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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 2, 2010
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 incorporation or organization) | (I.R.S. Employer Identification No.) | |
1805 Library Street | ||
Reston, VA | 20190 | |
(Address of principal executive offices) | (Zip Code) |
703-709-9119
(Registrant’s telephone number, including area code)
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. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨ Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | |||||
Non-accelerated filer | ¨ | (do not check if smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The number of shares of common stock, $.0001 par value, outstanding as of May 7, 2010 was 13,754,224.
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LEARNING TREE INTERNATIONAL, INC.
FORM 10-Q—April 2, 2010
Page | ||||
PART I—FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements | |||
Condensed Consolidated Balance Sheets as of April 2, 2010 (unaudited) and October 2, 2009 | 2 | |||
3 | ||||
4 | ||||
Notes to Condensed Consolidated Financial Statements (unaudited) | 5 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 24 | ||
Item 4. | Controls and Procedures | 25 | ||
PART II—OTHER INFORMATION | ||||
Item 1. | Legal Proceedings | 26 | ||
Item 1A. | Risk Factors | 26 | ||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 26 | ||
Item 3. | Defaults Upon Senior Securities | 26 | ||
Item 4. | Reserved | 26 | ||
Item 5. | Other Information | 26 | ||
Item 6. | Exhibits | 26 | ||
27 | ||||
28 |
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PART I—FINANCIAL INFORMATION
Item 1. | FINANCIAL STATEMENTS |
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
April 2, 2010 | October 2, 2009 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 34,535 | $ | 44,313 | ||||
Available for sale securities | 36,989 | 29,497 | ||||||
Trade accounts receivable, net | 12,950 | 15,157 | ||||||
Income tax receivable | 305 | 265 | ||||||
Prepaid expenses | 5,004 | 4,601 | ||||||
Deferred income taxes | 1,425 | 1,461 | ||||||
Other current assets | 1,402 | 1,449 | ||||||
Total current assets | 92,610 | 96,743 | ||||||
Equipment, Property and Leasehold Improvements: | ||||||||
Education and office equipment | 41,295 | 40,379 | ||||||
Transportation equipment | 199 | 231 | ||||||
Property and leasehold improvements | 27,927 | 28,134 | ||||||
69,421 | 68,744 | |||||||
Less: accumulated depreciation and amortization | (51,124 | ) | (49,068 | ) | ||||
18,297 | 19,676 | |||||||
Restricted interest-bearing investments | 9,042 | 9,387 | ||||||
Deferred income taxes | 9,736 | 9,558 | ||||||
Other assets | 1,051 | 1,456 | ||||||
Total assets | $ | 130,736 | $ | 136,820 | ||||
LIABILITIES | ||||||||
Current Liabilities: | ||||||||
Trade accounts payable | $ | 6,067 | $ | 8,229 | ||||
Deferred revenues | 35,797 | 38,103 | ||||||
Accrued payroll, benefits and related taxes | 3,814 | 4,023 | ||||||
Other accrued liabilities | 7,559 | 7,831 | ||||||
Income taxes payable | 296 | 1,091 | ||||||
Current portion of deferred facilities rent and other | 1,206 | 1,153 | ||||||
Total current liabilities | 54,739 | 60,430 | ||||||
Asset retirement obligations | 3,424 | 3,458 | ||||||
Deferred income taxes | 276 | 283 | ||||||
Deferred facilities rent and other | 5,710 | 4,756 | ||||||
Noncurrent tax liabilities | 4,786 | 5,031 | ||||||
Total liabilities | 68,935 | 73,958 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common Stock, $0.0001 par value; 75,000,000 shares authorized; 13,744,660 and 13,942,750 issued and outstanding, respectively | 1 | 1 | ||||||
Additional paid-in capital | 4,343 | 3,875 | ||||||
Accumulated comprehensive loss | (1,763 | ) | (1,085 | ) | ||||
Retained earnings | 59,220 | 60,071 | ||||||
Total stockholders’ equity | 61,801 | 62,862 | ||||||
Total liabilities and stockholders’ equity | $ | 130,736 | $ | 136,820 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
Three months ended | Six months ended | |||||||||||||||
April 2, 2010 | April 3, 2009 | April 2, 2010 | April 3, 2009 | |||||||||||||
Revenues | $ | 28,293 | $ | 30,526 | $ | 60,798 | $ | 68,492 | ||||||||
Cost of revenues | 13,696 | 14,398 | 27,723 | 30,715 | ||||||||||||
Gross profit | 14,597 | 16,128 | 33,075 | 37,777 | ||||||||||||
Operating expenses: | ||||||||||||||||
Course development | 1,873 | 1,977 | 3,590 | 4,188 | ||||||||||||
Sales and marketing | 7,679 | 8,846 | 14,480 | 17,957 | ||||||||||||
General and administrative | 7,215 | 7,766 | 13,291 | 15,421 | ||||||||||||
16,767 | 18,589 | 31,361 | 37,566 | |||||||||||||
Income (loss) from operations | (2,170 | ) | (2,461 | ) | 1,714 | 211 | ||||||||||
Other income (expense): | ||||||||||||||||
Interest income, net | 219 | 412 | 421 | 1,024 | ||||||||||||
Foreign exchange losses | (74 | ) | (38 | ) | (59 | ) | (241 | ) | ||||||||
Other, net | (8 | ) | (30 | ) | (2 | ) | (61 | ) | ||||||||
137 | 344 | 360 | 722 | |||||||||||||
Income (loss) before provision for income taxes | (2,033 | ) | (2,117 | ) | 2,074 | 933 | ||||||||||
Provision (benefit) for income taxes | (762 | ) | (756 | ) | 922 | 452 | ||||||||||
Net income (loss) | $ | (1,271 | ) | $ | (1,361 | ) | $ | 1,152 | $ | 481 | ||||||
Earnings (loss) per share: | ||||||||||||||||
Income (loss) per common share—basic | $ | (0.09 | ) | $ | (0.09 | ) | $ | 0.08 | $ | 0.03 | ||||||
Income (loss) per common share—diluted | $ | (0.09 | ) | $ | (0.09 | ) | $ | 0.08 | $ | 0.03 | ||||||
Weighted average shares outstanding: | ||||||||||||||||
Weighted average shares—basic | 13,748 | 15,623 | 13,793 | 15,967 | ||||||||||||
Weighted average shares—diluted | 13,748 | 15,623 | 13,801 | 15,967 | ||||||||||||
Comprehensive income (loss): | ||||||||||||||||
Net income (loss) | $ | (1,271 | ) | $ | (1,361 | ) | $ | 1,152 | $ | 481 | ||||||
Temporary recovery (impairment) of auction rate securities | (47 | ) | (352 | ) | 40 | (1,481 | ) | |||||||||
Foreign currency translation adjustments | (628 | ) | (101 | ) | (718 | ) | (3,159 | ) | ||||||||
Comprehensive income (loss) | $ | (1,946 | ) | $ | (1,814 | ) | $ | 474 | $ | (4,159 | ) | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Six months ended | ||||||||
April 2, 2010 | April 3, 2009 | |||||||
Cash flows—operating activities | ||||||||
Net Income | $ | 1,152 | $ | 481 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,901 | 3,020 | ||||||
Share based compensation | 303 | 482 | ||||||
Deferred income taxes | (19 | ) | (100 | ) | ||||
Provision for doubtful accounts | 34 | 89 | ||||||
Accretion on asset retirement obligations | 98 | 87 | ||||||
Gains on disposal of equipment and leasehold improvements | 1 | 27 | ||||||
Unrealized foreign exchange gains | (16 | ) | (345 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Trade accounts receivable | 1,949 | 4,856 | ||||||
Prepaid marketing expenses | (105 | ) | 35 | |||||
Prepaid expenses and other assets | 332 | 1,917 | ||||||
Income tax receivable/payable | (1,623 | ) | (171 | ) | ||||
Trade accounts payable | (1,945 | ) | (2,675 | ) | ||||
Deferred revenues | (1,995 | ) | (3,777 | ) | ||||
Deferred facilities rent and other | 1,106 | (417 | ) | |||||
Other accrued liabilities | (259 | ) | (1,068 | ) | ||||
Net cash provided by operating activities | 1,914 | 2,441 | ||||||
Cash flows—investing activities: | ||||||||
Purchases of available for sale securities | (18,916 | ) | (5,035 | ) | ||||
Sales of available for sale securities | 11,365 | 6,120 | ||||||
Purchases of equipment, property and leasehold improvements | (1,778 | ) | (696 | ) | ||||
Proceeds from sale of equipment, property and leasehold improvements | 18 | 1 | ||||||
Net cash (used in) provided by investing activities | (9,311 | ) | 390 | |||||
Cash flows—financing activities: | ||||||||
Payments to repurchase common stock | (2,003 | ) | (13,310 | ) | ||||
Proceeds from exercise of stock options | 165 | — | ||||||
Net cash used in financing activities | (1,838 | ) | (13,310 | ) | ||||
Effects of exchange rate changes on cash and cash equivalents | (543 | ) | (4,334 | ) | ||||
Net decrease in cash and cash equivalents | (9,778 | ) | (14,813 | ) | ||||
Cash and cash equivalents at beginning of period | 44,313 | 51,853 | ||||||
Cash and cash equivalents at end of period | $ | 34,535 | $ | 37,040 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
Unaudited
NOTE 1—BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements of Learning Tree International, Inc. and our subsidiaries have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and, therefore, omit or condense certain note disclosures and other information required by accounting principles generally accepted in the United States of America for complete financial statements. These financial statements should therefore be read in conjunction with the audited consolidated financial statements and accompanying notes for the fiscal year ended October 2, 2009 included in our Annual Report on Form 10-K.
We use the 52/53-week fiscal year method to better align our external financial reporting with the way we operate our business. Under this method, each fiscal quarter ends on the Friday closest to the end of the calendar quarter. Accordingly, the second quarter of the current fiscal year ended on April 2, 2010, while the second quarter of our prior fiscal year ended on April 3, 2009.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, that are only of a normal recurring nature, considered necessary to present fairly our financial position as of April 2, 2010, and our results of operations for the three months and six months ended April 2, 2010 and April 3, 2009, and our cash flows for the six months ended April 2, 2010 and April 3, 2009.
NOTE 2—STOCK-BASED COMPENSATION
Stock-based compensation expense of $0.1 million and $0.3 million related to grants of employee stock options, restricted stock, restricted stock units (including for bonuses) and unrestricted common stock (for bonuses) was included in cost of revenues and operating expenses during the three months and six months ended April 2, 2010, respectively, allocated in a manner consistent with the related employee salary costs. This compares to stock-based compensation expense of $0.3 million and $0.5 million for grants of employee stock options and restricted stock for the three months and six months ended April 3, 2009, respectively.
NOTE 3—ASSET RETIREMENT OBLIGATIONS
The following table presents the activity for the ARO liabilities, which are primarily related to the restoration of classroom facilities in our Learning Tree Education Centers:
Six months ended April 2, 2010 | Year ended October 2, 2009 | |||||||
ARO balance, beginning of period | $ | 3,458 | $ | 3,319 | ||||
Liabilities incurred | — | 233 | ||||||
Accretion expense | 98 | 180 | ||||||
Foreign currency translation | (132 | ) | (274 | ) | ||||
ARO balance, end of period | $ | 3,424 | $ | 3,458 | ||||
NOTE 4—EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding (which excludes unvested shares of our common stock granted under our 2007
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(tables in thousands, except per share data)
Unaudited
Equity Incentive Plan) during the reporting period. Diluted earnings (loss) per share is computed similarly to basic earnings (loss) per share except that the weighted average shares outstanding are increased to include common stock equivalents, to the extent their effect is dilutive. The computations of diluted earnings (loss) per share excluded approximately 375,000 stock options, shares of restricted stock and restricted stock units for the three months ended April 2, 1010 and 306,000 stock options for the six months ended April 2, 2010, because their effect would not have been dilutive. Approximately 597,000 stock options and shares of restricted stock were excluded from the computations of diluted earnings (loss) per share for both the three months and six months ended April 3, 2009. The computations for basic and diluted earnings (loss) per share are as follows:
Three months ended | Six months ended | |||||||||||||
April 2, 2010 | April 3, 2009 | April 2, 2010 | April 3, 2009 | |||||||||||
Numerator: | ||||||||||||||
Net income (loss) | $ | (1,271 | ) | $ | (1,361 | ) | $ | 1,152 | $ | 481 | ||||
Denominator: | ||||||||||||||
Weighted average shares outstanding | ||||||||||||||
Basic | 13,748 | 15,623 | 13,793 | 15,967 | ||||||||||
Effect of dilutive securities | — | — | 8 | — | ||||||||||
Diluted | 13,748 | 15,623 | 13,801 | 15,967 | ||||||||||
Income (loss) per common share—basic | $ | (0.09 | ) | $ | (0.09 | ) | $ | 0.08 | $ | 0.03 | ||||
Income (loss) per common share—diluted | $ | (0.09 | ) | $ | (0.09 | ) | $ | 0.08 | $ | 0.03 | ||||
NOTE 5—INCOME TAXES
The income tax provision used in the first six months of fiscal year 2010 reflects a 44.5% effective tax rate, which approximates our expected fiscal year 2010 full year effective tax rate, taking into consideration all projected permanent differences, and discrete items recorded in the year-to-date period. The income tax provision used in the first six months of fiscal year 2009 reflected a 48.4% effective tax rate.
NOTE 6—COMMITMENTS AND CONTINGENCIES
Contingencies
Currently, and from time to time, we are involved in litigation incidental to the conduct of our business. We are not a party to any lawsuit or proceeding that, in the opinion of management, is likely to have a material adverse effect on our consolidated financial position or results of operations.
Since 1996, we have sold Training Passports and Vouchers to the United States Government. The U.S. government alleged that some of those terms, although identical to those for our commercial customers, violated the terms of our GSA contract and applicable government regulations. Although we continue to believe that we have complied with both the terms of our GSA contract and applicable government regulations, we paid $4.5 million to settle the claim on April 7, 2010. The terms of the settlement were consistent with our previously announced reserves that we established in prior fiscal years and accordingly did not have any material impact on our financial statements in fiscal year 2010.
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(tables in thousands, except per share data)
Unaudited
NOTE 7—SEGMENT REPORTING
Our worldwide operations involve the design and delivery of instructor-led classroom training courses and related services to multinational companies and government entities. The training and education we offer is presented in a virtually identical manner in every country in which we operate. Our instructors present our courses in a virtually identical fashion worldwide, regardless of whether presented in leased classroom space or external facilities, the content of the class being taught or the location or method of distribution. We did not have sales to any single customer that amounted to 10% or more of our revenues in the first six months of fiscal year 2010.
We conduct and manage our business globally and have reportable segments that operate in six countries: the United States, Canada, the United Kingdom, France, Sweden and Japan.
Summarized financial information by country for the second quarter and first six months of fiscal years 2010 and 2009 is as follows:
Three months ended | Six months ended | |||||||||||
April 2, 2010 | April 3, 2009 | April 2, 2010 | April 3, 2009 | |||||||||
Revenues: | ||||||||||||
United States | $ | 13,607 | $ | 14,515 | $ | 27,482 | $ | 30,708 | ||||
Canada | 4,137 | 3,781 | 7,609 | 7,897 | ||||||||
United Kingdom | 6,300 | 7,701 | 14,137 | 16,743 | ||||||||
France | 2,329 | 2,396 | 6,905 | 7,723 | ||||||||
Sweden | 1,539 | 1,493 | 3,567 | 3,960 | ||||||||
Japan | 381 | 640 | 1,098 | 1,461 | ||||||||
Total | $ | 28,293 | $ | 30,526 | $ | 60,798 | $ | 68,492 | ||||
Gross profit: | ||||||||||||
United States | $ | 6,663 | $ | 7,402 | $ | 13,983 | $ | 15,768 | ||||
Canada | 2,692 | 2,408 | 4,941 | 5,178 | ||||||||
United Kingdom | 2,812 | 3,888 | 7,173 | 8,919 | ||||||||
France | 1,176 | 1,086 | 3,949 | 4,491 | ||||||||
Sweden | 1,009 | 920 | 2,261 | 2,459 | ||||||||
Japan | 245 | 424 | 768 | 962 | ||||||||
Total | $ | 14,597 | $ | 16,128 | $ | 33,075 | $ | 37,777 | ||||
Total assets: | ||||||||||||
United States | $ | 89,204 | $ | 85,609 | ||||||||
Canada | 5,109 | 13,631 | ||||||||||
United Kingdom | 21,693 | 27,127 | ||||||||||
France | 8,179 | 7,637 | ||||||||||
Sweden | 5,179 | 6,092 | ||||||||||
Japan | 1,372 | 1,177 | ||||||||||
Total | $ | 130,736 | $ | 141,273 | ||||||||
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(tables in thousands, except per share data)
Unaudited
NOTE 8—AVAILABLE FOR SALE SECURITIES
Securities are classified consistent with how we manage, monitor, and measure them on the basis of the nature and risks of the security. The amortized cost of these securities and their respective fair values are as follows:
Amortized Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
April 2, 2010: | |||||||||||||
Commercial Paper | $ | 6,000 | $ | — | $ | — | $ | 6,000 | |||||
Municipal Securities | 15,882 | 19 | — | 15,901 | |||||||||
Corporate Securities | 1,005 | 8 | — | 1,013 | |||||||||
Auction Rate Securities | 16,375 | — | (2,300 | ) | 14,075 | ||||||||
$ | 39,262 | $ | 27 | $ | (2,300 | ) | $ | 36,989 | |||||
Amortized Cost Basis | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||
October 2, 2009: | |||||||||||||
Commercial Paper | $ | — | $ | — | $ | — | $ | — | |||||
Municipal Securities | 13,822 | 62 | — | 13,884 | |||||||||
Corporate Securities | 1,006 | 7 | — | 1,013 | |||||||||
Auction Rate Securities | 17,000 | — | (2,400 | ) | 14,600 | ||||||||
$ | 31,828 | $ | 69 | $ | (2,400 | ) | $ | 29,497 | |||||
The scheduled maturities of available for sale debt securities were as follows as of April 2, 2010:
Fair Value | |||
Due within a year | $ | 27,667 | |
Due after one year through five years | 3,544 | ||
Due after five years through ten years | 1,448 | ||
Due after ten years | 4,330 | ||
$ | 36,989 | ||
The amounts due within one year include $16.4 million of auction rate securities (“ARS”) that can be sold at their stated value under our agreement with UBS at any time from June 30, 2010 through July 2, 2012. The maturities shown also reflect the maturities of the financial instruments that underlie our non-ARS available for sale securities. The effective maturity dates of our non-ARS available for sale securities are less than two years. Since it is not our intent to hold these securities until maturity and since there is an active market for these securities, we can and do sell these securities before their maturity dates.
Net purchases of available for sale securities were $7.1 million and $7.6 million for the second quarter and six months ended April 2, 2010, respectively, compared to net sales of $0.1 million and $1.1 million for the second quarter and six months ended April 3, 2009, respectively, and no realized gains or losses were recognized in any of these periods.
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(tables in thousands, except per share data)
Unaudited
The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized-loss position for less than 12 months and for 12 months or more, and are not other than temporarily impaired, are as follows:
Less than 12 months | 12 Months or Greater | Total | ||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||
April 2, 2010: | ||||||||||||||||||||
Auction Rate Securities | $ | — | $ | — | $ | 14,075 | $ | (2,300 | ) | $ | 14,075 | $ | (2,300 | ) | ||||||
$ | — | $ | — | $ | 14,075 | $ | (2,300 | ) | $ | 14,075 | $ | (2,300 | ) | |||||||
Less than 12 months | 12 Months or Greater | Total | ||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||
October 2, 2009: | ||||||||||||||||||||
Auction Rate Securities | $ | — | $ | — | $ | 14,500 | $ | (2,400 | ) | $ | 14,500 | $ | (2,400 | ) | ||||||
$ | — | $ | — | $ | 14,500 | $ | (2,400 | ) | $ | 14,500 | $ | (2,400 | ) | |||||||
At April 2, 2010 we had $16.4 million in face value of ARS with a fair value of $14.1 million, all of which are classified as current. This compares to $17.0 million in face value of ARS at October 2, 2009 with a fair value of $14.6 million, all of which was classified as current. Our ARS are long-term debt instruments backed by municipal bonds and student loans. None of our ARS are mortgage-backed debt. All of our ARS had credit ratings of AAA or AA when purchased. Historically, our ARS were highly liquid. As a result of liquidity issues in the global credit and capital markets, it has been difficult to sell ARS at their stated value. However, we sold $12.3 million of our ARS in fiscal year 2009, and an additional $0.6 million in the first six months of fiscal year 2010, all at their stated value. We have a repurchase agreement with UBS under which we have the right to sell our remaining $16.4 million of ARS at their stated value at any time from June 30, 2010 through July 2, 2012. We expect to exercise this right as soon as it becomes available.
We do not believe the failure of periodic auctions affects the value of the collateral underlying our ARS, and there have been no defaults on the underlying collateral. We continue to earn and receive interest at contractually set rates in a timely manner. We can finance our operations even if our ARS investments were to be illiquid for an extended period of time.
Based on a valuation performed by an independent expert, we concluded there was a temporary impairment of $2.3 million in the fair value of our ARS as of April 2, 2010, compared to $2.4 million at the end of our fourth quarter of fiscal year 2009. This valuation is updated at the end of each quarter based on the evaluation by our independent expert. Because we believe we will be able to sell these securities to UBS at par in the foreseeable future, we do not consider the impairment to be other than temporary or to be permanent. In the first six months of fiscal year 2010, we recorded an after-tax increase to other comprehensive income of $0.1 million to reduce the impairment of the ARS.
NOTE 9—STOCKHOLDERS’ EQUITY
During the three months and six months ended April 2, 2010, we repurchased 79,165 and 170,122 shares of our common stock, respectively, at a total cost of approximately $0.9 million and $2.0 million, respectively. These shares were retired, and the purchase price for the shares was charged to retained earnings.
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(tables in thousands, except per share data)
Unaudited
NOTE 10—FAIR VALUE MEASUREMENTS
We adopted the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosure, (“ASC 820”) in the first quarter of fiscal year 2009 for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal market for the asset or liability, or in the absence of a principal market, the most advantageous market for the asset or liability. The fair value is measured on assumptions that market participants would use, including assumptions about non performance risk and credit risk.
ASC 820 establishes a fair value hierarchy for valuation inputs and prioritizes them based on the extent to which the inputs are observable in the marketplace. Categorization is based on the lowest level of input that is available and significant to the measurement. These levels are:
Level 1—Quoted prices in active markets for identical assets and liabilities.
Level 2—Observable inputs other than quoted prices in active markets, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market corroborated inputs.
Level 3—Unobservable inputs that reflect management’s assumptions about the estimates and risks that market participants would use in pricing the asset or liability.
The following sections describe the valuation methodologies we use to measure different financial assets at fair value.
• | Commercial Paper—Because of the readily available markets for these instruments, we use quoted prices and other relevant information generated by market transactions involving identical or comparable assets provided by our investment broker/advisor, as well as our independent research, to establish fair values. |
• | Municipal Securities—Since these securities are not as liquid, with the assistance of our investment broker/advisor, the fair values are determined using valuation models that include assumptions about interest rates, yield curves, credit risks, and default rates. |
• | Corporate Securities—Because of the readily available markets for these instruments, we use quoted prices and other relevant information generated by market transactions involving identical or comparable assets provided by our investment broker/advisor, as well as our independent research, to establish fair values. |
• | Auction Rate Securities—Given the complexity of our investments in ARS, we engaged an independent expert to assist in determining the fair value of our investments. We, with the assistance of our advisor, estimated the fair value of the ARS based on the following: (i) the underlying structure of each security; (ii) the present value of future principal and interest payments discounted at rates consistent with current market conditions; (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period; and (iv) estimates of the recovery rates in the event of default for each security. The estimated fair values could change based on future market conditions. |
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(tables in thousands, except per share data)
Unaudited
Assets Measured at Fair Value on a Recurring Basis
The following table presents our assets measured at fair value on a recurring basis at April 2, 2010:
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||
April 2, 2010: | |||||||||
Commercial Paper | $ | 6,000 | $ | — | $ | — | |||
Municipal Securities | — | 15,901 | — | ||||||
Corporate Securities | 1,013 | — | — | ||||||
Auction Rate Securities | — | — | 14,075 | ||||||
$ | 7,013 | $ | 15,901 | $ | 14,075 | ||||
Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||
October 2, 2009: | |||||||||
Commercial Paper | $ | — | $ | — | $ | — | |||
Municipal Securities | — | 13,884 | — | ||||||
Corporate Securities | 1,013 | — | — | ||||||
Auction Rate Securities | — | — | 14,600 | ||||||
$ | 1,013 | $ | 13,884 | $ | 14,600 | ||||
Changes in Level 3 Assets Measured at Fair Value on a Recurring Basis
The following table presents the changes in Level 3 assets measured on a recurring basis for the six months ended April 2, 2010. All of our Level 3 assets consist of ARS, with changes in fair value included in other comprehensive income (loss).
Auction Rate Securities | ||||
Balance, beginning of period | $ | 14,600 | ||
Transfers into Level 3 | — | |||
Transfers out of Level 3 | — | |||
Total gains or losses | ||||
Included in earnings (or changes in net assets) | — | |||
Included in other comprehensive income (loss) | 100 | |||
Purchases, issuances, sales and settlements | ||||
Purchases | — | |||
Issuances | — | |||
Sales | (625 | ) | ||
Settlements | — | |||
Balance, end of period | $ | 14,075 | ||
Change in unrealized gains relating to assets still held at April 2, 2010 | $ | 100 | ||
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(tables in thousands, except per share data)
Unaudited
Non Financial Liabilities Measured at Fair Value on a Nonrecurring Basis
We measure our asset retirement obligations at fair value on a nonrecurring basis, when we believe there has been an indication the fair value has changed. We did not adjust the values of those liabilities during the six months ended April 2, 2010.
NOTE 11—RECENT ACCOUNTING PRONOUNCEMENTS
In February 2010, the Financial Accounting Standards Board (“FASB”) issued amended guidance (included in ASC 855) for subsequent events, which was effective for us in February 2010. In accordance with the revised guidance, an SEC filer no longer will be required to disclose the date through which subsequent events have been evaluated in issued and revised financial statements. The adoption of this revised guidance did not have a material impact on our consolidated financial statements.
In January 2010, the FASB issued standards (included in ASC 820) that provide new disclosures about fair value measurements. These include disclosing transfers in and out of Levels 1 and 2 as well as the reasons for the transfers and identifying the activity in Level 3 fair value measurements provided in reconciliation. The standards also provide clarification of existing standards on the level of disaggregation for each class of assets and liabilities and disclosures about inputs and valuation techniques. We adopted these standards on January 2, 2010, with no material effect on our consolidated financial statements.
In October 2008, the FASB issued standards (included in ASC 820) that provide a common definition of fair value and establish a framework to make the measurement of fair value in generally accepted accounting principles more consistent and comparable. These standards do not require new fair value measurements but apply to other standards that require fair value measurement; expanded disclosures are also required. In February 2008, the FASB delayed the effective date of these standards to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We adopted the standards for nonfinancial assets and nonfinancial liabilities on October 3, 2009, with no material effect on our consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including the Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, or management believes will not, have a material impact on our present or future consolidated financial statements.
NOTE 12—DEFERRED FACILITIES RENT AND OTHER
The following tables show details of the following line items in our consolidated balance sheets.
Current Portion of Deferred Facilities Rent and Other
April 2, 2010 | October 2, 2009 | |||||
Deferred rent | $ | 862 | $ | 1,079 | ||
Sublease loss accruals | 344 | 74 | ||||
$ | 1,206 | $ | 1,153 | |||
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(tables in thousands, except per share data)
Unaudited
Deferred Facilities Rent and Other
April 2, 2010 | October 2, 2009 | |||||
Deferred rent | $ | 4,026 | $ | 3,896 | ||
Sublease loss accruals | 1,155 | 339 | ||||
Other minimum lease payments | 529 | 521 | ||||
$ | 5,710 | $ | 4,756 | |||
NOTE 13—SUBSEQUENT EVENTS
We have evaluated all events and transactions that occurred after April 2, 2010. Based on this evaluation, we identified one subsequent event requiring recognition in the financial statements.
On April 7, 2010 we paid $4.5 million to settle a claim with the U.S. Government (see Note 6).
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis is provided to increase the understanding of, and should be read in conjunction with, our unaudited condensed consolidated financial statements and notes included in this Quarterly Report on Form 10-Q and our consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended October 2, 2009 (our “2009 10-K”). We use the terms “we,” “our,” and “us” to refer to Learning Tree International, Inc. and our subsidiaries.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may,” or other similar expressions in this Report. Our forward-looking statements relate to future events or our future performance and include, but are not limited to, statements concerning our business strategy, future commercial revenues, market growth, capital requirements, new product introductions, expansion plans and the adequacy of our funding. Other statements contained in this report that are not historical facts are also forward-looking statements.
We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on our beliefs, assumptions made by us, and information currently available to us. Such statements are based on assumptions, and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control and ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. We are not undertaking any obligation to update any forward-looking statements. Accordingly, investors should use caution in relying on forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include those related to the following: risks associated with the timely development, introduction, and customer acceptance of our courses; efficient delivery and scheduling of our courses; technology development and new technology introduction; competition; international operations, including currency fluctuations; attracting and retaining qualified personnel; intellectual property, including having to defend potential infringement claims; changing economic and market conditions; and adverse weather conditions, strikes, acts of war or terrorism and other external events. Please refer to the risk factors under “Item 1A. Risk Factors” beginning on page 11 and elsewhere in our 2009 10-K, as well as in our other filings with the Securities and Exchange Commission.
The risks included in our filings are not exhaustive, and additional factors could adversely affect our business and financial performance. We operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We do not undertake and specifically disclaim any obligation to update such forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statements, except as required by law.
OVERVIEW
We are a leading worldwide vendor-independent provider to business and government organizations for the training and education of their managers and information technology (“IT”) professionals. Since our founding in 1974, we have provided high-quality training to over two million managers and IT professionals.
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We develop our own proprietary courses to be highly interactive, and incorporate extensive hands-on exercises or case study workshops. Our vendor-independent IT courses provide participants an unbiased perspective regarding software and hardware products and the ability to compare and integrate multiple platforms and technologies from various vendors. Our management courses, while addressing core concepts and theories, focus heavily on providing skills, tools, and technologies that participants can apply immediately upon returning to their jobs. Our RealityPlus™ management courses utilize extensive “real-world” simulations to teach practical management techniques. This innovative, multi-media methodology provides an environment in which RealityPlus™ course participants learn entirely by doing. Throughout the courses, participants gain extensive experience applying new management skills in life-like, challenging situations, within the confines of the classroom and under the guidance of an expert instructor. As a result, RealityPlus™ course participants achieve greater mastery of effective management techniques as well as the confidence needed to apply them, and thus return to their jobs both ready and willing to immediately apply their expanded skills in their workplace.
Based on their sophistication and quality, all our courses are recommended for one to two semester hours of college credit by the American Council on Education. We are also a trusted continuing professional education (“CPE”) provider of the International Information Systems Security Certification Consortium (ISC)2 . In addition, we are on the National Association of State Boards of Accountancy National Registry of CPE sponsors and are a Registered Education Provider of the Project Management Institute.
After assessing market need, most of our courses are translated into French, Swedish and Japanese. We offer our proprietary courses through local operations in the United States, the United Kingdom, France, Canada, Sweden and Japan, and typically generate over half of our revenues internationally.
Based on extensive testing over the past several years of alternate delivery formats and training program structures, in fiscal year 2009 we introduced Learning Tree AnyWare™, our proprietary live e-learning platform that integrates participants in remote locations into live class events in another location. Attendees at home or in their offices can use an ordinary Internet connection to participate in a live Learning Tree course being held in one of our education centers. AnyWare class participants see and hear their instructor and classmates in real time, and view the instructor’s annotations on the two in-class MagnaLearn™ projection screens in real-time. They are able to participate in discussions, ask questions, work in breakout sessions, and complete the same hands-on exercises as their in-class counterparts, all under the guidance of a live, expert instructor. They gain the full benefit of our proprietary courseware, and achieve the same level of knowledge and skill transfer as in-class participants. Early customer feedback reports that AnyWare is highly different from, and significantly more effective in promoting job-related learning than, other forms of e-Learning.
Our instructors are not full time employees; rather, they are practicing professionals who apply the same IT and management skills they teach in our classrooms as independent consultants or full-time employees elsewhere when they are not teaching. On average, each expert instructor teaches about 10 courses per year on an “as needed” basis. This ensures that our instructors stay at the forefront of their respective disciplines, and also enables us to structure our business so the majority of course delivery costs are variable. In addition to the delivery of our courses in our state-of-the-art education centers, our infrastructure and logistical capabilities allow us to coordinate, plan and deliver our courses at hotels, conference facilities and customer sites worldwide.
We continue our tradition of excellence by always seeking to improve our core strengths: expert instructors, proprietary content library, state-of-the-art classrooms and worldwide course delivery systems. We believe that quality and customer satisfaction remain the underlying driving forces for our long-term success.
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KEY METRICS OF OUR SECOND QUARTER OF FISCAL YEAR 2010
As discussed in more detail throughout our Management’s Discussion and Analysis of Financial Condition and Results of Operations,
For the three months ended April 2, 2010:
• | Revenues decreased to $28.3 million from $30.5 million, a decline of 7.3% from the same quarter of fiscal year 2009. We are encouraged that this has been the smallest decline in quarterly revenues of the past year and a half; |
• | Our gross profit declined, to 51.6% of revenues from 52.8% for the same quarter of fiscal year 2009; |
• | We reduced operating expenses by $1.8 million compared to the same quarter of our prior fiscal year. Operating expenses were 59.3% of revenues compared to 60.9% for the same quarter of fiscal year 2009; |
• | Loss from operations was $2.2 million compared to a loss from operations of $2.5 million in the same quarter of fiscal year 2009; |
• | Net loss was $1.3 million compared to net loss of $1.4 million in our second quarter of fiscal year 2009; |
• | We repurchased 79,165 shares of our common stock during the quarter for a total purchase price of approximately $0.9 million; |
• | The sum of cash and cash equivalents and current available for sale securities decreased $2.3 million to $71.5 million at April 2, 2010 compared with October 2, 2009; and |
• | Net working capital (current assets minus current liabilities) increased by $1.6 million and was $37.9 at April 2, 2010 compared with $36.3 million at October 2, 2009. |
For the six months ended April 2, 2010:
• | Revenues decreased to $60.8 million from $68.5 million, a decline of 11.2% from the same period of fiscal year 2009; |
• | Our gross profit declined, to 54.4% of revenues from 55.2% for the same period of fiscal year 2009; |
• | We reduced operating expenses by $6.2 million compared to the same period of our prior fiscal year. Operating expenses were 51.6% of revenues compared to 54.9% for the same period of fiscal year 2009; |
• | Income from operations was $1.7 million compared to income from operations of $0.2 million in the same period of fiscal year 2009; |
• | Net income was $1.2 million compared to net income of $0.5 million in the same period of fiscal year 2009; and |
• | We repurchased 170,122 shares of our common stock during the period for a total purchase price of approximately $2.0 million. |
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RESULTS OF OPERATIONS
The following table summarizes our consolidated statements of operations for the periods indicated, expressed as a percentage of revenues:
Three months ended | Six months ended | |||||||||||
April 2, 2010 | April 3, 2009 | April 2, 2010 | April 3, 2009 | |||||||||
Revenues | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of revenues | 48.4 | % | 47.2 | % | 45.6 | % | 44.8 | % | ||||
Gross profit | 51.6 | % | 52.8 | % | 54.4 | % | 55.2 | % | ||||
Operating expenses: | ||||||||||||
Course development | 6.6 | % | 6.5 | % | 5.9 | % | 6.1 | % | ||||
Sales and marketing | 27.2 | % | 29.0 | % | 23.8 | % | 26.2 | % | ||||
General and administrative | 25.5 | % | 25.4 | % | 21.9 | % | 22.6 | % | ||||
Total operating expenses | 59.3 | % | 60.9 | % | 51.6 | % | 54.9 | % | ||||
Income (loss) from operations | -7.7 | % | -8.1 | % | 2.8 | % | 0.3 | % | ||||
Other income (expense), net | 0.5 | % | 1.2 | % | 0.6 | % | 1.1 | % | ||||
Income (loss) before taxes | -7.2 | %�� | -6.9 | % | 3.4 | % | 1.4 | % | ||||
Income tax provision (benefit) | -2.7 | % | -2.4 | % | 1.5 | % | 0.7 | % | ||||
Net income (loss) | -4.5 | % | -4.5 | % | 1.9 | % | 0.7 | % | ||||
THREE AND SIX MONTHS ENDED APRIL 2, 2010 COMPARED WITH THE THREE AND SIX MONTHS ENDED APRIL 3, 2009
Revenues.Revenues for our second quarter of fiscal year 2010 decreased by 7.3% compared to the same quarter in fiscal year 2009. The decrease in revenues is primarily due to three factors: (a) 11.5% fewer attendee-days of training; (b) an increase in the relative proportion of participants in onsite courses, which have a lower average revenue per participant than public courses; and (c) a partial offset of these decreases by the effect of changes in foreign exchange rates, which caused revenues to increase by 4.9%.
During our second quarter of fiscal year 2010, we trained 16,442 course participants, an 8.4% decrease from the 17,954 course participants we trained in our second quarter of fiscal year 2009. Average days per event decreased to 3.5 days per event in our second quarter of fiscal year 2010, a decrease of 2.5% from our second quarter of fiscal year 2009.
During our second quarter of fiscal year 2010, we provided 56,586 attendee-days of training, an 11.5% decrease from 63,970 attendee-days in the same quarter in fiscal year 2009. In our management courses during our second quarter of fiscal year 2010, we provided 20,821 attendee-days of training, an 11.6% decrease from the 23,565 attendee-days in the corresponding period in fiscal year 2009. In our IT courses during our second quarter of fiscal year 2010, we provided 35,765 attendee-days of training, an 11.5% decrease from the 40,405 attendee-days in the corresponding period in fiscal year 2009.
In our second quarter of fiscal year 2010, average revenue per participant was 0.9% higher than in the same quarter of fiscal year 2009 due primarily to the 4.9% positive effect of changes in foreign exchange rates, which was partially offset by a 3.4% reduction in average number of attendee days per participant compared to last year (shorter courses are generally priced lower than their longer counterparts).
Revenues for the six months ended April 2, 2010 decreased 11.2% compared to the same period in fiscal year 2009. The decrease in revenues is primarily due to 16.4% fewer attendee-days of training per available week, which was partially offset by changes in foreign exchange rates, which caused revenues to increase by 4.3%.
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During the six months ended April 2, 2010, we provided 118,396 attendee-days of training, a 16.1% decline from the 141,088 attendee-days in the same period in fiscal year 2009. In our management courses during the six months ended April 2, 2010, we provided 44,476 attendee-days of training, a 10.9% decrease over the 49,941 attendee-days in the corresponding period in fiscal year 2009. In our IT courses during the six months ended April 2, 2010, we provided 73,920 attendee-days of training, an 18.9% decrease from the 91,147 attendee-days in the corresponding period in fiscal year 2009.
Cost of Revenues. Our cost of revenues primarily includes the costs of course instructors and their travel expenses, course materials, classroom facilities, equipment, freight and refreshments.
During our second quarter of fiscal year 2010, we presented 1,308 events, a 13.0% decrease from 1,503 events during the same period in fiscal year 2009. Our cost of revenues for our second quarter of fiscal year 2010 was $13.7 million compared to $14.4 million in the same period in fiscal year 2009. As a result, our gross profit percentage for our second quarter of fiscal year 2010 was 51.6% compared to 52.8% in the same quarter of the prior fiscal year. Changes in exchange rates do not materially affect gross profit percentages since exchange rates have essentially the same impact on both revenues and cost of revenues in any period.
During the first six months of fiscal year 2010, we presented 2,701 events, a 13.3% decrease from 3,116 events during the same period in fiscal year 2009. Our cost of revenues for the first six months of fiscal year 2010 was $27.7 million compared to $30.7 million in the same period in fiscal year 2009. As a result, our gross profit percentage for the first six months of fiscal year 2010 was 54.4% compared to 55.2% in the same period of the prior fiscal year. Changes in exchange rates do not materially affect gross profit percentages since exchange rates have essentially the same impact on both revenues and cost of revenues in any period.
The increase in cost of revenues as a percentage of revenues in our second quarter of fiscal year 2010 reflects a 9.3% increase in average cost per event, partially offset by a 6.2% increase in average revenue per event. The increase in our average cost per event was the result of start-up costs (such as instructor recruitment and training) associated with our recently announced contract with the U.S. Department of Veterans Affairs (“VA”) and, to a lesser extent, costs associated with our continued expansion of our AnyWare course offerings. We expect to see the VA contract-related start-up costs continue through the remainder of fiscal year 2010 and then abate. We held 195, or 13.0%, fewer events in our second quarter of fiscal year 2010 than in our second quarter of fiscal year 2009. While we reduced the variable costs of revenues, such as instructor costs and course materials, by a greater percentage than that for the decrease in the number of events, we could not reduce the costs of long-term obligations, such as the lease costs for our education centers, as quickly.
Cost of revenues as a percentage of revenues increased slightly in the first six months of fiscal year 2010 because revenues declined 11.2% and cost of revenues declined only 9.7%. We held 415, or 13.3%, fewer events in the first six months of fiscal year 2010 than in the same period of fiscal year 2009. While we reduced the variable costs of revenues, such as instructor costs and course materials, by a greater percentage than that for the decrease in the number of events, we could not reduce the costs of long-term obligations, such as the lease costs for our education centers, as quickly. Start-up costs associated with our recently announced contract with the VA and, to a lesser extent, costs associated with the continued expansion of our AnyWare course offerings also partially offset the other decreases in cost of revenues.
Course Development Expenses. We maintain a disciplined process to develop new courses and update our existing courses. Costs incurred in that process, principally for internal product development staff and for subject matter experts, are expensed when incurred and are included in course development expenses.
During our second quarter of fiscal year 2010 course development expenses were 6.6% of revenues, compared to 6.5% in the same quarter of fiscal year 2009. Overall spending on course development in our second quarter of fiscal year 2010 was $1.9 million, a 5.3% decrease from the $2.0 million spent on course development in our second quarter of fiscal year 2009. The decrease in expense relates primarily to reductions in royalties to course authors as well as to reductions in payroll and benefits.
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During the first six months of fiscal year 2010 course development expenses were 5.9% of revenues, compared to 6.1% in the same period of fiscal year 2009. Overall spending on course development in the first six months of fiscal year 2010 was $3.6 million, a 14.3% decrease from the $4.2 million spent on course development in the first six months of fiscal year 2009. The decrease in expense reflects the development of fewer courses as well as cost savings in the development process of $0.4 million and reductions in royalties to course authors of $0.3 million, partially offset by consulting expenses of $0.1 million on the development of AnyWare.
In our second quarter of fiscal year 2010, we introduced three new IT course titles and three new management course titles. We retired two management course titles and retired three IT course titles in our second quarter. As a result, our library of instructor-led courses numbered 214 titles at the end of our second quarter of fiscal year 2010 compared with 206 titles at the end of the same quarter of fiscal year 2009. At the end of our second quarter of this fiscal year, we had 75 management titles in our course library, compared with 68 titles at the end of the same quarter of fiscal year 2009. Our library of IT titles numbered 139 at the end of our second quarter of fiscal year 2010, compared to 138 at the end of the same quarter of fiscal year 2009. During this period, we have continued to improve our Learning Tree AnyWare™ live e-learning delivery platform, adding additional features and functionality.
Sales and Marketing Expenses. Sales and marketing expenses include the costs of: designing, producing and distributing direct mail and media advertisements; distributing marketing e-mails; maintaining and further developing our website; compensation and travel for sales and marketing personnel; and information systems to support these activities. Our sales and marketing expense, and in particular our expenditure on course catalogs, is one of our largest expenditures. We have adjusted the market sectors to which we mail our catalogs, and continue to evaluate additional ways to increase the efficiency of our marketing expenditures by spending less while increasing the response rates to that marketing.
Sales and marketing expense in our second quarter of fiscal year 2010 was 27.2% of revenues, compared with 29.0% for the same quarter in fiscal year 2009. Sales and marketing expense was $7.7 million in our second quarter of fiscal year 2010, compared to $8.8 million during our second quarter of fiscal year 2009. During our second quarter of this fiscal year, we reduced the number of catalogs produced and mailed, lowering our expense by $0.9 million. Reductions of personnel and related benefits accounted for an additional reduction of $0.4 million, partially offset by other increases of $0.1 million. Changes in foreign exchange rates included in these figures caused total sales and marketing expenses to increase by about 3.6% for our second quarter of fiscal year 2010 compared to the same quarter of the prior fiscal year.
Sales and marketing expense in the first six months of fiscal year 2010 was 23.8% of revenues, compared with 26.2% for the same period in fiscal year 2009. Sales and marketing expense was $14.5 million in the first six months of fiscal year 2010, compared to $18.0 million during the first six months of fiscal year 2009. During the first six months of this fiscal year, we reduced the number of catalogs produced and mailed, lowering our expense by $2.0 million. Reductions of personnel and related benefits accounted for an additional reduction of $1.2 million. Other marketing reductions included $0.2 million of advertising expense, and other reductions of $0.1 million. Changes in foreign exchange rates included in these figures caused total sales and marketing expenses to increase by about 3.1% for the first six months of fiscal year 2010 compared to the same period of the prior fiscal year.
General and Administrative Expenses.General and Administrative expense during our second quarter of fiscal year 2010 was $7.2 million, a decrease of $0.6 million compared to $7.8 million in our second quarter of fiscal year 2009. This decrease related primarily to $0.2 million in payroll and benefits, $0.2 million in equity and incentive compensation and $0.1 million of other reductions. Additionally, our second quarter of fiscal years 2010 and 2009 included significant items not associated with current operations:
• | Our second quarter of fiscal year 2010 included a charge of $1.1 million for an expected period of vacancy due to the exercise of an option to terminate by one of our London education center sub |
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tenants, expected to be effective October 7, 2010. This accrual may be reversed, either in part or in total, if and when we secure a replacement sub tenant, and depending on the terms of such a replacement sub tenant’s sublease; |
• | Our second quarter of fiscal year 2009 included $0.8 million of restructuring costs incurred as a result of reductions in staff taken in April 2009; and |
• | Our second quarter of fiscal year 2009 included $0.4 million of costs associated with exploring a potential sale of the company, including non-contingent transaction contribution bonuses for certain employees, principally in our finance and accounting department, as well as legal fees and special committee fees. |
Changes in foreign exchange rates included in these figures caused total general and administrative expenses to increase by about 3.0% for our second quarter of fiscal year 2010 compared to the same quarter of the prior fiscal year.
General and Administrative expense during the first six months of fiscal year 2010 was $13.3 million, a decrease of $2.1 million compared to $15.4 million in the same period of fiscal year 2009. This decrease related primarily to $0.8 million in payroll and benefits, $0.4 million in professional services (primarily auditing and legal fees) and various other reductions of $0.1 million. Additionally, the six months ended April 2, 2010 and April 3, 2009 included significant items not associated with current operations:
• | The six months ended April 2, 2010 included a charge of $1.1 million for an expected period of vacancy due to the exercise of an option to terminate by one of our London education center sub tenants, expected to be effective October 7, 2010, |
• | The six months ended April 3, 2009 included $1.2 million of restructuring costs incurred as a result of reductions in staff taken in November 2008 and April 2009, and |
• | The six months ended April 3, 2009 included $0.7 million of costs associated with exploring a potential sale of the company, including non-contingent transaction contribution bonuses for certain employees, principally in our finance and accounting department, as well as legal fees and special committee fees. |
Changes in foreign exchange rates included in these figures caused total general and administrative expenses to increase by about 2.3% for the first six months of fiscal year 2010 compared to the same period of the prior fiscal year.
Other Income (Expense), Net. Other income (expense), net consists primarily of interest income and foreign currency transaction gains and losses.
During our second quarter of fiscal year 2010, other income, net totaled $0.1 million compared to $0.3 million in the same period of fiscal year 2009. The net decrease was primarily due to a reduction in interest income of $0.2 million due to lower interest rates and lower cash balances.
During the first six months of fiscal year 2010, other income, net totaled $0.4 million compared to $0.7 million in the same period of fiscal year 2009. The net decrease was primarily due to a reduction in interest income of $0.6 million due to lower interest rates and lower cash balances as well as minimal foreign currency gains in the first six months of fiscal year 2010 compared to a foreign currency transaction loss of $0.2 million in the same period of fiscal year 2009.
Income Taxes. Our income tax provision in our second quarter of fiscal year 2010 was a benefit of $0.8 million compared to a benefit of $0.8 million in our second quarter of fiscal year 2009. Our income tax provision for the first six months of fiscal year 2010 reflects a 44.5% effective tax rate, compared with our income tax provision for the first six months of fiscal year 2009, which reflected a 48.4% effective rate. The high effective
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rates for fiscal years 2010 and 2009 are primarily due to permanent differences associated with stock option compensation expense, and the effect of low pre-tax income, which tends to increase the effective tax rate because the unfavorable permanent differences do not decrease in proportion to decreases in pre-tax income.
Net Income (Loss). Our net loss for our second quarter of fiscal year 2010 was $1.3 million compared to a net loss of $1.4 million for our second quarter of fiscal year 2009.
Our net income for the first six months of fiscal year 2010 was $1.2 million compared to net income of $0.5 million for the first six months of fiscal year 2009.
Effects of Foreign Exchange Rates.Although our consolidated financial statements are stated in U.S. dollars, all of our subsidiaries outside of the U.S. have functional currencies other than the U.S. dollar. Gains and losses arising from the translation of the balance sheets of our subsidiaries from the functional currencies to U.S. dollars are reported as adjustments to stockholders’ equity. Fluctuations in exchange rates may also have an effect on our results of operations. Since both revenues and expenses are generally denominated in our subsidiaries’ local currency, changes in exchange rates that have an adverse effect on our foreign revenues are partially offset by a favorable effect on our foreign expenses. The impact of future exchange rates on our results of operations cannot be accurately predicted. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates, and therefore we continue to be subject to such risks. Even if we undertake such hedging transactions in the future, there can be no assurance that any hedging techniques we implement would be successful in eliminating or reducing the effects of currency fluctuations. See Item 1A “Risk Factors” in our 2009 10-K.
Recently Issued Accounting Pronouncements.
In February 2010, the Financial Accounting Standards Board (“FASB”) issued amended guidance (included in Accounting Standards Codification (“ASC”) 855) for subsequent events, which was effective for us in February 2010. In accordance with the revised guidance, a Securities and Exchange Commission filer no longer will be required to disclose the date through which subsequent events have been evaluated in issued and revised financial statements. The adoption of this revised guidance did not have a material impact on our consolidated financial statements.
In January 2010, the FASB issued standards (included in ASC 820) that provide new disclosures about fair value measurements. These include disclosing transfers in and out of Levels 1 and 2 as well as the reasons for the transfers and identifying the activity in Level 3 fair value measurements provided in reconciliation. The standards also provide clarification of existing standards on the level of disaggregation for each class of assets and liabilities and disclosures about inputs and valuation techniques. We adopted these standards on January 2, 2010, with no material effect on our consolidated financial statements.
In October 2008, the FASB issued standards (included in ASC 820) that provide a common definition of fair value and establish a framework to make the measurement of fair value in generally accepted accounting principles more consistent and comparable. These standards do not require new fair value measurements but apply to other standards that require fair value measurement; expanded disclosures are also required. In February 2008, the FASB delayed the effective date of these standards to fiscal years beginning after November 15, 2008 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We adopted the standards for nonfinancial assets and nonfinancial liabilities on October 3, 2009, with no material effect on our consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including the Emerging Issues Task Force), the American Institute of Certified Public Accountants and the Securities and Exchange Commission did not, or management believes will not, have a material impact on our present or future consolidated financial statements.
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FLUCTUATIONS IN QUARTERLY RESULTS
Our quarterly results are affected by many factors, including the number of weeks during which courses can be conducted in a quarter, the nature and extent of our marketing, the timing of the introduction of new courses, competitive forces within the markets we serve, the mix of our course events between IT and management and customer site or education center venues, and currency fluctuations.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity at April 2, 2010 include cash and cash equivalents and available for sale securities on hand of $71.5 million.
At April 2, 2010 our net working capital (current assets minus current liabilities) was $37.9 million, a $1.6 million increase from our working capital balance at October 2, 2009 as a result of a decrease in accounts payable of $2.2 million, a decrease in deferred revenues of $2.3 million, a $0.8 million decrease in income taxes payable, a $0.4 million decrease in accrued payroll and benefits and other accrued liabilities and an increase of $0.4 million in prepaid and other current assets, all offset by a decrease in accounts receivable of $2.2 million and $2.4 million of tax payments.
Cash Flows. Our cash and cash equivalents decreased $9.8 million to $34.5 million at April 2, 2010 from $44.3 million at October 2, 2009 (dollars in thousands).
Six months ended | Net Change | |||||||||||
April 2, 2010 | April 3, 2009 | |||||||||||
Cash provided by operating activities | $ | 1,914 | $ | 2,441 | $ | (527 | ) | |||||
Cash provided by (used in) investing activities | (9,311 | ) | 390 | (9,701 | ) | |||||||
Cash used in financing activities | (1,838 | ) | (13,310 | ) | 11,472 | |||||||
Effects of exchange rate changes on cash and cash equivalents | (543 | ) | (4,334 | ) | 3,791 | |||||||
Net decrease in cash and cash equivalents | $ | (9,778 | ) | $ | (14,813 | ) | $ | 5,035 | ||||
Cash provided by operating activities decreased by $0.5 million in the first six months of fiscal year 2010 to $1.9 million over the same period of fiscal year 2009. Cash used in investing activities increased by $9.7 million in the first six months of fiscal year 2010, due primarily to an increase of $8.6 million in net purchases of available for sale securities and an increase in the purchases of equipment and other capital assets of $1.1 million. Cash used in financing activities decreased by $11.5 million due to repurchases of fewer shares of our common stock. Changes in exchange rates had a $0.5 million negative effect on cash and cash equivalents during the six months ending April 2, 2010.
Liquidity. During the first six months of fiscal year 2010, the total of our cash and cash equivalents and available for sale securities decreased by $2.3 million to $71.5 million at April 2, 2010 from $73.8 million at October 2, 2009. This decrease included the effects of $2.0 million of stock repurchases and $1.8 million of capital expenditures which were partially offset by $0.2 million of proceeds of stock options exercised and $1.9 million in cash provided by operating activities. Changes in exchange rates caused our reported cash balances to decrease by $0.5 million.
We have no outstanding debt or line of credit agreements. We anticipate we will continue to rely primarily on our balance of cash and cash equivalents on hand and cash flows from operations to finance our operating cash needs. We believe that such funds will be sufficient to satisfy our anticipated cash requirements for the foreseeable future.
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At April 2, 2010 we also had $16.4 million in face value of Auction Rate Securities (“ARS”). This compares to $17.0 million in ARS at October 2, 2009. Our ARS are long-term debt instruments backed by municipal bonds and student loans. None of our ARS are mortgage-backed debt. All of our ARS had credit ratings of AAA or AA when purchased. Historically, our ARS were highly liquid. As a result of liquidity issues in the global credit and capital markets, it has been difficult to sell ARS at their stated value. However, we sold $12.3 million of our ARS in fiscal year 2009 and an additional $0.6 million in the first six months of fiscal year 2010, all at their stated value. We have a repurchase agreement with UBS under which we have the right to sell all of our remaining ARS at their stated value at any time from June 30, 2010 through July 2, 2012. We intend to exercise that right when it becomes exercisable.
We do not believe that the failure of periodic auctions affects the value of the collateral underlying our ARS, and there have been no defaults on the underlying collateral. We continue to earn and receive interest at contractually set rates in a timely manner. We believe we could finance our operations even if our ARS investments were to be illiquid for an extended period of time.
Capital Requirements. During our six months ended April 2, 2010, we made capital expenditures of $1.8 million for the purchase of furniture and computer equipment worldwide. We plan to purchase an additional $1.7 million in equipment and other capital assets during the remainder of fiscal year 2010. Our contractual obligations as of April 2, 2010 are consistent in material respects with our fiscal year-end disclosure in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Requirements” of our 2009 10-K.
We have a number of operating leases for our administrative offices and education center classroom facilities located worldwide. These leases expire at various dates over the next 9 years. In addition to requiring monthly payments for rent, some of the leases contain asset retirement provisions whereby we are required to return the leased facility back to a specified condition at the expiration of the lease.
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
Management’s discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements. The preparation of these financial statements is based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and notes. We believe some of the more critical estimates and policies that affect our financial condition and results of operations are in the areas of revenue recognition, operating leases, asset retirement obligations, stock-based compensation and income taxes. For more information regarding our critical accounting estimates and policies, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates and Policies” of our 2009 10-K. We have discussed the application of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.
FUTURE OUTLOOK
As we have for the past 35 years, we continue to emphasize excellence in educating and training managers and IT professionals from government and commercial organizations around the world. We believe that quality is a significant differentiator in the eyes of our customers, and that Learning Tree’s proven long-term record of exceptional performance is a reason for our clients’ tremendous loyalty. We continue our emphasis on excellence by focusing on our core strengths: our expert instructors, proprietary content library, state-of-the-art classrooms, application of technology to education, and worldwide course delivery systems.
The current economic climate is having an effect on our business, and many economists are predicting a long, challenging period for the global economy. We believe that effective training in IT and management skills improves our customers’ competitiveness, and that our customers will continue to invest in training their
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personnel in these critical competencies. However, we also expect that some customers will reduce their spending on training services as part of their response to the current economic conditions. We therefore believe we must manage our business with the expectation that such economic conditions will adversely affect our revenues.
Effect of Exchange Rates. Approximately half of our business annually is conducted in currencies other than U.S. dollars, and fluctuations in exchange rates will affect future revenues and expenses when translated into U.S. dollars. If the exchange rates of May 6, 2010 remain constant for the remainder of our third quarter we would expect to report a favorable effect of approximately 1.0% due to changes in foreign exchange rates in our third quarter of fiscal year 2010, which would have the effect of increasing both our revenues and our expenses compared to our third quarter of fiscal year 2009.
Third Quarter Revenues. We currently expect revenues in our third quarter of fiscal year 2010 to be between $32.2 million and $34.2 million, compared to $32.3 million in the same quarter of fiscal year 2009.
Third Quarter Gross Profit.We expect our gross profit percentage in our third quarter of fiscal year 2010 to be between 53.5% and 55.0% compared to 55.3% in our third quarter of fiscal year 2009.
Third Quarter Operating Expenses. We expect overall operating expenses for our third quarter of fiscal year 2010 to be between $15.5 million and $16.5 million, compared to $14.6 million in our third quarter of fiscal year 2009. Our expected increase in operating expenses results from planned increases in sales and marketing expenditures.
Third Quarter Income from Operations. As a result of the above factors, we expect income from operations for our third quarter of fiscal year 2010 to be between $1.2 million and $2.8 million, compared with earnings from operations of $3.2 million in the third quarter of fiscal year 2009.
Third Quarter Interest Income. We expect interest income in our third quarter of fiscal year 2010 to be approximately $0.2 million.
Third Quarter Pre-Tax Income. As a result of the above factors, we expect pre-tax earnings for our third quarter of fiscal year 2010 to be between $1.4 million and $3.0 million, compared with pre-tax earnings of $3.5 million in the third quarter of fiscal year 2009.
Effective Tax Rate. We estimate that our effective tax rate in our third quarter of fiscal year 2010 will be approximately 0% due to the release of certain ASC 740-10 reserves.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
For information required by this item see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our 2009 10-K. We do not believe our exposure to market risk has changed materially since October 2, 2009.
As discussed in Note 8 and in the Liquidity and Capital Resources section of this report, we held $16.4 million in ARS at April 2, 2010. Due to the turmoil in the worldwide credit markets since mid-February 2008, we have not been able to sell our remaining ARS in the scheduled auctions. There can be no assurance that we will be able to sell these securities at par in the unexpected event that we need to do so in the near term. However, these ARS are backed by long-term debt which, if necessary, we have the ability to hold until maturity; furthermore, our belief in the value of the securities underlying our ARS is bolstered by our ability to sell $12.3 million of our ARS at face value in fiscal year 2009, $0.6 million at face value in the first six months of fiscal year 2010, and our right to have UBS purchase them at par commencing in June 2010.
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Item 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
As of the end of the period covered by this report, management performed an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that we believe have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. | LEGAL PROCEEDINGS |
As of April 2, 2010, other than routine legal proceedings and claims incidental to our business, we are not involved in any legal proceedings that, we believe could reasonably be expected to have a material adverse effect on our financial condition or results of operations.
Since 1996, we have sold Training Passports and Vouchers to the United States Government. The U.S. government alleged that some of those terms, although identical to those for our commercial customers, violated the terms of our GSA contract and applicable government regulations. Although we continue to believe that we complied with both the terms of our GSA contract and applicable government regulations, we paid $4.5 million to settle the claim on April 7, 2010. The terms of the settlement were consistent with our previously announced reserves that we established in prior fiscal years and accordingly did not have any material impact on our financial statements in fiscal year 2010.
Item 1A. | RISK FACTORS |
We do not believe that there are any material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our 2009 10-K. Please refer to that section of our 2009 10-K for disclosure regarding the risks and uncertainties related to our business.
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The table below shows the repurchases by us of our common stock during the fiscal quarter ended April 2, 2010:
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | |||
January 2, 2010 – January 31, 2010 | 37,350 | $ | 11.71 | ||
February 1, 2010 – February 28, 2010 | 41,815 | $ | 11.42 | ||
March 1, 2010 – April 2, 2010 | — | $ | — | ||
Total | 79,165 | $ | 11.56 |
(1) | All of these shares were repurchased other than through a publicly announced plan or program, in open-market transactions, pursuant to an authorization from our board of directors. |
Item 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
Item 4. | RESERVED |
Item 5. | OTHER INFORMATION |
None.
Item 6. | EXHIBITS |
The exhibits listed in the Exhibit Index are filed as part of this Quarterly Report on Form 10-Q.
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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.
May 11, 2010 | LEARNING TREE INTERNATIONAL, INC. | |||||||
By: | /s/ NICHOLAS R. SCHACHT | |||||||
Nicholas R. Schacht | ||||||||
Chief Executive Officer |
By: | /s/ CHARLES R. WALDRON | |||||||
Charles R. Waldron | ||||||||
Chief Financial Officer |
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Exhibit | Description | |
10.1 | Form of Stock Award Agreement | |
31.1 | Section 302 Certification of Chief Executive Officer (filed herewith) | |
31.2 | Section 302 Certification of Chief Financial Officer (filed herewith) | |
32.1 | Section 906 Certification of Chief Executive Officer (filed herewith) | |
32.2 | Section 906 Certification of Chief Financial Officer (filed herewith) |
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