10-Q 1 d10q.txt FORM 10-Q 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, 2001 ------------- or [_] Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the transition period from____________to___________ Commission file number 0-27248 ------- Learning Tree International, Inc. --------------------------------- (Exact name of registrant as specified in its charter) Delaware 95-3133814 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 6053 West Century Boulevard, Los Angeles, CA 90045 -------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (310) 417-9700 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- -------- The number of shares of common stock, $.0001 par value, outstanding as of August 3, 2001, is 19,240,545 shares. Total number of pages 18 -- 1 LEARNING TREE INTERNATIONAL, INC. FORM 10-Q June 30, 2001 TABLE OF CONTENTS
Part I--Financial Statements Page ---- 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.............................................................................. 17 Item 2. Changes in Securities.......................................................................... 17 Item 3. Defaults Upon Senior Securities................................................................ 17 Item 4. Submission of Matters to a Vote of Security Holders............................................ 17 Item 5. Other Information.............................................................................. 17 Item 6. Exhibits and Reports on Form 8-K............................................................... 17 Signatures............................................................................................... 18
2 PART I-FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30, 2001 2000 ------------ ------------ ASSETS (Unaudited) Current assets: Cash and cash equivalents........................................................ $101,397,000 $116,231,000 Short-term interest-bearing investments.......................................... -- 37,882,000 Trade accounts receivable, net................................................... 19,139,000 25,565,000 Prepaid marketing expenses....................................................... 1,910,000 1,723,000 Prepaid income taxes............................................................. 5,973,000 -- Prepaid expenses and other....................................................... 5,939,000 5,251,000 ------------ ------------ Total current assets........................................................... 134,358,000 186,652,000 Equipment, property and leasehold improvements, net............................... 28,430,000 22,752,000 Long-term interest-bearing investments............................................ 8,450,000 8,824,000 Other assets...................................................................... 2,119,000 2,125,000 ------------ ------------ Total assets................................................................... $173,357,000 $220,353,000 ============ ============ LIABILITIES Current liabilities: Trade accounts payable........................................................... $ 12,213,000 $ 15,283,000 Deferred revenue................................................................. 59,992,000 53,327,000 Accrued liabilities.............................................................. 9,307,000 11,820,000 Income taxes payable............................................................. 2,130,000 4,729,000 ------------ ------------ Total current liabilities...................................................... 83,642,000 85,159,000 Deferred income taxes............................................................. 79,000 82,000 Deferred facilities rent.......................................................... 2,637,000 2,317,000 ------------ ------------ Total liabilities.............................................................. 86,358,000 87,558,000 ------------ ------------ Commitments and Contingencies STOCKHOLDERS' EQUITY Common Stock, $.0001 par value, 75,000,000 shares authorized, 19,241,000 and 22,119,000 shares issued and outstanding, respectively........... 2,000 2,000 Additional paid-in capital....................................................... 1,660,000 52,649,000 Cumulative foreign currency translation.......................................... (5,448,000) (4,007,000) Retained earnings................................................................ 90,785,000 84,151,000 ------------ ------------ Total stockholders' equity..................................................... 86,999,000 132,795,000 ------------ ------------ Total liabilities and stockholders' equity..................................... $173,357,000 $220,353,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 3 LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended Nine Months Ended June 30, June 30, --------------------------- ----------------------------- 2001 2000 2001 2000 ----------- ----------- ------------ ------------ Revenues....................................... $57,833,000 $63,024,000 $177,927,000 $165,420,000 Cost of revenues............................... 23,933,000 22,261,000 71,701,000 59,330,000 ----------- ----------- ------------ ------------ Gross profit................................. 33,900,000 40,763,000 106,226,000 106,090,000 ----------- ----------- ------------ ------------ Operating expenses: Course development........................... 2,957,000 2,699,000 8,893,000 7,598,000 Sales and marketing.......................... 16,095,000 14,036,000 47,676,000 41,172,000 General and administrative................... 6,828,000 6,520,000 20,243,000 18,519,000 ----------- ----------- ------------ ------------ 25,880,000 23,255,000 76,812,000 67,289,000 ----------- ----------- ------------ ------------ Income from operations......................... 8,020,000 17,508,000 29,414,000 38,801,000 ----------- ----------- ------------ ------------ Other income (expense): Interest expense............................. (3,000) (7,000) (7,000) (12,000) Interest income.............................. 1,176,000 1,896,000 5,689,000 4,797,000 Foreign exchange............................. 70,000 (149,000) (464,000) (292,000) Other........................................ 98,000 (307,000) (38,000) (149,000) ----------- ----------- ------------ ------------ 1,341,000 1,433,000 5,180,000 4,344,000 ----------- ----------- ------------ ------------ Income before provision for income taxes....... 9,361,000 18,941,000 34,594,000 43,145,000 Provision for income taxes..................... 3,323,000 6,629,000 12,281,000 15,100,000 ----------- ----------- ------------ ------------ Net income..................................... $ 6,038,000 $12,312,000 $ 22,313,000 $ 28,045,000 =========== =========== ============ ============ Earnings per common share...................... $ 0.31 $ 0.56 $ 1.06 $ 1.29 =========== =========== ============ ============ Earnings per common share assuming dilution...................................... $ 0.31 $ 0.54 $ 1.03 $ 1.25 =========== =========== ============ ============ Weighted average number of shares outstanding................................... 19,402,000 21,793,000 21,050,000 21,699,000 =========== =========== ============ ============ Diluted shares outstanding..................... 19,742,000 22,717,000 21,689,000 22,370,000 =========== =========== ============ ============
See accompanying notes to condensed consolidated financial statements. 4 LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Notes Foreign Additional Receivable Currency Total Common Paid-In From Translation Retained Stockholders' Stock Capital Stockholders Adjustment Earnings Equity ------- ----------- ------------- ------------ ----------- ------------- Balance, September 30, 1999........... $ 2,000 $39,888,000 $ (6,000) $ (1,300,000) $ 47,056,000 $ 85,640,000 Comprehensive income: Net income................. -- -- -- -- 28,045,000 28,045,000 Foreign currency translation............... -- -- -- (1,549,000) -- (1,549,000) ------------- Comprehensive income......... 26,496,000 Stock option exercises....... -- 5,845,000 -- -- -- 5,845,000 Tax benefit related to stock option exercises.......... -- 1,253,000 -- -- -- 1,253,000 Collection of notes receivable................. -- -- 6,000 -- -- 6,000 ------- ----------- ------------ ------------ ------------ ------------- Balance at June 30, 2000................. $ 2,000 $46,986,000 $ -- $ (2,849,000) $ 75,101,000 $ 119,240,000 ======= =========== ============ ============ ============ ============= Balance, September 30, 2000........... $ 2,000 $52,649,000 $ -- $ (4,007,000) $ 84,151,000 $ 132,795,000 Comprehensive income: Net income................. -- -- -- -- 22,313,000 22,313,000 Foreign currency translation............... -- -- -- (1,441,000) -- (1,441,000) ------------- Comprehensive income......... 20,872,000 Stock option exercises....... -- 4,410,000 -- -- -- 4,410,000 Tax benefit related to stock option exercises.... -- 1,595,000 -- -- -- 1,595,000 Stock repurchases............ -- (56,994,000) -- -- (15,679,000) (72,673,000) ------- ----------- ------------ ------------ ----------- ------------- Balance at June 30, 2001................. $ 2,000 $ 1,660,000 $ -- $ (5,448,000) $90,785,000 $ 86,999,000 ======= =========== ============ ============ =========== =============
See accompanying notes to condensed consolidated financial statements. 5 LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended June 30, --------------------------- 2001 2000 ------------ ------------ Cash flows--operating activities: Net income........................................................ $ 22,313,000 $ 28,045,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................. 6,113,000 6,491,000 Unrealized foreign exchange losses............................. 390,000 215,000 Deferred facilities rent charges............................... 353,000 (300,000) Losses on retirements of equipment and leasehold improvements.. 141,000 144,000 Change in net assets and liabilities: Trade accounts receivable................................... 5,967,000 (8,181,000) Prepaid marketing expenses.................................. (189,000) 739,000 Prepaid expenses and other.................................. (846,000) (1,411,000) Income taxes................................................ (6,790,000) 5,580,000 Trade accounts payable...................................... (2,704,000) (54,000) Deferred revenue............................................ 7,967,000 13,891,000 Accrued liabilities......................................... (2,282,000) 3,635,000 ------------ ------------ Net cash provided by operating activities...................... 30,433,000 48,794,000 ------------ ------------ Cash flows--investing activities: Purchases of equipment, property and leasehold improvements....... (12,418,000) (4,936,000) Retirements of equipment, property and leasehold improvements..... 52,000 874,000 Sales of short-term interest-bearing investments: Investments held to maturity................................... 68,615,000 94,106,000 Investments held for sale...................................... -- 37,800,000 Purchases of short-term interest-bearing investments: Investments held to maturity................................... (30,733,000) (56,899,000) Investments held for sale...................................... -- (38,600,000) Other, net......................................................... (65,000) (862,000) ------------ ------------ Net cash provided by investing activities................... 25,451,000 31,483,000 ------------ ------------ Cash flows--financing activities: Repurchases of Common Stock....................................... (72,673,000) -- Proceeds from exercise of stock options........................... 4,410,000 5,845,000 Collections of stockholder notes receivable....................... -- 6,000 ------------ ------------ Net cash provided by (used in) financing activities......... (68,263,000) 5,851,000 ------------ ------------ Effects of exchange rates on cash................................... (2,455,000) (1,995,000) ------------ ------------ Net increase (decrease) in cash and cash equivalents................ (14,834,000) 84,133,000 Cash and cash equivalents at the beginning of the period............ 116,231,000 33,059,000 ------------ ------------ Cash and cash equivalents at the end of the period.................. $101,397,000 $117,192,000 ============ ============ Supplemental disclosures: Income taxes paid................................................. $ 13,331,000 $ 8,101,000 ============ ============ Interest paid..................................................... $ -- $ 6,000 ============ ============
See accompanying notes to condensed consolidated financial statements. 6 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, 2000 that are contained in the Company's 2000 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, 340,000 shares and 639,000 shares were added to the weighted average number of shares outstanding for the three and nine month periods ended June 30, 2001, respectively. Approximately 924,000 shares and 671,000 shares were added to the weighted average number of shares outstanding for the three and nine month periods ended June 30, 2000, respectively. Approximately 1,586,000 stock options were excluded from the calculation of earnings per common share assuming dilution for the quarter ended June 30, 2001 because they were antidilutive. Note 3 Litigation: ---------- On August 6, 1998, a class action lawsuit was filed against Learning Tree and certain officers and directors of Learning Tree in the United States District Court for the Central District of California (Schlagal v. Learning Tree International et al., Case No. 98-6384 ABC), purportedly on behalf of persons who purchased Learning Tree's Common Stock between May 8, 1997 and May 13, 1998. In May 2000, plaintiffs and defendants executed a Stipulation of Settlement ("Settlement Stipulation") in the Schlagal Action, which was filed with the Court. The Settlement Stipulation provided, among other things, for dismissal of the Schlagal Action against all defendants. Counsel for plaintiffs provided written notice of the Settlement Stipulation to class members, giving them the opportunity to object to the Settlement Stipulation or to opt out of participation in the settlement. Only four class members opted out. 7 On August 7, 2000, the Court gave its final approval to the Settlement Stipulation and signed and filed a Judgment which, among other things, dismissed the Schlagal action against all defendants. The Judgment is now final and non- appealable. Note 4 Repurchase of Company Stock: ---------------------------- On November 27, 2000, the Board of Directors of the Company authorized the reinstatement of the stock repurchase plan. During the third quarter ended June 30, 2001, the Company repurchased 1,729,100 shares of Common Stock for $36,347,000. In total, during the nine month period ended June 30, 2001, the Company repurchased 3,142,400 shares of Common Stock for $72,673,000. The Company may make additional purchases through open-market transactions based upon market conditions and pursuant to the requirements of Rule 10b-18 of the Securities Exchange Act of 1934. There can be no assurance that the Company will repurchase additional shares of Common Stock. 8 Item. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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; risks in technology development and introduction; risks associated with the introduction of distance learning both by the Company and its competitors; the impact of competition and pricing pressures; the Company's ability to attract and retain key management and other personnel; risks associated with international operations, including currency fluctuations; the effect of changing economic conditions; the Company's ability to maintain its current operating margins; the effect of adverse weather conditions, strikes and other external events; and the other risks and uncertainties detailed from time to time in Learning Tree's filings with the Securities and Exchange Commission, including Learning Tree's 2000 Annual Report on Form 10-K and in Exhibit 99 "Risk Factors" thereto. 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, programming languages, databases, object- oriented technology and IT management. In addition, the Company provides custom developed training for larger clients who need to train large numbers of their IT professionals and end-users, and tests and certifies IT professionals. The Company's instructor-led courses are recommended for college credit by the American Council on Education. In the past, the Company has delivered certain of its courses by using a computer-based training method ("CBT") on CD-ROMs. In 1999, the Company discontinued further development of its CBT courses, and substantially reduced its sales and marketing of these courses. During fiscal 2000, sales of CBT contributed a small amount of relatively high margin revenues, and by the end of fiscal 2000 sales of CBT courses were largely discontinued. The Company has engaged in limited testing of a system for delivering its courses over the Internet ("e-learning"). Until the Company develops what it believes could be a profitable e-learning business model, it expects to limit its ongoing investment in e-learning. There can be no assurance that the Company will be able to successfully develop or profitably implement its current or any other e-learning strategy. Results of Operations In the third quarter ended June 30, 2001, revenues decreased by 8% to $57.8 million from $63.0 million for the corresponding quarter of the prior year. Income from operations for the quarter ended June 30, 2001 decreased by 54% to $8.0 million versus $17.5 million for the same quarter of fiscal 2000. Net income for the quarter ended June 30, 2001 decreased by 51% to $6.0 million from $12.3 million for the same period last year. For the nine month period ended June 30, 2001, year-to-date revenues increased by 8% to $177.9 million from $165.4 million for the nine months ended June 30, 2000. Income from operations for the nine months ended June 30, 2001, decreased by 24% to $29.4 million versus $38.8 million for the corresponding period of 9 the prior year. Net income for the nine months ended June 30, 2001 decreased by 20% to $22.3 million versus $28.0 million for the corresponding period of the prior year. The decline in revenues in the third quarter of fiscal 2001 was primarily the result of a 4% decrease in the number of multi-day course participants to 37,516 compared to 39,172 in the corresponding three months of the prior year and a 1% decrease in average revenue per multi-day course participant. The decrease in the number of multi-day course participants is primarily the result of the economic slowdown in the IT industry, which the Company believes has resulted in more cautious spending by its customers. For the nine months ended June 30, 2001, the increase in revenues resulted primarily from a 12% increase in the number of multi-day course participants to 113,335 compared to 101,450 in the corresponding nine months of the prior year, partially offset by a 1% decrease in average revenue per multi-day course participant. This increase in course participants reflects better market conditions for IT training during the first quarter of fiscal 2001 and an increase in expenditures for course development, sales and marketing. Additionally, since the sales of CBT courses were largely discontinued as of September 30, 2000, total revenues reflect a reduction in CBT revenues in both the three months and nine months ended June 30, 2001 as compared to the same periods of the prior year. For both the three month and nine month periods ended June 30, 2001, the average revenue per attendee declined 1% as compared to the same periods in the prior fiscal year. These trends primarily reflect the impact of changes in foreign exchange rates compared to the exchange rates that prevailed during the corresponding periods in fiscal 2000. Changes in exchange rates compared with last year adversely affected revenues by approximately 4% in the third quarter of fiscal 2001 and 5% in the comparable year-to-date period. The effect of changes in foreign exchange rates was partially offset by the impact of increases in prices. Excluding the impact of exchange rate changes, the average revenue per multi-day course participants increased 3% in local currencies for the three months ended June 30, 2001 compared to the same quarter of the prior year and 4% for the nine months ended June 30, 2001 compared to the year-to-date period. The Company's cost of revenues for its instructor-led courses primarily includes the costs associated with course instructors, course materials and equipment, freight, classroom facilities and refreshments. The cost of revenues increased to 41.4% of revenues in the third quarter of fiscal 2001 compared to 35.3% in the third quarter of fiscal 2000. For the nine months ended June 30, 2000, the cost of revenues increased to 40.3% of revenues compared to 35.9% for the same period in fiscal 2000. The change in margins in instructor-led courses in the third quarter of fiscal 2001 reflects an 11% decrease in revenue per multi-day course event and a 3% increase in cost per multi-day course event. For the nine months ended June 30, 2001, the change in margins in the Company's instructor-led courses reflects a 7% decrease in revenue per multi-day course event and a 2% increase in cost per multi-day course event. The decrease in revenue per multi-day course event primarily reflects a decrease in average attendees per event and the decrease in average revenue per attendee. The higher cost per multi-day course event is primarily due to increased instructor training and recruiting activities, expansion costs associated with the Company's education centers in New York City, Chicago and Atlanta, and an increase in lease rates for the Company's education center in Reston, Virginia. The increased cost per multi-day course event was partially offset by the impact of changes in foreign exchange rates compared to the exchange rates that prevailed during the corresponding periods in fiscal 2000. Excluding the impact of foreign exchange rate changes, the cost per multi-day course event would have been 7% higher for both the same quarter of the prior year and the year-to-date period. In addition, the overall cost of revenues increased as a percent of revenues in part because of the reduction in relatively high margin CBT sales during fiscal 2001. 10 For the third quarter of fiscal 2001, the cost of revenues increased by 8% to $23.9 million from $22.3 million for the same quarter of fiscal 2000. For the nine months ended June 30, 2001, the Company's cost of revenues increased by 21% to $71.7 million from $59.3 million for the corresponding period in the prior year. The increase in the cost of revenues compared to the same period in the prior year primarily reflects a 6% increase in the number of course events during the third quarter of fiscal 2001 and a 19% increase for the year-to-date period. During the third quarter of fiscal 2001, the number of multi-day instructor-led course events was 2,551 compared to 2,413 during the same period last year. For the nine months ended June 30, 2001, the number of multi-day instructor-led courses was 7,534 compared to 6,308 for the corresponding period in fiscal 2000. In addition, this increase is due to higher instructor training and recruiting activities, education center expansion costs, and higher lease rates. These higher costs are partially offset by the impact of changes in foreign exchange 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. Course development expense was 5.1% of revenue during the third quarter of fiscal 2001 compared to 4.3% for the same period of fiscal 2000. For the nine months ended June 30, 2001, course development expense was 5.0% of revenue compared to 4.6% of revenue for the corresponding period in the prior year. Course development expenses increased by 10% to $3.0 million for the quarter ended June 30, 2001 from $2.7 million in the quarter ended June 30, 2000. For the nine months ended June 30, 2001, course development expenses increased by 17% to $8.9 million from $7.6 million for the corresponding period in the prior year. These increases are primarily due to an increase in the number of instructor-led course titles that were developed during the period, as well as a modest increase in the Company's investment in e-learning. The Company offered 163 multi-day course titles as of June 30, 2001, compared to 145 a year earlier. The Company has recently released additional multi-day course titles on topics such as Windows 2000, SQL Server 2000, Web development, C# programming, UNIX, Security, Cisco Switched Networks, Oracle9i, Technical Writing and IT Management. 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. The actual number of instructor-led 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, and the availability of subject matter experts. There can be no assurance that the Company will develop more titles than it retires in any period. Course development costs may increase in the future as the Company continues to expand its instructor-led training course library and explores the development of Internet distance learning approaches and technologies. 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. The Company generally tries to adjust its expenditures for sales and marketing depending on its expectations of future customer demand and other factors. However, if the Company's assumptions prove to be wrong, any significant revenue shortfall would have a material adverse effect on the Company's results of operations. Sales and marketing expenses increased by 15% to $16.1 million for the quarter ended June 30, 2001 from $14.0 million for the quarter ended June 30, 2000. For the nine months ended June 30, 2001, sales and marketing expenses increased by 16% to $47.7 million from $41.2 million for the corresponding period in the prior fiscal year. The increase primarily reflects increased marketing activities and marketing costs and 11 increases in the number of sales personnel. For the nine months ended June 30, 2001, the increase also reflects increased selling commission due to the higher level of sales. Sales and marketing expense for the quarter ended June 30, 2001 increased as a percentage of revenues to 27.8% compared to 22.3% for the quarter ended June 30, 2000. Sales and marketing expenses for the nine months ended June 30, 2001 increased to 26.8% as a percentage of revenues compared to 24.9% for the same period last year. General and administrative expenses increased by 5% to $6.8 million for the quarter ended June 30, 2001 compared to $6.5 million in the same quarter of the prior year. For the nine months ended June 30, 2001, general and administrative expenses increased by 9% to $20.2 million from $18.5 million for the corresponding period in the prior year. The increase in general and administrative expenses reflects increases in administrative staff and related costs. As a percentage of revenue, these costs increased to 11.8% in the quarter ended June 30, 2001 from 10.3% in the corresponding period of the prior year. In the nine months ended June 30, 2001, these costs increased slightly to 11.4% from 11.2% as a percentage of revenue as compared to the same period of the 2000 fiscal year. Other income (expense) is primarily comprised of interest income and foreign currency transaction gains and losses. Other income (expense) decreased by 6% to $1.3 million for the quarter ended June 30, 2001 versus $1.4 million for the corresponding quarter in the prior year. For the nine months ended June 30, 2001, other income (expense) increased by 19% to $5.2 million from $4.3 million for the corresponding nine month period in the prior year. Interest income decreased to $1.2 million for the quarter ended June 30, 2001 compared to $1.9 million in the same quarter of the prior year primarily due to lower cash balances and interest rates. This decrease was partially offset by foreign exchange gains of $70,000 recorded in the third quarter of fiscal 2001, compared to foreign exchange losses of $149,000 in the third quarter of fiscal 2000. For the nine months ended June 30, 2001, interest income increased to $5.7 million from $4.8 million for corresponding period in the prior year. This increase was partially offset by foreign exchange losses of $464,000 in the nine months ended June 30, 2001, compared with foreign exchange losses of $292,000 in the corresponding period of the prior year. 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 decreased $3.3 million to $3.3 million for the quarter ended June 30, 2001 compared to $6.6 million for the same quarter of the prior year. For the nine months ended June 30, 2001, the provision for income taxes decreased $2.8 million to $12.3 million from $15.1 million for the same period a year ago. The decreases in the income tax provision reflect the decreases in taxable income, partially offset by a slight increase in the effective tax rate. Fluctuations in Quarterly Results Historically, the Company's quarterly operating results have fluctuated, and fluctuations are expected to continue in the future. The Company tries to adjust its expenditures for course development, sales and marketing depending on its expectations of future customer demand and other factors. However, if the Company's assumptions prove to be wrong, and revenues fall short of expectations, the Company may not be able to adjust its expenditures quickly enough to compensate for lower than anticipated revenues. Any significant revenue shortfall would therefore have a material adverse effect on the Company's results of operations. The Company's quarterly operating results may fluctuate based on other factors including: the frequency and availability of course events; the number of weeks in a quarter during which courses can be conducted; the 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; the mix between course events held at customer-sites and 12 course events held in the Company's education centers and hotels; competitive forces within current and anticipated future markets served by the Company; the Company's ability to attract customers and meet their expectations; currency fluctuations and other risks of international operations; natural disasters, external strikes, and other external factors; and general economic conditions and industry-specific slowdowns. Fluctuations in quarter-to-quarter results may also occur as a result of differences in the timing of the Company's spending on development and marketing of its courses and receiving revenues from its customers. The Company's quarterly revenues and income typically reflect seasonal patterns. Generally, the Company's revenue and operating income are greater in the second half of its fiscal year (April through September) than in the first half (October through March). This is due in large part to seasonal spending patterns of the Company's customers, which are affected by factors such as: their budgetary considerations; factors specific to their business or industry; and weather, holiday and vacation considerations. 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 decreased to $101.4 million at June 30, 2001 from $154.1 million at September 30, 2000, primarily as a result of cash used for repurchases of Common Stock, income tax payments, expansion costs related to the Company's education centers in New York, Chicago and Atlanta, and investments in new and upgraded course equipment. The decrease was partially offset by cash provided by operations and proceeds from the exercise of stock options. For the nine months ended June 30, 2001, cash provided by operations was approximately $30.4 million compared to $48.8 million during the same period in the prior year. This decrease in cash provided by operations primarily reflects the change in profitability and higher income tax payments. At June 30, 2001, the Company had working capital of $50.7 million. In November 2000, the Board of Directors of the Company authorized the reinstatement of the Company's stock repurchase plan. During the third quarter ended June 30, 2001, the Company repurchased 1,729,100 shares of Common Stock for $36,347,000. In total, during the nine month period ended June 30, 2001, the Company repurchased 3,142,400 shares of Common Stock for $72,673,000. The Company may make additional purchases through open-market transactions based upon market conditions and pursuant to the requirements of Rule 10b-18 of the Securities Exchange Act of 1934. There can be no assurance that the Company will repurchase additional shares of Common Stock. For the nine months ended June 30, 2001, the Company invested $12.4 million in equipment and facilities compared to $4.9 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, Chicago and Atlanta and the purchase of new and upgraded course equipment. As of June 30, 2001, the Company had no other 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. 13 Quantitative and Qualitative Disclosures About Market Risk The Company's cash equivalents and short-term investment portfolio is diversified and consists primarily of investment grade securities. Investments are held with high-quality financial institutions, government and government agencies, and corporations, thereby reducing credit risk concentrations. The fair value of the Company's portfolio of marketable securities would not be significantly impacted by either a 10 percent (50 basis point) increase or decrease in the rates of interest due primarily to the short-term nature of the portfolio. The Company does not hold or issue derivative financial instruments. The Company's consolidated financial statements are prepared in U.S. dollars, while the operations of its foreign subsidiaries are conducted in their respective local currencies. Consequently, changes in exchange rates can result in exchange losses. The Company does not hedge against the risks associated with fluctuations in exchange rates and therefore continues to be subject to such risks. The Company may use hedging techniques in the future. However, there can be no assurance that any hedging techniques implemented by the Company would be successful in eliminating or reducing the effects of currency fluctuations. Outlook For Fiscal 2001 Backlog. At June 30, 2001, the Company had a backlog of orders for instructor-led courses of $37.0 million, which represented a 2% increase compared to the backlog of $36.2 million at June 30, 2000. At July 31, 2001, the Company had a backlog of orders for instructor-led courses of $36.5 million, which represented a 1% decrease compared to the backlog of $36.7 million at July 31, 2000. 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. Fiscal 2001 Outlook. Throughout this document, there have been various forward-looking statements. However, all of the statements in this section are forward-looking and are subject to various risks and uncertainties, including those detailed from time to time in the Company's filings with the Securities and Exchange Commission including the Company's 2000 Annual Report on Form 10-K and "Risk Factors," filed as Exhibit 99. As economic and market conditions change during fiscal 2001, the Company's future revenues, plans and expenditures will vary from the observations below, and these differences may be material. Approximately 40% of the Company's business is conducted in European currencies. Accordingly, fluctuations in the exchange rates of European currencies will impact future revenues and expenses. If current exchange rates remain stable for the remainder of fiscal 2001, the Company believes that its fiscal 2001 revenue will be approximately 5% less than it would have been had the average exchange rates during fiscal 2000 prevailed throughout fiscal 2001. Changes in exchange rates that have an adverse effect on the Company's foreign revenues, also reduce its foreign expenses when translated into dollars. If current exchange rates remain stable through the remainder of fiscal 2001, the Company estimates that net income for the year would be approximately 5% lower than the Company would otherwise achieve had fiscal 2000 average exchange rates prevailed throughout fiscal 2001. The recent uncertainty surrounding economic conditions, especially in the corporate information technology sector, makes it difficult to forecast the Company's growth rate. During weak economic conditions, the Company's growth rate generally slows. The recent rate of enrollments for courses at the Company's education centers has been about the same as it was a year earlier, while bookings for future customer-site courses have recently been significantly lower than in the comparable period last year. 14 The Company believes that some of the factors that could affect fourth quarter revenues include the following: . At June 30, 2001, the Company's backlog of $37.0 million was 2% higher than at June 30, 2000. At July 31, 2001, the Company's backlog of $36.5 million was 1% lower than at July 31 last year, primarily reflecting the slowdown during July in bookings for customer site courses. . In the most recent marketing programs, the Company announced seven new course titles that will have their initial presentations during the fourth fiscal quarter and expects to retire about six course titles. The Company expects to have approximately 164 course titles in the fourth quarter. . Changes in exchange rates compared with last year are expected to adversely affect revenues by approximately 3% in the quarter. Based on these factors and the Company's current assessment of general economic conditions, the Company believes that its instructor-led base business in the fourth quarter will be between 8% and 10% lower than last year. Additionally, the Company expects to realize no CBT course revenues in the fourth quarter of fiscal 2001, as this product line was largely discontinued at the end of September 2000. During the fourth quarter of fiscal 2001, the Company expects the following factors to adversely affect its gross margins by approximately 6% compared to the fourth quarter in the prior fiscal year: . Lower attendees per event, primarily the result of the slowing in enrollment growth rates . The absence of high margin CBT revenues . Expansion costs associated with the Company's education centers in New York City, Chicago and Atlanta . Increased lease rates for the Company's education center in Reston, Virginia The Company expects the amount of its fourth quarter sales and marketing expenses to be between the amounts it expended in the second and third quarters. The Company expects that its aggregate expenditures for course development and general and administrative expenses will be approximately the same in the fourth quarter as incurred in the third quarter. Interest income reflects changes in the Company's cash balances as well as changes in interest rates. During the third quarter of fiscal 2001, the Company's cash and interest-bearing investments decreased by $35.2 million. This decrease reflects the $36,347,000 expenditure on repurchases of the Company's Common Stock during the third quarter as well as the construction of the Company's new Atlanta education center, partially offset by cash from operations. Additionally, interest rates in the United States have recently declined 1% and there may be further rate reductions in the future. As a result, interest income can be expected to decline in the fourth quarter compared with the levels in earlier quarters. The Company estimates that its tax rate in fiscal 2001 will be approximately 35.5%. Changes in economic conditions, and especially the slowdown in corporate spending for IT, make it difficult to forecast future revenues. While some trends indicate a further slowdown, others indicate that the slowdown may be nearing a bottom, while still others indicate a future return to growth. If enrollments for courses at the Company's education centers and bookings for customer-site courses continue at current rates, the Company believes that revenues in its first quarter of fiscal 2002 will increase from those of its fourth quarter of fiscal 2001 by about 6%. 15 To date, the Company has maintained an aggressive sales and marketing program. During fiscal 2002, the Company intends to gradually adjust sales and marketing expenditures in accordance with expected revenue levels. The goal of this approach is to expand market share and to strengthen the Company's position for the time when the corporate IT environment begins to improve. The Company also plans to focus on improving the efficiency and effectiveness of its operations, since the extent and duration of the current slowdown remains uncertain. Beyond the first quarter of next year, it is likely that the Company's revenues will be influenced by spending trends in the corporate marketplace for information technology. The Company plans to monitor these trends, and may make adjustments to its business plans as the 2002 fiscal year unfolds. 16 PART II - OTHER INFORMATION Item 1: LEGAL PROCEEDINGS On August 6, 1998, a class action lawsuit was filed against Learning Tree and certain officers and directors of Learning Tree in the United States District Court for the Central District of California (Schlagal v. Learning Tree International et al., Case No. 98-6384 ABC), purportedly on behalf of persons who purchased Learning Tree's Common Stock between May 8, 1997 and May 13, 1998. In May 2000, plaintiffs and defendants executed a Stipulation of Settlement ("Settlement Stipulation") in the Schlagal Action, which was filed with the Court. The Settlement Stipulation provided, among other things, for dismissal of the Schlagal Action against all defendants. Counsel for plaintiffs provided written notice of the Settlement Stipulation to class members, giving them the opportunity to object to the Settlement Stipulation or to opt out of participation in the settlement. Only four class members opted out. On August 7, 2000, the Court gave its final approval to the Settlement Stipulation and signed and filed a Judgment which, among other things, dismissed the Schlagal action against all defendants. The Judgment is now final and non- appealable. 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 Not applicable b) Reports on Form 8-K No reports on Form 8-K were filed during the three months ended June 30, 2001. 17 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 14, 2001 By: /s/ Gary R. Wright --------------------------------- Gary R. Wright Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 18