. The Company's marketing and promotion
programs rely heavily on direct mail programs and telephone solicitation. An
interruption in mail delivery or telephone service could significantly reduce
the Company's marketing efforts with a possible material adverse impact on
revenues. Further, the services rendered by the Company are heavily reliant on
the ability of its customers to travel to the locations where the Company offers
its courses. An interruption in travel services could significantly reduce the
ability of the Company's customers to attend courses with a possible adverse
impact on revenues. The Y2K problem is also expected to result in some degree of
general economic dislocation, which could decrease demand for the Company's
products and services resulting in a possible material adverse impact on
revenues. Certain independent as well as internal market surveys have indicated
that companies have reduced their spending on IT training and on new software
and hardware investments while working to overcome their Y2K problems. There can
be no assurance that the Company's revenue will increase as more companies
complete their Y2K Compliance projects.
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 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 and
introduction, 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 1998 Annual Report
on Form 10-K.
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. BO193465) , also
-------------------------
purportedly on behalf of persons who purchased the Company's Common Stock
between May 8, 1997 and November 3, 1997.
13
<PAGE>
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. 95-6384ABC),
---------------------------------------------
purportedly on behalf of persons who purchased the Company's Common Stock
between May 8, 1997 and May 13, 1998. On August 10, 1998, the Superior Court
dismissed the Sarah case. On April 15, 1999, the Court of Appeals reversed the
-----
dismissal of Sarah.
-----
On August 27, 1998, plaintiffs amended the Guthrie action to add the
Company and two additional officers as defendants and to expand the proposed
class period to include 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 made by the Company at various times during the
class period. Each complaint also alleges that the Company and the defendant
officers and directors concealed an alleged deterioration of business early in
1997 and that several of the officers and directors realized profits by trading
their shares of Company Stock while in possession of allegedly concealed
material adverse information. Each complaint seeks an unspecified amount of
compensatory damages and, additionally, seeks attorneys' fees and other costs,
interest, and other relief.
The Company has agreements with officers and directors under which it
is indemnifying them in each of these proceedings. The Company is unable to
estimate the outcome of these matters or any potential liabilities it may incur.
The Company may incur legal and other defense costs as a result of such
proceedings in an amount which it can not currently estimate. These proceedings
could involve a substantial diversion of the time of some of the 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, 1999.
14
<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 10, 1999 By: /s/ Gary R. Wright
___________________________
Gary R. Wright
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
15
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<SECURITIES> 42,591,000
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