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 March 31, 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 May 4, 2001, is 19,234,608 shares. Total number of pages 19 ------ 1 LEARNING TREE INTERNATIONAL, INC. FORM 10-Q March 31, 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...........................................................18 Item 3. Defaults Upon Senior Securities.................................................18 Item 4. Submission of Matters to a Vote of Security Holders.............................18 Item 5. Other Information...............................................................18 Item 6. Exhibits and Reports on Form 8-K................................................18 Signatures...............................................................................19
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, September 30, 2001 2000 ----------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents............................................... $136,575,000 $116,231,000 Short-term interest-bearing investments................................. -- 37,882,000 Trade accounts receivable, net.......................................... 22,547,000 25,565,000 Prepaid marketing expenses.............................................. 2,461,000 1,723,000 Prepaid income taxes.................................................... 5,645,000 -- Prepaid expenses and other.............................................. 7,201,000 5,251,000 ------------ ------------ Total current assets.................................................. 174,429,000 186,652,000 Equipment, property and leasehold improvements, net...................... 27,796,000 22,752,000 Long-term interest-bearing investments................................... 8,450,000 8,824,000 Other assets............................................................. 2,276,000 2,125,000 ------------ ------------ Total assets.......................................................... $212,951,000 $220,353,000 ============ ============ LIABILITIES Current liabilities: Trade accounts payable.................................................. $ 12,979,000 $ 15,283,000 Deferred revenue........................................................ 59,638,000 53,327,000 Accrued liabilities..................................................... 17,769,000 11,820,000 Income taxes payable.................................................... 2,524,000 4,729,000 ------------ ------------ Total current liabilities............................................. 92,910,000 85,159,000 Deferred income taxes.................................................... 79,000 82,000 Deferred facilities rent................................................. 2,387,000 2,317,000 ------------ ------------ Total liabilities..................................................... 95,376,000 87,558,000 ------------ ------------ Commitments and Contingencies STOCKHOLDERS' EQUITY Common Stock, $.0001 par value, 75,000,000 shares authorized, 20,963,000 and 22,119,000 shares issued and outstanding, respectively.. 2,000 2,000 Additional paid-in capital.............................................. 22,249,000 52,649,000 Cumulative foreign currency translation................................. (5,102,000) (4,007,000) Retained earnings....................................................... 100,426,000 84,151,000 ------------ ------------ Total stockholders' equity............................................ 117,575,000 132,795,000 ------------ ------------ Total liabilities and stockholders' equity............................ $212,951,000 $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 Six Months Ended March 31, March 31, -------------------------- ---------------------------- 2001 2000 2001 2000 ----------- ----------- ------------ ------------ Revenues................................... $57,990,000 $52,997,000 $120,094,000 $102,396,000 Cost of revenues........................... 24,155,000 18,862,000 47,768,000 37,069,000 ----------- ----------- ------------ ------------ Gross profit............................. 33,835,000 34,135,000 72,326,000 65,327,000 ----------- ----------- ------------ ------------ Operating expenses: Course development....................... 3,116,000 2,504,000 5,936,000 4,899,000 Sales and marketing...................... 17,064,000 14,787,000 31,581,000 27,136,000 General and administrative............... 6,878,000 6,098,000 13,415,000 11,999,000 ----------- ----------- ------------ ------------ 27,058,000 23,389,000 50,932,000 44,034,000 ----------- ----------- ------------ ------------ Income from operations.................... 6,777,000 10,746,000 21,394,000 21,293,000 ----------- ----------- ------------ ------------ Other income (expense): Interest expense........................ (3,000) (4,000) (4,000) (5,000) Interest income......................... 2,027,000 1,577,000 4,513,000 2,901,000 Foreign exchange........................ (359,000) (76,000) (534,000) (143,000) Other................................... (50,000) 137,000 (136,000) 158,000 ----------- ----------- ------------ ------------ 1,615,000 1,634,000 3,839,000 2,911,000 ----------- ----------- ------------ ------------ Income before provision for income taxes.. 8,392,000 12,380,000 25,233,000 24,204,000 Provision for income taxes................ 2,979,000 4,333,000 8,958,000 8,471,000 ----------- ----------- ------------ ------------ Net income................................ $ 5,413,000 $ 8,047,000 $ 16,275,000 $ 15,733,000 =========== =========== ============ ============ Earnings per common share................. $ 0.25 $ 0.37 $ 0.74 $ 0.73 =========== =========== ============ ============ Earnings per common share assuming dilution................................. $ 0.24 $ 0.36 $ 0.72 $ 0.71 =========== =========== ============ ============ Weighted average number of shares outstanding.............................. 21,761,000 21,665,000 21,873,000 21,651,000 =========== =========== ============ ============ Diluted shares outstanding................ 22,520,000 22,301,000 22,663,000 22,196,000 =========== =========== ============ =============
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.............. -- -- -- -- 15,733,000 15,733,000 Foreign currency translation........... -- -- -- (884,000) -- (884,000) ------------ Comprehensive income...... 14,849,000 Stock option exercises.... -- 927,000 -- -- -- 927,000 Collection of notes receivable.............. -- -- 6,000 -- -- 6,000 ----------- ------------ ------------ ----------- ------------ ------------ Balance at March 31, 2000............ $ 2,000 $ 40,815,000 $ -- $(2,184,000) $62,789,000 $101,422,000 =========== ============ ============ =========== =========== ============ Balance, September 30, 2000........ $ 2,000 $ 52,649,000 $ -- $(4,007,000) $ 84,151,000 $132,795,000 Comprehensive income: Net income.............. -- -- -- -- 16,275,000 16,275,000 Foreign currency translation........... -- -- -- (1,095,000) -- (1,095,000) ------------ Comprehensive income...... 15,180,000 Stock option exercises.... -- 4,343,000 -- -- -- 4,343,000 Tax benefit related to stock option exercises.. -- 1,583,000 -- -- -- 1,583,000 Stock repurchases........ -- (36,326,000) -- -- -- (36,326,000) ----------- ------------ ----------- ----------- ------------ ------------ Balance at March 31, 2001............ $ 2,000 $ 22,249,000 $ -- $(5,102,000) $100,426,000 $117,575,000 =========== ============ =========== =========== ============ ============
See accompanying notes to condensed consolidated financial statements. 5 LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
For the Six Months Ended March 31, ------------------------- 2001 2000 ------------ ---------- Cash flows--operating activities: Net income......................................................... $ 16,275,000 $ 15,733,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................. 3,973,000 4,452,000 Unrealized foreign exchange losses............................. 422,000 81,000 Deferred facilities rent charges............................... 108,000 (131,000) Losses on retirements of equipment and leasehold improvements.. 93,000 73,000 Change in net assets and liabilities: Trade accounts receivable................................... 2,665,000 (3,609,000) Prepaid marketing expenses.................................. (769,000) 40,000 Prepaid expenses and other.................................. (2,110,000) (1,366,000) Income taxes................................................ (6,051,000) 2,352,000 Trade accounts payable...................................... (1,962,000) 605,000 Deferred revenue............................................ 7,549,000 10,858,000 Accrued liabilities......................................... 6,158,000 2,818,000 ------------ ------------ Net cash provided by operating activities...................... 26,351,000 31,906,000 ------------ ------------ Cash flows--investing activities: Purchases of equipment, property and leasehold improvements........ (9,630,000) (2,750,000) Retirements of equipment, property and leasehold improvements...... 86,000 803,000 Sales of short-term interest-bearing investments: Investments held to maturity...................................... 68,615,000 42,511,000 Investments held for sale......................................... -- 27,100,000 Purchases of short-term interest-bearing investments: Investments held to maturity...................................... (30,733,000) (56,899,000) Investments held for sale......................................... -- (23,600,000) Other, net......................................................... (175,000) (900,000) ------------ ------------ Net cash provided by (used in) investing activities............. 28,163,000 (13,735,000) ------------ ------------ Cash flows--financing activities: Repurchases of Common Stock........................................ (36,326,000) -- Proceeds from exercise of stock options............................ 4,343,000 927,000 Collections of stockholder notes receivable........................ -- 6,000 ------------ ------------ Net cash provided by (used in) financing activities................. (31,983,000) 933,000 ------------ ------------ Effects of exchange rates on cash................................... (2,187,000) (1,106,000) ------------ ------------ Net increase in cash and cash equivalents........................... 20,344,000 17,998,000 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.................. $136,575,000 $ 51,057,000 ============ ============ Supplemental disclosures: Income taxes paid................................................ $ 9,307,000 $ 4,700,000 ============ ============ Interest paid.................................................... $ -- $ 1,000 ============ ============
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, 759,000 shares and 790,000 shares were added to the weighted average number of shares outstanding for the three and six month periods ended March 31, 2001, respectively. Approximately 636,000 shares and 545,000 shares were added to the weighted average number of shares outstanding for the three and six month periods ended March 31, 2000, respectively. Approximately 134,000 and 26,200 stock options were excluded from the calculation of earnings per common share assuming dilution for the six months ended March 31, 2001 and 2000, respectively, because they were antidilutive. Note 3 Litigation: ---------- On April 16, 1998, a class action lawsuit was filed against certain officers and directors of Learning Tree 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 Learning Tree'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 Learning Tree in the Superior Court of the State of California, County of Los Angeles (Guthrie v. Collins et al., Case No. BC193465), also ------------------------- purportedly on behalf of persons who purchased Learning Tree'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 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. 98-6384ABC), purportedly on behalf of persons who purchased --- Learning Tree's Common Stock between May 8, 1997 and May 13, 1998. On February 2, 2000, plaintiffs and defendants stipulated to the filing of an amended complaint in the Schlagal action which asserts the same state law claims that -------- are contained in the Sarah and Guthrie actions. On February 7, 2000, the state ----- ------- court granted the 7 parties' joint request to dismiss Sarah and Guthrie. Thus, only the amended ----- ------- Schlagal class action remained pending against Learning Tree, its officers and -------- directors. The complaints in Sarah, Guthrie and Schlagal made similar allegations of ----- ------- -------- misrepresentations in certain public disclosures made by Learning Tree at various times during the class period. Each complaint alleged that Learning Tree 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 Learning Tree Stock while in possession of the allegedly concealed material adverse information. Each complaint sought an unspecified amount of compensatory damages and, additionally, sought attorneys' fees and other costs, interest, and other relief. 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 provides, 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. If the Judgment becomes final, the -------- Settlement will have no financial impact upon the Company, its officers or its directors. If the Judgment approving the Settlement Stipulation does not become final, Learning Tree cannot estimate the outcome of further proceedings or any potential liabilities it may incur. In such circumstances, Learning Tree may incur legal and other defense costs in an amount that it cannot 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 Learning Tree's business, financial condition, results of operations and cash flows. Learning Tree has agreements with its officers and directors under which it is indemnifying them in these proceedings. 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 six month period ended March 31, 2001, the Company repurchased 1,413,300 shares of Common Stock for $36,326,000. From November 27, 2000 through May 4, 2001, the Company had 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. On July 13, 1999, the Company announced that it intended to shift its focus in technology-based training from these CBT courses to other distance learning methodologies using the Internet. As a result, 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 expects to realize little or no revenues from selling its CBT courses in fiscal 2001. The Company has completed the conversion of seven instructor-led courses for delivery over the Internet and engaged in limited test marketing of these courses. The Company is currently working on various packaging and marketing approaches for these courses. 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 distance learning strategy. Results of Operations In the second quarter ended March 31, 2001, revenues increased by 9% to $58.0 million from $53.0 million for the corresponding quarter of the prior year. Income from operations for the quarter ended March 31, 2001 decreased by 37% to $6.8 million versus $10.7 million for the same quarter of fiscal 2000. Net income for the quarter ended March 31, 2001 decreased by 33% to $5.4 million from $8.0 million for the same period last year. 9 For the six month period ended March 31, 2001, revenues increased by 17% to $120.1 million from $102.4 million for the six months ended March 31, 2000. Income from operations for the six months ended March 31, 2001, increased slightly to $21.4 million versus $21.3 million for the corresponding period of the prior year. Net income for the six months ended March 31, 2001 increased by 3% to $16.3 million versus $15.7 million for the corresponding period of the prior year. The growth in revenues in the second quarter of fiscal 2001 was primarily the result of a 12% increase in the number of multi-day course participants to 36,648 compared to 32,672 in the corresponding three months of the prior year. The increase in revenues for the six months ended March 31, 2001 resulted primarily from a 22% increase in the number of multi-day course participants to 75,819 compared to 62,278 in the corresponding six months of the prior year, partially offset by a 1% decrease in average revenue per multi-day course participant. Additionally, since the sales of CBT courses were largely discontinued as of September 30, 2000, the increase in instructor-led course revenue was partially offset by a reduction in CBT revenues in both the three months and six months ended March 31, 2001 as compared to the same periods of the prior year. The increase in course participants for the three months ended March 31, 2001, is primarily the result of an increase in expenditures for course development, sales and marketing, as well as the effect of Y2K on the Company's customers' IT activities during the prior fiscal year. For the six months ended March 31, 2001 the increase in course participants reflects better market conditions for IT training during the first quarter of fiscal 2001; an increase in expenditures for course development, sales and marketing; and an increase in the number of effective course weeks due to the timing of holidays. During the later part of the quarter ended March 31, 2001, the rate of growth in course participants slowed noticeably, which the Company believes reflects more cautious spending by its customers in light of economic conditions. During the three months ended March 31, 2001, revenue per attendee was virtually unchanged and during the six months ended March 31, 2001 it declined 1% as compared to the same period in the prior fiscal year. These trends reflect the impact of changes in foreign exchange rates compared to the exchange rates that prevailed during the corresponding periods in fiscal 2000. 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 would have been 4% higher than that in the same quarter of the prior year and 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 41.7% of revenues in the second quarter of fiscal 2001 compared to 35.6% in the second quarter of fiscal 2000. For the six months ended March 31, 2000, the cost of revenues increased to 39.8% of revenues compared to 36.2% for the same period in fiscal 2000. These increases are primarily due to lower margins in the Company's instructor-led courses in both the three months and six months ended March 31, 2001, as compared to the same periods of the prior year. The decline in the second quarter of fiscal 2001 reflects the combined effect of an 8% decrease in revenue per multi-day course event and a 7% increase in cost per multi-day course event. For the six months ended March 31, 2001, the decline in the Company's instructor-led course margins reflects the combined effect of a 6% 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. For the six months ended March 31, 2001 the decrease also reflects the decrease in 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 and Chicago, and increased rental 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 11% and 7% higher than that in the same quarter of the prior year and the year-to-day period, respectively. In 10 addition, the increase in the cost of revenues as a percent of revenues reflects the absence of relatively high margin CBT sales during fiscal 2001. For the second quarter of fiscal 2001, the cost of revenues increased by 28% to $24.2 million from $18.9 million for the same quarter of fiscal 2000. For the six months ended March 31, 2001, the Company's cost of revenues increased by 29% to $47.8 million from $37.1 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 21% increase in the number of course events during the second quarter of fiscal 2001 and a 28% increase for the year-to-date period. During the second quarter of fiscal 2001, the number of multi-day instructor-led course events was 2,452 compared to 2,028 during the same period last year. For the six months ended March 31, 2001, the number of multi-day instructor-led courses was 4,983 compared to 3,895 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 rental 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 5.4% of revenue during the second quarter of fiscal 2001 compared to 4.7% for the same period of fiscal 2000. For the six months ended March 31, 2001, course development expense was 4.9% of revenue compared to 4.8% of revenue for the corresponding period in the prior year. Course development expenses increased by 24% to $3.1 million for the quarter ended March 31, 2001 from $2.5 million in the quarter ended March 31, 2000. For the six months ended March 31, 2001, course development expenses increased by 21% to $5.9 million from $4.9 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 152 multi-day course titles as of March 31, 2001, compared to 143 a year earlier. The Company has recently released additional multi-day course titles on topics such as XML and Java, Web technologies, Internetworking, Security, SQL Server 2000, Oracle8i and Crystal Reports. 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 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. 11 Sales and marketing expenses increased by 15% to $17.1 million for the quarter ended March 31, 2001 from $14.8 million for the quarter ended March 31, 2000. For the six months ended March 31, 2001, sales and marketing expenses increased by 16% to $31.6 million from $27.1 million for the corresponding period in the prior fiscal year. The increases primarily reflect increased marketing activities and marketing costs, selling commissions due to the higher level of sales, and increases in the number of sales and marketing personnel. Sales and marketing expenses for the quarter ended March 31, 2001 increased as a percentage of revenues to 29.4% compared to 27.9% for the quarter ended March 31, 2000. Sales and marketing expenses for the six months ended March 31, 2001 decreased slightly to 26.3% as a percentage of revenues compared to 26.5% for the same period last year. General and administrative expenses increased by 13% to $6.9 million for the quarter ended March 31, 2001 compared to $6.1 million in the same quarter of the prior year. For the six months ended March 31, 2001, general and administrative expenses increased by 12% to $13.4 million from $12.0 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 11.9% in the quarter ended March 31, 2001 from 11.5% in the corresponding period of the prior year. In the six months ended March 31, 2001, these costs decreased to 11.2% from 11.7% 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) remained virtually unchanged at $1.6 million for the quarter ended March 31, 2001 compared to the corresponding quarter in the prior year. For the six months ended March 31, 2001, other income (expense) increased by 32% to $3.8 million from $2.9 million for the corresponding six months period in the prior year. Interest income increased in both the three month and six month periods ended March 31, 2001 as compared to comparable periods in the prior years primarily as a result of greater cash balances. These increases were partially offset by foreign exchange losses of $359,000 recorded in the second quarter of fiscal 2001, compared to foreign exchange losses of $76,000 in the second quarter of fiscal 2000 and foreign exchange losses of $534,000 in the six months ended March 31, 2001, compared with foreign exchange losses of $143,000 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 $1.3 million to $3.0 million for the quarter ended March 31, 2001 compared to $4.3 million for the same quarter of the prior year. For the six months ended March 31, 2001, the provision for income taxes increased $487,000 to $9.0 million from $8.5 million for the same period a year ago. The increase in the income tax provision reflects a slight increase in the effective tax rate and changes in taxable income. 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. 12 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 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 $136.6 million at March 31, 2001 from $154.1 million at September 30, 2000, primarily as a result of cash used for repurchases of Common Stock, 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 six months ended March 31, 2001, cash provided by operations was approximately $26.4 million compared to $31.9 million during the same period in the prior year. This decrease in cash provided by operations primarily reflects higher income tax payments. At March 31, 2001, Learning Tree had working capital of $81.5 million. In November 2000, the Board of Directors of the Company authorized the reinstatement of the Company's stock repurchase plan. During the six month period ended March 31, 2001, the Company repurchased 1,413,300 shares of Common Stock for $36,326,000. As of March 31, 2001, the accompanying balance sheet includes $7.6 million of accrued liabilities for shares of Common Stock that had been repurchased, but for which final settlement did not occur until after the quarter end. From November 2000 through May 4, 2001, the Company had 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 six months ended March 31, 2001, the Company invested $9.6 million in equipment and facilities compared to $2.8 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 March 31, 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. Quantitative and Qualitative Disclosures About Market Risk 13 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 March 31, 2001, the Company had a backlog of orders for instructor-led courses of $40.4 million, which represented a 7% increase compared to the backlog of $37.9 million at March 31, 2000. At April 30, 2001, the Company had a backlog of orders for instructor-led courses of $38.7 million, which represented a 1% increase compared to the backlog of $38.3 million at April 30, 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 continue for the remainder of fiscal 2001, the Company believes that its fiscal 2001 revenue will be approximately 4% 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 continue through the remainder of fiscal 2001, the Company estimates that net income for the year would be approximately 4% lower than the Company would otherwise achieve had fiscal 2000 average exchange rates prevailed throughout fiscal 2001. The recent uncertainty surrounding economic conditions in the United States makes it difficult to forecast the Company's growth rate during the remainder of fiscal 2001. During weak economic conditions, the Company's growth rate generally slows. The recent growth rate in enrollments for courses at the Company's education centers has been only slightly positive, and bookings for future customer-site courses have recently 14 been lower than in the comparable period last year. However, some economists are forecasting improvements in the remainder of 2001. If that occurs, the Company would anticipate that the market for IT Training would also improve. The Company believes that some of the factors that could affect third quarter revenues include the following: . At March 31, 2001, the Company's backlog of $40.4 million was 7% higher than at March 31, 2000. At April 30, 2001, the Company's backlog of $38.7 million was 1% higher than at April 30 last year, reflecting the slowdown during April in bookings for customer site courses. . In the third quarter of fiscal 2001, the Company will have approximately one-half week less of course delivery than in the comparable quarter of fiscal 2000, primarily because of the timing of European holidays. . In the most recent marketing programs, the Company announced 18 new course titles that will have their initial presentations during the third and fourth fiscal quarters and expects to retire about 6 course titles. The Company expects to have approximately 164 course titles in the third quarter, and approximately 169 course titles in the fourth quarter. Based on these factors and its current assessment of economic conditions, the Company expects only modest growth in its third quarter instructor-led base business compared with last year. The Company expects that this modest growth in its instructor-led base business will be slightly more than offset by two factors: . The Company expects to realize little or no revenues from selling CBT courses in fiscal 2001, as this product line was largely discontinued at the end of September 2000. The Company expects that the absence of CBT revenues in the third quarter will approximately offset the growth of its instructor-led base business exclusive of the affect of exchange rates. . If current exchange rates continue, they will have approximately a 4% adverse effect on revenues in the third quarter this fiscal year compared to last year. Based on the Company's current assessment of general economic conditions, the Company believes that its instructor-led base business will grow modestly in the fourth quarter, and that this growth will be approximately offset by the following two factors: . The absence of CBT revenues in the fourth quarter. . If current exchange rates continue, they will have approximately a 2% adverse effect on our fourth quarter revenues this fiscal year compared to last year. During the third quarter of fiscal 2001, the Company expects the following factors to adversely impact its gross margins by approximately 4% to 5% compared with the exceptional margins the Company achieved in the same quarter last year: . Lower attendees per event, especially during the months of April and May, which are the result of the recent slowing in enrollment growth rates. . The absence of high margin CBT revenues. . Additional instructor training expenses. . Expansion costs associated with the Company's education centers in New York City, Chicago and Atlanta. 15 . Increased rental rates for the Company's education center in Reston, Virginia. In the fourth quarter of fiscal 2001, the Company expects the same factors to adversely affect its gross margins by approximately 3% compared to the fourth quarter in the prior fiscal year. The Company intends to maintain the level of its expenditures for sales and marketing in the third and fourth quarters from that in the second quarter. In addition, the Company expects that, in aggregate, expenditures on course development, sales and marketing, and G&A will be at approximately the same levels in the third and fourth quarters as incurred in the second quarter. While current economic conditions make it difficult to forecast future enrollments, the Company is taking steps to improve its operating results for the remainder of the fiscal year compared to what the Company achieved in the second quarter. These include actions intended to increase revenue per event, and to increase the return on sales and marketing investments. Interest income reflects changes in the Company's cash balances as well as changes in interest rates. During the second quarter of fiscal 2001, the Company's cash and interest-bearing investments decreased by $8.0 million. This decrease reflects expenditures on repurchases of the Company's Common Stock during the second quarter as well as the construction of the Company's new Atlanta education center, partially offset by $18.7 million in cash from operations. Since March 31, 2001, the Company has spent $36.4 million to purchase additional shares of its common stock. Additionally, interest rates in the United States have recently fallen 1% and there have been indications that there may be further rate reductions in the future. As a result, interest income can be expected to decline in the third and fourth quarters compared with the second quarter this fiscal year. The Company estimates that its tax rate in fiscal 2001 will be approximately 35.5%. 16 PART II - OTHER INFORMATION Item 1: LEGAL PROCEEDINGS On April 16, 1998, a class action lawsuit was filed against certain officers and directors of Learning Tree 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 Learning Tree'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 Learning Tree in the Superior Court of the State of California, County of Los Angeles (Guthrie v. Collins et al., Case No. BC193465), also ------------------------- purportedly on behalf of persons who purchased Learning Tree'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 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. 98-6384ABC), purportedly on behalf of persons who purchased --- Learning Tree's Common Stock between May 8, 1997 and May 13, 1998. On February 2, 2000, plaintiffs and defendants stipulated to the filing of an amended complaint in the Schlagal action which asserts the same state law claims that -------- are contained in the Sarah and Guthrie actions. On February 7, 2000, the state ----- ------- court granted the parties' joint request to dismiss Sarah and Guthrie. Thus, ----- ------- only the amended Schlagal class action remained pending against Learning Tree, -------- its officers and directors. The complaints in Sarah, Guthrie and Schlagal made similar allegations of ----- ------- -------- misrepresentations in certain public disclosures made by Learning Tree at various times during the class period. Each complaint alleged that Learning Tree 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 Learning Tree Stock while in possession of the allegedly concealed material adverse information. Each complaint sought an unspecified amount of compensatory damages and, additionally, sought attorneys' fees and other costs, interest, and other relief. 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 provides, 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. If the Judgment becomes final, the -------- Settlement will have no financial impact upon the Company, its officers or its directors. If the Judgment approving the Settlement Stipulation does not become final, Learning Tree cannot estimate the outcome of further proceedings or any potential liabilities it may incur. In such circumstances, Learning Tree may incur legal and other defense costs in an amount that it cannot 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 Learning Tree's business, financial condition, results of operations and cash flows. Learning Tree has agreements with its officers and directors under which it is indemnifying them in these proceedings. 17 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 The Company held its Annual Meeting on March 2, 2001. During the Annual Meeting of Stockholders the matter that was voted upon was as follows: 1. Election of Directors The following are the results of the voting: 1. Election of Directors: Shares Shares for withheld ---------- -------- Class III Directors for a term expiring in 2004: David C. Collins 16,090,613 2,599,845 Eric R. Garen 16,361,258 2,329,200 Gary R. Wright 17,873,233 817,225 The current terms of the Class II Directors, Michael W. Kane, Mary C. Adams, and James E. Furlan will continue until the 2003 Annual Meeting of Stockholders. The current terms of the Class I Directors, W. Mathew Juechter, Alan B. Salisbury and Theodore E. Guth will continue until the 2002 Annual Meeting of Stockholders. 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 March 31, 2001. 18 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: May 15, 2001 By: /s/ Gary R. Wright ----------------------------- Gary R. Wright Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 19