<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 December 31, 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
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Learning Tree International, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 95-3133814
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
6053 West Century Boulevard, Los Angeles, CA 90045
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(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
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The number of shares of common stock, $.0001 par value, outstanding as of
February 2, 1999, is 21,994,507 shares.
Total number of pages 15
----
1
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LEARNING TREE INTERNATIONAL, INC.
FORM 10-Q
December 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I--Financial Statements Page
<C> <S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets............................................. 3
Consolidated Statements of Operations................................... 4
Consolidated Statements of Stockholders' Equity......................... 5
Consolidated Statements of Cash Flows................................... 6
Notes to 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
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 42,689,000 $ 36,055,000
Short-term interest-bearing investments......................... 27,671,000 31,136,000
Trade accounts receivable, net.................................. 16,456,000 18,265,000
Prepaid marketing expenses...................................... 1,335,000 1,154,000
Prepaid expenses and other...................................... 2,196,000 3,691,000
------------ ------------
Total current assets...................................... 90,347,000 90,301,000
Equipment, property and leasehold improvements, net................. 28,628,000 27,235,000
Long-term interest-bearing investments.............................. 10,000,000 10,169,000
Other assets........................................................ 9,250,000 9,685,000
------------ ------------
Total assets.............................................. $138,225,000 $137,390,000
============ ============
LIABILITIES
Current liabilities:
Trade accounts payable.......................................... $ 10,993,000 $ 14,618,000
Deferred revenue................................................ 36,010,000 33,357,000
Accrued liabilities............................................. 7,275,000 7,234,000
Income taxes payable............................................ 3,081,000 4,071,000
------------ ------------
Total current liabilities................................. 57,359,000 59,280,000
Deferred income taxes............................................... 3,000 17,000
Deferred facilities rent............................................ 1,716,000 1,265,000
------------ ------------
Total liabilities......................................... 59,078,000 60,562,000
------------ ------------
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.............................. (8,000) (9,000)
Deferred compensation--stockholders............................. (27,000) (47,000)
Cumulative foreign currency translation......................... (1,058,000) (752,000)
Retained earnings............................................... 37,246,000 34,642,000
------------ ------------
Total stockholders' equity................................ 79,147,000 76,828,000
------------ ------------
Total liabilities and stockholders' equity................ $138,225,000 $137,390,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended December 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues................................... $45,152,000 $45,179,000
Costs of revenues.......................... 19,840,000 20,340,000
----------- -----------
Gross profit........................... 25,312,000 24,839,000
----------- -----------
Operating expenses:
Course development..................... 3,377,000 3,165,000
Sales and marketing.................... 13,298,000 14,838,000
General and administrative............. 5,796,000 5,445,000
----------- -----------
22,471,000 23,448,000
----------- -----------
Income from operations..................... 2,841,000 1,391,000
----------- -----------
Other income (expense):
Interest expense....................... (2,000) (5,000)
Interest income........................ 1,080,000 821,000
Foreign exchange....................... 144,000 (32,000)
Other.................................. (118,000) (217,000)
----------- -----------
1,104,000 567,000
----------- -----------
Income before provision for income taxes... 3,945,000 1,958,000
Provision for income taxes................. 1,341,000 666,000
----------- -----------
Net income................................. $ 2,604,000 $ 1,292,000
=========== ===========
Earnings per common
share...................................... $ 0.12 $ 0.06
=========== ===========
Earnings per common share assuming
dilution................................... $ 0.12 $ 0.06
=========== ===========
Weighted average number shares
outstanding................................ 21,995,000 21,995,000
=========== ===========
Diluted shares
outstanding................................ 21,995,000 22,062,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
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............... -- -- -- -- -- 1,292,000 1,292,000
Foreign currency
translation............ -- -- -- -- (145,000) -- (145,000)
-----------
Comprehensive Income....... 1,147,000
Amortization of deferred
compensation............. -- -- -- 20,000 -- -- 20,000
Collection of notes
receivable............... -- -- 2,000 -- -- -- 2,000
---------- ----------- ------------ ---------- ----------- ----------- -----------
Balance at
December 31,1997........... $ 2,000 $42,992,000 $(12,000) $(107,000) $(1,211,000) $25,400,000 $67,064,000
========== =========== ============ ========== =========== =========== ===========
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............... -- -- -- -- -- 2,604,000 2,604,000
Foreign currency
translation............ -- -- -- -- (306,000) -- (306,000)
-----------
Comprehensive Income....... 2,298,000
Amortization of deferred
compensation............. -- -- -- 20,000 -- -- 20,000
Collection of notes
receivable............... -- -- 1,000 -- -- -- 1,000
---------- ----------- ------------ ---------- ----------- ----------- -----------
Balance at
December 31,1998........... $ 2,000 $42,992,000 $ (8,000) $ (27,000) $(1,058,000) $37,246,000 $79,147,000
========== =========== ============ ========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended December 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows--operating activities:
Net income...................................................... $ 2,604,000 $ 1,292,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization......................... 2,386,000 2,310,000
Deferred facilities rent charges...................... 453,000 67,000
Amortization of deferred compensation................. 20,000 20,000
Unrealized foreign exchange (gains) losses............ (226,000) 75,000
Losses on retirements of equipment.................... 133,000 243,000
Change in net assets and liabilities:
Trade accounts receivable...................... 1,708,000 5,149,000
Prepaid marketing expenses..................... (185,000) 171,000
Prepaid expenses and other..................... 1,476,000 258,000
Income taxes................................... (909,000) (2,402,000)
Trade accounts payable......................... (3,547,000) (5,483,000)
Deferred revenue............................... 2,918,000 2,110,000
Accrued liabilities............................ 59,000 759,000
----------- -----------
Net cash provided by operating activities............. 6,890,000 4,569,000
----------- -----------
Cash flows--investing activities:
Purchases of equipment, property and leasehold improvements..... (4,004,000) (2,558,000)
Retirements of equipment, property and leasehold improvements... (10,000) 28,000
Sales of short-term interest-bearing investments:
Investments held to maturity................................ 11,136,000 6,958,000
Investments held for sale................................... 400,000 --
Purchases of short-term interest-bearing investments:
Investments held to maturity................................ (7,371,000) (2,652,000)
Investments held for sale................................... (700,000) --
Other, net...................................................... 480,000 (816,000)
----------- -----------
Net cash provided by (used in) investing activities... (69,000) 960,000
----------- -----------
Cash flows--financing activities:
Principal payments of debt and capital leases................... -- (19,000)
Collections of stockholder notes................................ 1,000 2,000
----------- -----------
Net cash provided by (used in) financing activities... 1,000 (17,000)
----------- -----------
Effects of exchange rates on cash................................... (188,000) (189,000)
----------- -----------
Net increase in cash and cash equivalents........................... 6,634,000 5,323,000
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.................. $42,689,000 $37,764,000
=========== ===========
Supplemental disclosures:
Income taxes paid......................................... $ 1,055,000 $ 1,662,000
=========== ===========
Interest paid............................................. $ 2,000 $ 2,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<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, 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 using the treasury stock method, 67,000
shares and zero shares were added to the weighted average number of shares
outstanding as of December 31, 1997 and 1998, respectively.
Note 3. Comprehensive Income:
--------------------
The Company adopted Statement of Financial Accounting Standard ("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 month periods ended December
31, 1997 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. 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 October 27, 1998, the
-----
plaintiff filed a notice of appeal in Sarah.
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7
<PAGE>
LEARNING TREE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 the 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 5. Subsequent Event:
----------------
In January 1999, the Company's Board of Directors approved, subject to
shareholder approval, 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 OPERATIONS
Overview
Learning Tree International, Inc. (the "Company"), is a leading worldwide
provider of education and training to information technology ("IT")
professionals in business and government organizations. The Company develops,
markets and delivers a broad, proprietary library of instructor-led course
titles focused on client/server systems, 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 26 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. The focus of this program is on training that supports the roll-out
and use of new organization-wide information systems, tools and applications.
The first Learning Solutions program, for General Motors Corporation, was begun
during fiscal 1997 and completed in the first quarter of fiscal 1998. A smaller
follow-on program for General Motors was also completed during fiscal 1998. The
Company is seeking additional Learning Solutions contracts with other potential
customers. However, since this business is dependent upon obtaining a small
number of large contracts, its revenues are inherently subject to fluctuation
and there can be no assurance as to if, or when, the Company will obtain
Learning Solutions contracts or the amounts thereof.
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 developing
and marketing its products, including its multimedia CBT products, the Company
has emphasized educational quality and features. The Company believes that the
value of quality training significantly outweighs the incremental cost to
deliver it. That philosophy notwithstanding, at the current time many
purchasers of CBT products, particularly those making larger library purchases,
appear to be placing more emphasis on pricing and the total number of CBT titles
available than on quality. As a result, the Company has attempted to increase
its market share by emphasizing sales directly to IT professionals and other
prospective purchasers who are focused on quality. There can be no assurance
that these strategies will increase market share or that the Company's market
share will not decline as a result of these or other trends.
During fiscal 1998, the Company began to provide its customers with a
skills assessment service through its SkillsTree program. SkillsTree is a
software package that identifies the skills necessary to perform IT functions
and provides an organized computer-based process for companies to assess the
technical proficiency of their staff to perform current and future functions.
Further, SkillsTree identifies areas where technical proficiency is lacking and
specifies which Learning Tree courses could best provide the training necessary
to meet the customers' training needs at individual, departmental and enterprise
levels. The Company believes there is a demand for these services but there can
be no assurances that it will be able to develop a profitable market for the
SkillsTree program.
Results of Operations
In the first fiscal quarter ended December 31, 1998, revenues were
substantially unchanged at $45.2 million when compared to the same quarter of
the prior year. Income from operations for the quarter ended December 31, 1998
increased $1.4 million or 104% to $2.8 million versus $1.4 million for the same
quarter of fiscal 1998. Net income for the quarter ended December 31, 1998
increased by $1.3 million or 102% to $2.6 million versus $1.3 million for the
quarter ended December 31, 1997.
The revenues for the three months ended December 31, 1998 reflect an
increase in the number of multi-day course participants to 26,786 compared to
26,298 in the corresponding three months of the prior year and a 4% increase in
average revenue per multi-day course participant, which was offset by a
reduction in Learning Solutions revenues. The rate of growth in the number of
course participants was less than the growth in the prior year. The Company
believes that the lower growth rate of course participants may be due to a
number of causes, including the pace of introduction of major new software
9
<PAGE>
technologies, the effect of our clients' Year 2000 ("Y2K") Compliance programs,
and other possible factors. 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 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 reduction in revenues produced
by the Company's Learning Solutions program reflects the completion of the
initial and follow-on contracts with General Motors to train General Motors'
personnel and dealers on the use and support of a new proprietary information
system. The initial contract with General Motors ran from June 1997 to November
1997 and was much larger than the follow-on contract which began in February
1998 and was completed in August 1998. In the first quarter of fiscal 1999,
revenues from the Learning Solutions program were from a small third phase of
the General Motors program.
The Company's cost of revenues for its instructor-led courses primarily
includes the costs associated with the course instructors, course materials and
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 was 43.9% of
revenues in the first quarter of fiscal 1999 compared to 45.0% in the first
quarter of fiscal 1998. This reflects the reduced impact of the lower margin
Learning Solutions courses for General Motors, an improvement in margins in the
instructor-led base business, and the elimination of the low margin Power
Seminars business. These improvements were partially offset by a decline in
margins on certain multimedia CBT courses due to the amortization of development
costs.
For the first quarter of the fiscal year ended September 30, 1998, the cost
of revenues decreased $500,000 or 2% to $19.8 million from $20.3 million for the
previous fiscal year. The decrease in the cost of revenues is primarily the
result of the decrease in the number of courses conducted under the Learning
Solutions program and the elimination of the Power Seminars business. These
reductions were offset, in part, by the increased number of course events as
well as costs associated with the multimedia CBT product line. The number of
multi-day instructor-led course events increased 4% in the first quarter of
fiscal 1999 to 1,695 from 1,626 course events in the first quarter of fiscal
1998.
Costs per multi-day course event increased by approximately 1% in the first
quarter of fiscal 1999 compared to the same period in fiscal 1998. The change
in the average cost per course event primarily reflects an increase in the
average course duration. The Company's new education centers in the United
Kingdom and New York both opened in October 1998 and have reduced the Company's
use of the more expensive hotel facilities in those cities. To allow for
growth, the Company initially leases more capacity in new facilities than it
immediately requires. Accordingly, the cost benefit to be realized from new
facilities depends upon their current and future utilization rates.
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 first quarter of fiscal 1999, course
development expense was 7.5% of revenue compared to 7.0% in the same period of
fiscal 1998. For the three months ended December 31, 1998, course development
expenses increased by $212,000 or 7% to $3.4 million from $3.2 million for the
three months ended December 31, 1997. The increase in course development costs
reflects the write off of development costs for certain CBT courses which were
terminated while still under development.
The number of multi-day course titles was 150 as of December 31, 1998,
compared to 146 a year earlier. The change in the size of the multi-day 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 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 net number of its course
titles to decline somewhat in the second quarter of fiscal 1999, and then grow
modestly over the remainder of the next year. However, there can be no
assurance that the Company will develop more titles than it retires in any
period.
The number of multimedia CBT course titles increased to 123 as of December
31, 1998 compared to 76 the year before. During the first quarter of fiscal
1998, the Company introduced an HTML-based engine for its multimedia CBT product
line. New multimedia CBT titles developed since the first half of fiscal 1998
have been developed using this engine and resources have been allocated to adapt
existing courses based on prior engines to the new HTML-based engine.
10
<PAGE>
Accordingly, the rate of the introduction of new multimedia CBT titles has been
less during these periods than in earlier periods. The Company anticipates
continued allocation of resources to engine development and/or the acquisition
of a new engine during fiscal 1999.
The amount of course development expenses are expected to increase in
fiscal 1999 due primarily to development of the SkillsTree product line. The
actual number of instructor-led and multimedia CBT course titles which the
Company will produce and their delivery dates are subject to a number of factors
such as the hiring and training of staff, perceived customer demand, continued
refinements in the CBT development and production process and the availability
of subject matter experts who are also responsible for teaching the Company's
instructor-led courses.
Sales and marketing expense consists of salaries, commissions and travel-
related costs for sales and marketing personnel, the costs of designing,
producing and distributing direct mail marketing and media advertisements, and
the costs of information systems to support these activities. Sales and
marketing expenses decreased $1.5 million or 10% to $13.3 million in the first
quarter of fiscal 1999 from $14.8 million in the same period of fiscal 1998. The
decrease in sales and marketing expenses, for the 1999 fiscal year, occurred
primarily as a result of a decrease in direct mail marketing. The Company
adjusts 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 first quarter of fiscal 1999
compared to the same period of the 1998 fiscal year. Sales and marketing
expenses for the first quarter of fiscal 1999 decreased as a percentage of
revenues to 29.5% compared to 32.8% in the first quarter of fiscal 1998.
In the first quarter of fiscal 1999, general and administrative expenses
increased $351,000 or 6% to $5.8 million from $5.4 million for the same period
in fiscal 1998. The increase in general and administrative expenses reflects
increases in facility related costs and the costs of subleasing a portion of the
new London education center. As a percentage of revenue, general and
administrative expenses were 12.8% for the first quarter of fiscal 1999 compared
to 12.1% in the first quarter of fiscal 1998.
Other income (expense) is primarily comprised of interest income, interest
expense and foreign currency gains and losses. For the first quarter of fiscal
1999, other income increased $537,000 to $ 1.1 million from $567,000 for the
first quarter of fiscal 1998. This increase reflects a $259,000 increase in
interest income in the first quarter of fiscal 1999 compared the same period of
the prior year. In addition, the Company recorded foreign exchange gains of
$144,000 in the first quarter of fiscal 1999, compared to $32,000 of foreign
exchange losses in the first quarter of fiscal 1998. These transaction gains and
losses arose from receivables and payables denominated in currencies other than
the functional currencies of the Company's foreign subsidiaries.
The provision for income taxes increased $675,000 to $1.3 million for the
quarter ended December 31, 1998 from $666,000 for the quarter ended December 31,
1997. The increase in the income tax provision reflects the increase in taxable
income.
Backlog
At December 31, 1998, the Company had a backlog of orders for instructor-
led courses of $24.2 million, which represented a 3% decrease compared to the
backlog of $24.9 million at December 31, 1997. 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
11
<PAGE>
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 seasonal 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 $70.4 million at December 31, 1998 from $67.2 million at September
30, 1998, primarily as a result of the cash provided by operations. In the
quarter ended December 31, 1998, cash provided by operations was approximately
$6.9 million compared to $4.6 million during the same period in the prior year.
The increase in cash provided by operations reflects the increase in
profitability, reduced payments of income taxes and increased deferred revenues.
At December 31, 1998, the Company had working capital of $33.0 million.
During the quarter ended December 31, 1998, the Company invested $4.0
million in equipment and facilities compared to $2.6 million in the same period
of the prior year. The higher level of investment during the current year was
primarily related to the build-out of education center facilities in New York
and London. As of December 31, 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 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 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 has completed a review of these critical systems and has
determined that they are not Y2K compliant. These systems are supported by
third parties who currently have software updates available at reasonable
prices. The Company expects to install and implement these updates by June 30,
1999. However, there can be no assurance that this schedule will not be
delayed. The Company is also in the progress of reviewing other equipment that
contains date-sensitive information. The Company expects to complete its review
of all other internal systems by April 30, 1999 and does not expect this review
to uncover 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.
The Company is also in the process of identifying any potential Y2K
problems from outside vendors whose systems interface with the Company's
internal systems. The Company expects to complete this review by April 30,
1999. The Company does not presently plan a general review of other outside
vendors, such as banks, utilities, telephone companies,
12
<PAGE>
airlines and shipping companies, and is relying on general industry pressure to
ensure Y2K compliance by these vendors.
Based on a preliminary 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, as the review of its interfaces with other outside vendors progresses,
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 revenues 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,
13
<PAGE>
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 October 27,
-----
1998, the plaintiff filed a notice of appeal in 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 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 the 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
No matters were submitted to a vote of security holders during the
first quarter of fiscal 1999, through the solicitation of proxies or
otherwise.
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
December 31, 1998.
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: February 3, 1999 By: /s/ Gary R. Wright
----------------------------------------
Gary R. Wright
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
15
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<PERIOD-END> DEC-31-1998
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<SECURITIES> 27,671,000
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