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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
6053 WEST CENTURY BOULEVARD
LOS ANGELES, CA 90045-0028
(310) 417-9700
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [ ]
The aggregate market value of the common stock, $.0001 par value, held by
non-affiliates of the registrant, as of December 16, 1997, was $262,983,000.
(Excludes 11,879,771 shares held by directors and officers of the Registrant
since such persons may be deemed to be affiliates.)
The number of shares of common stock, $.0001 par value, outstanding as of
December 16, 1997, was 21,994,507 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of the registrant to be delivered
to shareholders in connection with the 1998 Annual Meeting of Shareholders are
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Form
10-K.
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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
Part I
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 17
Item 3. Legal Proceedings......................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders....................................... 17
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters...................... 18
Item 6. Selected Consolidated Financial Data...................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 20
Item 8. Financial Statements and Supplementary Data................................................ 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures...... 47
Part III
Item 10. Directors and Executive Officers of the Registrant......................................... 47
Item 11. Executive Compensation..................................................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 48
Item 13. Certain Relationships and Related Transactions............................................. 49
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 50
Signatures........................................................................................... 51
Learning Tree(R), the Learning Tree and Professional Certification logos,
EDUCATION IS OUR BUSINESS(R), EDUCATION YOU CAN TRUST(R), WE BRING EDUCATION TO
LIFE(R), PRODUCTIVITY THROUGH EDUCATION(R), LearnTrack(TM), Training
Passport(R), Training Advantage(R), Alumni Gold(TM), TRAINING YOU CAN TRUST(TM),
learningtree.com(TM), 800-THE-TREE(R), 800-LRN-TREE(R) and 888-CBT-TREE(R) are
trademarks and service marks of the Company.
In addition to the trademarks and service marks of the Company, this Annual
Report on Form 10-K also contains trademarks and trade names of other companies.
2
PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed herein and in the caption "Risk Factors" in the Company's
Registration Statement on Form S-1 filed on September 20, 1996.
OVERVIEW
Learning Tree International, Inc. ("Learning Tree" or 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, Internet/intranet technologies,
computer networks, operating systems, databases, programming languages,
graphical user interfaces, object-oriented technology and IT management. The
Company also tests and certifies IT professionals in 21 IT job functions, and
its courses are recommended for college credit by the American Council on
Education. In addition to its instructor-led courses, the Company also provides
a line of multimedia computer-based training courses ("CBT") incorporating audio
and graphical elements that are designed for both stand-alone CD-ROM and
network-based delivery. The Company is paid directly by the employers of its
course participants and does not receive funding from any government aid or loan
programs. As a result, the Company does not depend on government appropriations
for those programs and is not subject to certain governmental regulations.
THE INFORMATION TECHNOLOGY EDUCATION AND TRAINING MARKET
The market for IT training is driven by technological change. As the rate of
this change accelerates, organizations find themselves increasingly hampered in
their ability to exploit the latest information technologies because their IT
professionals lack up-to-date knowledge and skills. Most organizations are
addressing this challenge by retraining their existing IT professionals. An
International Data Corporation ("IDC") study estimates that the 1996 worldwide
market for all IT training was $16.4 billion. The training of IT professionals,
such as programmers, analysts, and engineers, represents the majority of the
market for IT training.
The market for training IT professionals is driven by several factors. These
factors include: (i) the continuous introduction and evolution of new
client/server hardware and software technologies; (ii) the proliferation of
Internet and intranet applications; (iii) the proliferation of computers and
networks throughout all levels of organizations; (iv) the shift from legacy
mainframe systems to new client/server technologies; and (v) periodic corporate
downsizing, resulting in increased training requirements for employees who must
perform new job functions or multiple job tasks that require knowledge of varied
software applications and technologies. Furthermore, since many businesses use
hardware and software products provided by a variety of vendors, their IT
professionals require training on an increasing number of products and
technologies which apply across vendors, platforms and operating systems.
While much of the training for IT professionals continues to be provided by
internal training departments, many organizations are expanding their use of
external training providers due to the lack of internal trainers experienced in
the latest technologies, the cost of developing and maintaining internal
training courses in rapidly evolving technologies or corporate downsizing,
reorganizing and
3
reallocation of resources. The choice of training delivery formats and providers
generally is made by individual IT professionals or their immediate managers,
even in large organizations. When choosing an IT training provider, IT
professionals and their managers seek a provider who can respond to demanding
requirements, including: (i) high quality training; (ii) course titles that
cover a broad range of topics and skill levels; (iii) the ability to deliver an
integrated training program through multiple delivery formats; (iv) the
willingness and ability to tailor the training to the customer's particular
needs; (v) timeliness of the delivery of course events; (vi) qualified,
technically current instructors; (vii) the willingness to deliver training at
convenient locations, including the customer's business site; (viii) course
titles covering areas undergoing rapid technological change; (ix) an effective
training methodology, which delivers the maximum amount of practical information
in the minimum amount of time; (x)training which is vendor-independent; (xi) the
ability to provide testing and certification of technical competency; and (xii)
training that covers global implementation of networks and other IT
applications.
IT training is primarily delivered by classroom instructors, video, CBT and
printed means. According to IDC, instructor-led classroom training continues to
dominate the worldwide IT training market comprising approximately 80% of the
market. The Company believes that instructor-led training will continue to
dominate the market because course participants value the personalized
interaction and problem-solving with their instructor and fellow participants
concerning their specific projects and applications as well as the insulation
from workplace interruptions afforded by classroom instruction. However, the use
of desktop-based multimedia and CBT is gaining acceptance in the IT training
market. IDC projects that the market for technology-based IT education and
training formats, and the multimedia CBT format in particular, will grow at a
faster rate than instructor-led classroom training.
THE LEARNING TREE APPROACH
The Company develops, markets and delivers proprietary course titles covering
a broad range of topics that it believes are designed to meet the continually
evolving training needs of IT professionals worldwide. The Company develops
course titles in an instructor-led format and in a multimedia CBT format.
Its instructor-led course events take place at the Company's Education
Centers, in hotel and conference facilities, and at customer sites. As of
September 30, 1997, Learning Tree had 139 multi-day instructor-led course
titles. These course titles are regularly presented worldwide and cover IT
topics such as client/server systems, intranet/Internet technologies, computer
networks, operating systems, databases, programming languages, graphical user
interfaces, object-oriented technology, IT management and related topics.
During 1997, the Company expanded the breadth of its instructor-led training
activities through the introduction of its Learning Solutions Division. The new
Learning Solutions Division provides custom developed training programs for
larger clients who need to train large numbers of their IT professionals and
end-users. The initial focus of this new division is on training that supports
the roll-out and use of new organization-wide information systems, tools and
applications. In 1997, the Company also introduced a program of "Power Seminars"
which were multi-day conferences comprised of a number of 1-day, multimedia
lecture-style seminars in key information technologies. In November 1997, the
Company announced that it was no longer going to offer its Power Seminars.
The Company's courses provide participants with skills and knowledge that they
can immediately apply in their jobs. The instructor-led course events include
extensive hands-on, interactive exercises using networked classroom computers.
Learning Tree's multi-day course events typically deliver the equivalent of two
semester hours of college credit in an intensive four-day format, thus
minimizing participants' time away from the job.
4
As of September 30, 1997, the Company had 746 course instructors. These
instructors are IT professionals possessing expert knowledge and practical
experience. They work in a variety of industries applying the IT skills and
knowledge that are the subjects of the courses they teach. On average, they
teach approximately eight to nine Learning Tree course events each year on an
"as needed" basis.
Learning Tree places particular emphasis on the quality of its course
offerings. The Company employs a rigorous course development process designed to
ensure that each course title represents multiple points of view concerning the
application of the technology, provides information on different uses of the
technology throughout the world, and provides training that is relevant to
course participants working in diverse applications in a broad range of
industries. Learning Tree also maintains a centralized and ongoing program of
updating its proprietary course titles to maintain the courses' quality and
relevance. The Company tailors its instructor-led courses for customer-site
presentation as appropriate, and the Company's instructors further adapt the
course material to participants' needs based on feedback received in the
classroom.
Learning Tree meets customer demands for scheduling flexibility by holding
course events frequently at multiple locations around the world and by
delivering customer-site course events as required on short notice. The Company
believes that it has the resources to provide a rapid and flexible response to
its customers' needs by utilizing its large team of instructors, its course
development and customization processes, its team of customer support
specialists, its logistics team and its hundreds of classroom computer
workstations. In fiscal 1997, Learning Tree presented over 6,200 course events
worldwide.
The Company tests and certifies IT professionals in 21 IT job functions. Since
this program's inception in 1993, over 79,000 participants have completed one or
more certification examinations. In addition, the American Council on Education
recommends Learning Tree course events for college credit to more than 1,500
North American universities and colleges. See "Business--Learning Tree's
Products." In the United Kingdom, participation in some Learning Tree course
events may be applied toward post-graduate level university credit.
In response to the decentralized nature of IT training decision making, the
Company has developed a sophisticated direct mail marketing and telemarketing
capability, which it supplements by direct sales to corporations and government
organizations. The Company's direct mail marketing utilizes its proprietary list
of over 1,200,000 IT professionals and managers as well as rented lists. This
capability enables the Company to reach individual professionals and managers in
larger organizations and provides a cost-effective channel to reach IT personnel
in smaller organizations as well. The Company also uses its Internet Web site
(http://www.learningtree.com) to market and communicate with prospective
participants. Information contained in the Company's Web site shall not be
deemed to be part of this Annual Report on Form 10-K.
In addition to its instructor-led business, the Company introduced a line of
multimedia CBT course titles in 1996. The Company is continuing to expand its
multimedia CBT library and as of September 30, 1997, had developed 72 multimedia
CBT course titles. The Company's multimedia CBT courses can be delivered to the
workstation either by CD-ROM or over a customer's local area or wide area
network. The content and instructional design of the Company's multimedia CBT
course titles capitalize on its library of computer-based classroom course
content.
LEARNING TREE'S STRATEGY
The Company's objective is to strengthen its position as one of the leading
providers of IT training worldwide. To achieve this goal, the Company employs
the following key strategies:
5
Continue Expanding its Library of Proprietary Instructor-led Course Titles.
The Company intends to continue developing additional course titles and
certification programs in order to increase sales to its existing customer base
and to attract new customers. The Company expanded its multi-day course library
from 72 titles at September 30, 1994 to 139 titles as of September 30, 1997. The
new multi-day course titles introduced during fiscal 1997 cover rapidly
developing areas such as intranet/Internet technologies, computer networking,
Java, Windows NT, programming languages and databases.
Provide Flexible Training Solutions. The Company intends to continue its
strategy of providing training when, where and in the manner desired by the
customer. Participants can attend any of Learning Tree's 139 multi-day courses
which, on average, are presented approximately once per week around the world.
The Company also presents standard or customized courses on demand at its
customers' facilities. Through the Learning Solutions Division, customized
courses are offered to customers whenever and wherever they desire. In addition,
the Company offers its own line of multimedia CBT courses which allow users the
flexibility of learning by using the multimedia CBT courses on their own desktop
or notebook computers.
Expansion of Multimedia CBT Course Titles. Learning Tree is leveraging its
highly interactive instructor-led educational model through the expansion of its
line of multimedia CBT software. The Company believes that it can leverage its
existing instructor-led course business by (i) developing its multimedia CBT
courses based upon the content of its hands-on classroom courses, (ii)
"piggybacking" the marketing and sales of its multimedia CBT products on its
existing marketing and sales programs, and (iii) providing its customers with
the flexibility to tailor a cost-effective combination of multimedia CBT and
classroom training to meet their needs. The Company also intends to continue to
explore the delivery of its multimedia CBT courses via on-line computer services
and over the Internet.
Leverage its Integrated Marketing and Sales Programs. The Company uses an
integrated strategy of marketing both to individual IT professionals through its
extensive direct mail marketing and Internet capability and to their employers
through its direct sales force. These efforts are supplemented by its
telemarketing sales force. The Company intends to continue increasing the size
of its direct mail marketing campaigns and its sales force to reach a greater
proportion of IT professionals and managers in both large and small
organizations. The Company also intends to leverage its marketing investment by
advertising an increasing number of instructor-led and multimedia CBT course
titles in each direct mail package at a relatively small incremental cost per
title.
Build Continuing Relationships. The Company seeks to build continuing
relationships both with its individual course participants and its corporate
customers. The Company expands demand for its course events by motivating
individual IT professionals to purchase a series of course events through its
Training Passport, Professional Certification and College Credit Programs. In
addition to increasing revenues directly, the long-term relationships built by
these programs encourage participants to recommend the Company's course events
to their colleagues. The Company also seeks to create ongoing relationships with
its largest U.S. and international customers through its Training Advantage
Program. These annually renewable agreements allow all the employees of Training
Advantage customers to receive training and special services at negotiated
prices.
Leverage International Operations. The Company maintains offices and education
centers in six countries outside the United States, and in fiscal 1997 presented
course events at its education centers and third-party and customer sites in a
total of 27 countries. In fiscal 1997, international revenues represented
approximately 45% of the Company's revenues. Learning Tree intends, on an
ongoing basis, to seek ways to expand its international operations and expects
that revenues derived from international sources will continue to account for a
6
significant portion of its revenues. The Company's centrally-developed course
titles currently are translated into French, Swedish and Japanese and sold
through its operations in Great Britain, France, Canada, Sweden, Japan and Hong
Kong to customers in those and other countries. The Company intends to open
Education Centers in additional territories as justified by increases in local
demand. Inherent risks represented by the Company's international operations
include currency fluctuations, potential difficulties in translating course
subject matter into foreign languages, varying political and economic
conditions, unanticipated changes in regulation, trade barriers, staffing
problems and adverse tax consequences. There can be no assurance that such
factors will not have a material adverse effect on the Company in the future.
LEARNING TREE'S PRODUCTS
Learning Tree courses are designed to be highly interactive. Most of its
instructor-led, classroom courses involve "hands-on" training on networked
Pentium-based workstations, which allow participants to practice and better
assimilate the skills being taught. Participants spend a significant portion of
each course working on computer-based exercises and participating in group
workshops. Each participant typically receives extensive course materials that
facilitate learning and serve as a post-course reference. The Company's line of
multimedia CBT products are also designed to teach students through interaction,
and its multimedia CBT course titles incorporate interactive "learn-by-doing"
activities based on the Company's existing classroom courses.
Instructor-led Courses. Learning Tree strives to build job-related curricula
by developing a sequence of course titles that create a cohesive program which
imparts the skills and knowledge required to perform particular job functions.
Each job-related curriculum is comprised of course titles that proceed from
introductory to advanced, and cover the breadth and depth of skills and
knowledge required for a particular job. At September 30, 1997, Learning Tree's
multi-day course library included 139 proprietary course titles comprising over
3,200 hours of classroom instruction. This course library is recommended for
over 250 semester hours of undergraduate and graduate level college credit in
information systems by the American Council on Education (the "ACE"). In the
Company's experience, the final decision of each college or university to grant
or deny credit for the Company's courses as recommended by the ACE is made on a
case-by-case basis, taking into account a variety of factors such as the
academic standing of the student making the request, the requirements of the
particular degree program and limits on the number of credits that may be
obtained outside of the college or university. Subject to these rules generally
applicable to transfer credits, the Company believes that its course
participants have generally been granted credit upon application.
The following chart presents the Company's 139 proprietary multi-day course
titles as of September 30, 1997:
CURRICULUM COURSES
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Client/Server Introduction to Open Systems
Introduction to Client/Server Computing
Distributing Data in Client/Server Systems
Client/Server Application Development--Hands-On
Client/Server Systems: Analysis and Design
Managing and Supporting Client/Server Systems--Hands-On
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Intranet/Internet
Technologies Internet and System Security
Deploying Internet and Intranet Firewalls--Hands-On
Internet for Business Applications--Hands-On
Internet E-Mail with UNIX Sendmail--Hands-On
Developing a Web Site--Hands-On
Java Programming--Hands-On
Advanced Java Programming--Hands-On
Java for Multimedia Applications Development--Hands-On
VBScript--Hands-On
VRML--Hands-On
7
CURRICULUM COURSES
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Intranet/Internet
Technologies
(cont.) Developing an Intranet Site--Hands-On
Netscape Servers for Intranet/Internet Development--Hands-On
Visual J++--Hands-On
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Windows Windows Networking--Hands-On
Windows Configuration--Hands-On
Windows 95 Support and Networking--Hands-On
Windows NT Workstation and Server--Hands-On
Windows NT 4.0 Workstation and Server--Hands-On
Windows NT Optimization and Troubleshooting--Hands-On
Integrating Microsoft Office 97--Hands-On
TCP/IP Internetworking on Windows NT--Hands-On
Microsoft System Management Server--Hands-On
Microsoft Exchange--Hands-On
UNIX and Windows NT Integration--Hands-On
Netware to Windows NT Migration--Hands-On
Implementing Windows NT Security--Hands-On
Implementing Microsoft SNA Server 3--Hands-On
Microsoft Exchange 5 Server Administration--Hands-On
Microsoft Internet Information Server--Hands-On
Microsoft SQL Server Introduction--Hands-On
Microsoft SQL Server System Administration--Hands-On
Developing SQL Server Applications with Visual Basic 5--Hands-On
Optimizing SQL Server Database and Application Performance--Hands-On
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Local Area Networks Local Area Networks
PC Networking--Hands-On
LAN Troubleshooting--Hands-On
High-Performance Cabling Systems
High-Performance Ethernet--Hands-On
Fast LAN Technologies
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NetWare NetWare 4.x Administration--Hands-On
NetWare 4.x Advanced Administration--Hands-On
NetWare 4.x Installation & Configuration--Hands-On
NetWare 4.x Design and Implementation--Hands-On
NetWare 4.x Service and Support--Hands-On
Networking Technologies
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Wide Area Networks Introduction to Datacomm and Networks
Network Planning, Support and Management
Computer Network Architectures and Protocols
X.25--Hands-On
Wide Area Networks Troubleshooting--Hands-On
SNMP--Hands-On
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Internetworking Multivendor Networking
Internetworking: Bridges and Routers
Data Network Design and Optimization
Routers--Hands-On
Cisco Routers: A Comprehensive Introduction--Hands-On
Configuring Cisco Routers: Advanced Workshop--Hands-On
Migrating to IPv6--Hands-On
Introduction to TCP/IP--Hands-On
Internetworking with TCP/IP--Hands-On
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Operating Systems X Window System Programming--Hands-On
TCP/IP Programming--Hands-On
UNIX Programming--Hands-On
UNIX--Hands-On
UNIX Tools and Utilities--Hands-On
UNIX System and Network Security--Hands-On
UNIX Workstation Administration--Hands-On
UNIX Server Administration--Hands-On
KornShell Programming--Hands-On
OS/2 Warp--Hands-On
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Telecommunications Telecommunications and Wide Area Networking
ISDN for Data Communications--Hands-On
Introduction to ISDN
Implementing Computer Telephony Integration
Wireless Networks
High-Speed Wide Area Networks
Implementing Fiber-Optic Communications
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Database Systems Relational Databases
Sybase SQL Server--Hands-On
DB2 for Client/Server--Hands-On
8
CURRICULUM COURSES
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Database Systems (cont.) Building a Data Warehouse--Hands-On
Oracle7--Hands-On
Oracle7 for Database Administrators--Hands-On
Oracle7 for Application Developers--Hands-On
Tuning Oracle7 Applications--Hands-On
Complex SQL Queries--Hands-On
PowerBuilder 5 and Oracle 7--Hands-On
Oracle Developer/2000--Hands-On
Building Oracle WebServer Applications--Hands-On
Lotus Notes Application Development--Hands-On
Lotus Notes System Administration--Hands-On
Lotus Notes R4.5 A Comprehensive Introduction--Hands-On
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PC Support PC Configuration and Troubleshooting--Hands-On
Advanced PC Configuration--Hands-On
Macintosh Troubleshooting--Hands-On
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Graphical User Inter-
faces and Programming Windows Programming--Hands-On
Microsoft Exchange Applications Development--Hands-On
Visual C++--Hands-On
Introduction to Programming--Hands-On
Client/Server and System Programming for Windows--Hands-On
Advanced Windows Programming With MFC--Hands-On
Porting Applications from UNIX to Windows NT--Hands-On
Windows Open Services Architecture--Hands-On
Visual Basic--Hands-On
Microsoft Access--Hands-On
Microsoft Access Programming--Hands-On
Delphi Application Development--Hands-On
Integrating MS Office Applications--Hands-On
PowerBuilder--Hands-On
Perl Programming--Hands-On
Visual Basic 4 for Enterprise Applications--Hands-On
Visual FoxPro Applications Development--Hands-On
C Programming--Hands-On
C Advanced Programming--Hands-On
C++ Object-Oriented Programming--Hands-On
Advanced C++ Programming--Hands-On
C++ for Non-C Programmers--Hands-On
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Software Development
Methods Object-Oriented Analysis and Design
Introduction to Object Technology
Implementing the Year 2000 Conversion--Hands-On
Software Quality Assurance
Identifying User Requirements
Practical Software Testing Methods
Software Systems Analysis and Design
Software Project Planning and Management
Software Configuration Management
Systems Engineering
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IT Soft Skills Business Process Re-engineering
Effective Skills for Technical Managers
Effective Communication Skills for IT Professionals
Teambuilding Skills for IT Professionals
Project Management--Hands-On
Influence Skills
In addition to the foregoing course titles, the Company also modifies the
content of its courses for presentation at customer sites and, through its
Learning Solutions Division, develops custom course titles for its clients. All
of these courses typically are customized to cover particular topics and
applications requested by the customer. Learning Tree typically provides all of
the software, hardware and networking systems required for use in customer-site
courses.
The Company presents its classroom courses at Learning Tree Education Centers
in Boston, Los Angeles, New York, Washington D.C., Toronto, Ottawa, London,
Paris and Stockholm, as well as in rented hotel or conference centers in other
cities worldwide. The Company's Education Centers include 85 classrooms that
have been custom-designed to accommodate the technical demands of Learning
Tree's computer-based courses, including electronic projection of computer
screens, local area networks within the classroom and multimedia presentation
capability.
9
Multimedia CBT Courses. Learning Tree continues to expand its line of
multimedia CBT course titles based on the interactive content of its computer-
based classroom courses. The Company believes that the adaptation of its
classroom courses to the multimedia CBT format can be accelerated by the
incorporation of the proven hands-on exercises from its classroom courses, its
accumulated experience with course participants and by utilizing its large
instructor team as subject matter experts to support the process. The Company
designed its multimedia CBT courses to be interactive using a common interface
across all course titles. In addition, the Company structures its multimedia CBT
courses to complement its classroom-based offerings, thereby providing IT
professionals with the flexibility to learn and reinforce a given set of skills
and knowledge, from introductory to advanced levels, through a combination of
multimedia CBT and hands-on classroom-based training. The Company's multimedia
CBT courses are delivered to the workstation either by CD-ROM or over the
customer's local area network.
The Company has also developed LearnTrack, a CBT management software package
that provides training administrators with the capability to install and
distribute Learning Tree and third-party CBT courses, enroll participants in the
courses, monitor usage and print reports on course utilization, learner progress
and course completion.
As of September 30, 1997, the Company had released 72 CBT course titles. The
Company began the initial marketing of its multimedia CBT product line in
January 1996, and has expanded and intends to continue expanding these sales and
marketing activities commensurate with the growth of titles in its multimedia
CBT library. The actual number of titles which the Company will produce and
their delivery dates are subject to a number of factors such as the hiring and
training of additional staff, continued refinements in the development and
production process and the availability of subject matter experts who are also
responsible for developing and teaching the Company's instructor-led courses.
The following chart presents the Company's 72 multimedia CBT course titles as
of September 30, 1997:
CURRICULUM COURSES
- ---------- -------
Client/Server Client/Server Concepts and Architecture
Client/Server Connectivity and Implementation
Client/Server Analysis and Design
- --------------------------------------------------------------------------------
Intranet/Internet
Technologies Using the Internet and Intranets
Internet and System Security
Developing a Web Site
Configuring and Securing IIS Web Services
Introduction to Java Programming
Java Database Programming with JDBC
Introduction to Programming in Visual J++
- --------------------------------------------------------------------------------
Local Area Networks Local Area Networks
Introduction to PC Networking
LAN Troubleshooting
Improving LAN Performance
- --------------------------------------------------------------------------------
Wide Area Networks Introduction to Datacomm and Networks
Introduction to SNMP
- --------------------------------------------------------------------------------
Internetworking Introduction to Internetworking
Internetworking with Routers
Introduction to TCP/IP
Configuring TCP/IP Networks
- --------------------------------------------------------------------------------
Microsoft Windows and
Windows NT Introduction to Windows NT 4
Administering Windows NT 4
Windows NT 4 Server Management
Windows NT 4 Policies, Profiles and Registry
Introduction to TCP/IP on Windows NT 4
Introduction to Windows NT 4 Optimization
Installing and Using Windows 95
Networking with Windows 95
10
CURRICULUM COURSES
- ---------- -------
Microsoft Windows and
Windows NT (cont.) Systems Management Server
SQL Server 6.5 Using Transact-SQL
- --------------------------------------------------------------------------------
Graphical User Interfaces
and Programming Introduction to C++ for Non-C Programmers
C++ Classes and Inheritance
Windows Programming with Visual C++ and MFC
User Interfaces with Visual C++ and MFC
Visual C++ and MFC: Controls, Forms and ODBC
Introduction to Visual Basic 4
Visual Basic 4 Application Development
Introduction to Visual Basic 5
Visual Basic 5 Application Development
Microsoft Access Application Development
Access 7 Applications Using VBA
- --------------------------------------------------------------------------------
Software Development
Methods Introduction to Object-Oriented Analysis
Object-Oriented Design
- --------------------------------------------------------------------------------
Operating Systems UNIX Basic Concepts and Usage
UNIX Utilities and Shell Scripts
Introduction to UNIX Korn Shell
Introduction to UNIX Filters and Shell Programming
UNIX Server Administration: Network Services
- --------------------------------------------------------------------------------
Telecommunications ISDN for Data Networks
- --------------------------------------------------------------------------------
Database Systems Relational Databases: A Comprehensive Introduction
Oracle7 SQL
Building an Oracle7 Database
Oracle7 PL/SQL
Oracle7 Database Administration
Oracle7 Database Resources
Oracle7 Database Backup and Recovery
Oracle7 Database Tuning
Oracle7 Server Programming
Oracle7 Server Development Techniques
Oracle7 Application Tuning
Oracle7 Query Optimization
Advanced Queries for Oracle7
Developer/2000 Forms
Developer/2000 Advanced Forms
Developer/2000 Reports
Developer/2000 Graphics
Introduction to Oracle WebServer
Integrating Web Sites with Oracle Databases
Integrating Java with Oracle WebServer
- --------------------------------------------------------------------------------
PC Support PC Configuration and Troubleshooting
PC Diagnostics
Configuring PC Devices
DEVELOPMENT OF COURSES
Instructor-Led Courses. Learning Tree endeavors to identify and develop course
titles that satisfy a large market demand. Learning Tree seeks to accomplish
this by (i) building close working relationships with the development groups of
leading IT vendors in order to obtain information on upcoming products, (ii)
canvassing its expert instructors to identify general market trends and specific
topics within existing course titles that can be expanded to serve as new
courses, (iii) holding periodic discussions with its Training Advantage
customers to determine their upcoming project plans and training requirements,
and (iv) conducting market surveys of the Company's course participants.
Moreover, the members of executive management of the Company have strong IT
educational and professional backgrounds and stay closely involved with the
course selection and development process. See "Management--Executive Officers
and Directors."
Each Learning Tree course title is developed by a team comprised of a product
manager who manages the project and instructional design process, a product
marketing manager, and three subject matter experts who generally are selected
11
from the Learning Tree author and instructor team. Learning Tree endeavors to
select a group of experts from different countries and industries and with
complementary applications backgrounds. The Company believes that its use of a
team of experts provides multiple points of view concerning the application of
the subject technology, information on different uses of that technology
throughout the world and training that is relevant to course participants
working in diverse applications in a broad range of industries worldwide. The
result is a set of proprietary course materials and several hundred pages of
presentation graphics for each course. To ensure its courses meet the needs of
the market place and provide a high quality of instruction, the Company requests
that each course participant complete an evaluation of the course and the
instructor. Learning Tree course titles are updated regularly to incorporate new
technology and to improve their educational effectiveness. Learning Tree courses
currently are translated into French, Japanese and Swedish and are taught by
nationals in the local language in the Company's United States, Canadian, United
Kingdom, French, Swedish Japanese and Hong Kong subsidiaries.
The Company's development of new course titles, or enhancements to existing
course titles, must anticipate and keep pace with the introduction in the
marketplace of new hardware, software and networking technology. The need to
respond to technological changes may require the Company to make substantial,
unanticipated expenditures in order to develop new course titles and acquire
additional equipment in order to deliver such new course titles. There can be no
assurance that the Company will be able to respond successfully to technological
change. If, because of financial, technological or other constraints, the
Company could not adequately anticipate or respond to changes in computer
platforms, customer preferences and/or software technology, the Company's
business and results of operations would be materially adversely affected.
Multimedia CBT Courses. Learning Tree develops each multimedia CBT title using
its internal staff of project managers, instructional designers, programmers,
computer graphic artists, multimedia producers and testing personnel. The
Company develops its multimedia CBT courses based upon the proprietary content
of its hands-on, instructor-led courses and uses subject matter experts selected
from the Learning Tree instructor team as its CBT course authors. The Company
believes that this approach for developing its multimedia CBT courses can reduce
development time while enhancing the technical content, structure and
educational benefit of its CBT products.
LEARNING TREE INSTRUCTORS
The Company believes that its instructors are vital to its success. Learning
Tree instructors work either full-time for other companies or as independent
consultants in a variety of industries applying the IT skills and knowledge that
are the subjects of the courses they teach. On average, the Company's
instructors teach eight to nine Learning Tree courses each year as needed. At
September 30, 1997, the Company had 746 instructors.
The Company's future success will also depend on its ability to attract and
retain highly-skilled instructors. Each Learning Tree subsidiary has an
Instructor Resources Department that follows a formal process to recruit, train,
coach and manage its instructor team. The Company identifies new instructor
candidates primarily through referrals from its existing instructors. Instructor
candidates undergo a rigorous technical evaluation prior to participating in
Learning Tree's proprietary instructor training program. The Company believes
that its instructor force is relatively stable, and its recruitment and training
program focuses primarily on expanding the Company's instructor staff to meet
growing market demand. There can be no assurance that the Company will be
successful in these recruitment and training efforts.
12
CUSTOMERS
Learning Tree has developed a broad customer base focusing on Fortune 1000-
level companies and their international equivalents and government organizations
worldwide. In fiscal 1997, the Company trained over 101,000 multi-day course
participants who were employed by over 12,000 organizations. In fiscal 1997, the
Company derived approximately 55% of its revenues in the United States and 45%
of its revenues internationally.
The Company's customers generally operate in the computer, communications,
electronics, systems integration, finance, aerospace, military, manufacturing
and energy sectors, and a number of the customers are government organizations.
The Company had over 200 customers worldwide that purchased over $100,000 of
Learning Tree training in fiscal 1997. Generally, each customer purchased this
training throughout the year in individual purchase decisions ranging from
$2,000 to $20,000 rather than through a single contract. No customer accounted
for 10% or more of the Company's fiscal 1997 revenues.
MARKETING AND SALES
Direct Mail Marketing and Advertising. Learning Tree markets its courses
primarily through direct mail marketing to its proprietary mail list of over
1,200,000 individuals (including course participants, their immediate
supervisors, department managers, training managers and other people who have
inquired about the Company's courses) as well as to rented mailing lists of IT
professionals. The Company has leveraged its direct mail program by including
promotional materials for its multimedia CBT product line in its mailing package
which can be accomplished at a relatively low incremental cost. The Company also
advertises in industry trade magazines and periodicals.
The Company believes that it achieves economies of scale by producing its
marketing materials centrally. Its centralized marketing department develops the
Company's catalogs, brochures and advertisements using color desktop publishing
and electronic pre-press technology to create the files used to produce direct
full-color film for plate-making. This in-house capability enables the Company
to make quick improvements to its marketing materials in order to feature the
latest technological developments and address market opportunities in a timely
manner.
The Company has built a strong brand image through the frequent and prominent
use of its trademarks in its marketing materials and course materials. These
trademarks include the Learning Tree and professional certification logos, its
name, and its trademarks, including EDUCATION IS OUR BUSINESS(R), EDUCATION YOU
CAN TRUST(R), WE BRING EDUCATION TO LIFE(R), PRODUCTIVITY THROUGH EDUCATION(R),
Alumni Gold(TM), TRAINING YOU CAN TRUST(TM), learningtree.com(TM),
LearnTrack(TM), Training Passport(R), Training Advantage(R), 800-THE-TREE(R),
800-LRN-TREE(R) and 888-CBT-TREE(TM).
Internet Marketing. The Company maintains a web site for marketing its
products and services over the Internet.(http://www.learningtree.com)
Information contained in the Company's Web site shall not be deemed to be part
of this Annual Report on Form 10-K. The Company believes that the Internet will
become an increasingly significant marketing channel to prospective IT course
participants in the future.
Telemarketing Sales Force. At September 30, 1997, Learning Tree's
telemarketing sales force consisted of over 110 people who were responsible for
responding to phone, e-mail, Web site and facsimile orders and inquiries
received by the Company and pursuing sales opportunities. These telemarketers
sell both to individual prospective course participants and to line managers and
training directors in assigned accounts. The Company has developed a proprietary
automated system which is integrated with its customer and course operations
databases and provides its telemarketers with on-line information that
facilitates rapid response to inbound callers, provides targeted lists for
outbound calling, records the results of
13
calls and automates the sales follow-up process. The Company believes its
telemarketing sales force has been instrumental to the Company's success in
selling its multiple-enrollment Training Passport programs.
Field Sales Force. The Learning Tree field sales force, which consisted of
over 60 sales people at September 30, 1997, generates a significant portion of
the Company's revenues. The field sales force concentrates its attention on the
Company's larger customers to sell multiple course customer-site training
programs, Learning Solutions programs and to sign Training Advantage Agreements
covering all formats of Learning Tree training. The Company's Training Advantage
Agreements provide its nationwide and international customers with negotiated
pricing and special services.
The field sales force is assisted by the Company's Customer Support Group
which provides the administration and logistics support necessary to ensure the
successful presentation, at the customer's site, of Learning Tree's hands-on,
computer-based classroom courses. For large contracts requiring customization,
the customer support staff serve as team leaders to coordinate rapid and
effective cooperation between the instructor(s) which modify and teach the
courses, the internal development team who implements the changes, the Company's
technical support group which modifies the course hardware and software as
needed, and the logistics staff which assembles and ships course equipment and
materials for each course event.
Multiple Enrollment Programs. The Company markets its Training Passport
program to encourage course participants to enroll in multiple courses, and
thereby increase the average attendance in its Learning Tree-site courses.
Generally, the holder of a Learning Tree Training Passport may attend up to 8
courses (10 in the United Kingdom and France) during a 12-month period. The list
price for such Training Passports is approximately three times the list price
for an individual four-day course. During fiscal 1997, the Company expanded the
Training Passport program in its European subsidiaries by offering a 4 course
Passport which is priced at approximately twice the list price for an individual
four-day course.
The Company has also developed the Learning Tree Professional Certification
Programs for certifying IT professionals in 21 job functions in the areas of the
Company's focus. Professional certification is important to many participants in
Learning Tree courses as it provides documentation of their qualifications. Each
professional certification program requires completion of a series of five
Learning Tree courses and an examination associated with each course. Since this
program's inception in fiscal 1993, over 79,000 participants have completed one
or more certification examinations.
COMPETITION
The IT education and training market is highly fragmented, with low barriers
to entry and no single competitor accounting for a dominant market share. The
Company's competitors are primarily company internal training departments,
independent education and training companies, technology manufacturers, systems
integrators and others. Some of these competitors offer course titles and
programs similar to those of the Company at lower prices. In addition, some
competitors have greater financial and other resources than the Company.
Internal Training Departments. Internal IT training departments generally
provide companies with the most control over the method and content of training,
enabling them to tailor the training to their specific needs. However, the
Company believes that industry trends toward downsizing and outsourcing continue
to reduce the size of IT training departments and increase the percentage of IT
training delivered by external providers. Because internal trainers find it
increasingly difficult to keep pace with new technologies, lack the hands-on
experience needed to teach the latest technological developments and lack the
capacity to meet demand, organizations increasingly supplement their internal
training resources with externally supplied training in order to meet their
requirements.
14
Other Independent Education and Training Providers. The Company believes that
the majority of independent training providers are smaller organizations, which
often provide training as one of several services or product lines. Many are
"Authorized Training Centers" which present courses utilizing materials prepared
by computer hardware and software vendors such as Novell and Microsoft. The
Company differentiates itself from these providers based on its size; scope and
quality of its proprietary course offerings; worldwide delivery capability;
number, quality and experience of its instructors; and vendor independence.
Computer Hardware and Software Vendors. Many hardware and software vendors
supply training bundled in the prices of their product. In addition, their
knowledge of upcoming developments in their products is likely to be better than
that of other training providers. Learning Tree differentiates itself from
computer systems manufacturers and software vendors by maintaining a vendor-
independent posture and providing cross-platform training solutions.
CBT Providers. The market for IT education and training historically has
consisted primarily of instructor-led training. Multimedia and computer-based IT
training currently account for a small portion of the overall IT training
market, but according to IDC, CBT is growing at a faster rate than instructor-
led training. To capitalize on this opportunity, the Company introduced a line
of multimedia CBT products in fiscal 1996. During fiscal 1997, the Company was
continuing to develop and expand its multimedia CBT library and, as a result, a
substantial majority of the its revenue in fiscal 1997 was derived from its
instructor-led, hands-on training courses. Accordingly, the Company's future
success will depend upon, among other factors, the extent to which the market
continues to accept instructor-led training as a method of delivery for IT
training, the Company's ability to develop and market instructor-led courses
that compete effectively against CBT courses offered by others and the Company's
ability to develop its own curriculum of competitive multimedia CBT course
titles.
In the CBT market, many of the Company's current and potential competitors
have substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition in the CBT area than the Company.
In addition, the CBT area is characterized by significant price competition. As
a greater number of CBT providers enter the field, the Company anticipates that
it will face price pressure from competitors. The Company differentiates itself
from other CBT providers based on its field sales, telemarketing and direct mail
sales and marketing channels, its reputation for providing quality training, the
content of its multimedia CBT courses, the frequent feedback the Company
receives about its course content and teaching methods from its established
customer base and its ability to provide users with the flexibility to acquire a
given set of skills and knowledge through either multimedia CBT or classroom-
based training or an integrated combination of the two. However, there can be no
assurance that the Company's products will be more favorably viewed by the
marketplace than other interactive training software or that competitive
pressures will not require the Company to reduce its prices significantly.
INTELLECTUAL PROPERTY AND LICENSES
The Company regards its course development process and its course titles as
proprietary and relies primarily on a combination of statutory and common law
copyright, trademark and trade secret laws, customer licensing agreements,
employee and third-party nondisclosure agreements and other methods to protect
its proprietary rights. Notwithstanding the foregoing, a third party or parties
could copy or otherwise obtain and use the Company's course materials in an
unauthorized manner or use these materials to develop course titles which are
substantially similar to those of the Company. In addition, the Company operates
in countries that do not provide protection of proprietary rights to the same
extent as the United States. The Company's course materials generally do not
include any mechanisms to prohibit or prevent unauthorized use. If substantial
unauthorized
15
use of the Company's products were to occur, the Company's business and results
of operations could be materially adversely affected. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop similar course
titles or delivery methods. Additionally, there can be no assurance that third
parties will not claim that the Company's current or future courses infringe on
the proprietary rights of others. The Company expects that it will be
increasingly subject to such claims as the number of products and competitors
increases in the future. Any such claim could result in a material adverse
effect on the Company's business.
REGULATORY ENVIRONMENT
Many federal, state and international governmental authorities assert
authority to regulate providers of educational programs. Generally, the Company
is exempt from such regulation because the Company contracts with the employer
of the course participants and does not participate in any federal or state
student aid/loan programs. However, state laws and regulations affect the
Company's operations and may limit the ability of the Company to obtain
authorization to operate in certain states. If the Company were required to
comply with, or found to be in violation of, a state's current or future
licensing or regulatory requirements, it could be subject to civil or criminal
sanctions, including monetary penalties, and could be barred from providing
educational services in that state.
EMPLOYEES
As of September 30, 1997, the Company had a total of 645 full-time equivalent
employees, of whom 190 were employed outside the United States. The Company also
utilized the services of 746 instructors to teach its courses. The Company
considers its relations with its employees and its instructors to be good.
16
Item 2. PROPERTIES
As of September 30, 1997, all of Learning Tree's education center classroom
facilities were leased by the Company. The leases expire at various dates over
the next ten years. The Company owns a 38,500 square foot office facility which
is used to house the sales, administrative and operations groups of its U.S.
subsidiary. The Company's Swedish subsidiary has entered into a lease agreement
to replace its present education center facility with a new 22,600 square foot
facility. This new facility is expected to open in January 1998. The Company
intends to lease additional facilities for a number of its subsidiaries in the
foreseeable future. The Company has and expects to continue to supplement its
education center classroom facilities through the use of rented hotel and
conference facilities as needed.
The Company's headquarters is located at 6053 West Century Boulevard, Los
Angeles, California 90045. The table below sets forth certain information
regarding Learning Tree's facilities, comprised of classroom sites and offices
as of September 30, 1997:
LOCATION NO. OF AREA IN
(METROPOLITAN AREA) CLASSROOMS SQUARE FEET
- ----------------------------- ---------- -----------
Boston, MA.................... 2 5,555
Los Angeles, CA............... 3 45,687
New York, NY.................. 5 7,715
Washington, DC metropolitan
area (4 sites)............... 36 130,690
Miscellaneous other U.S....... N/A 2,000
Paris, France................. 13 36,814
London, England (2 sites)..... 13 31,902
Ottawa, Canada................ 4 13,895
Toronto, Canada............... 5 10,830
Stockholm, Sweden............. 4 9,462
Tokyo, Japan.................. N/A 646
Hong Kong..................... N/A 574
Item 3. LEGAL PROCEEDINGS
The Company is not involved in any pending or threatened legal proceedings
that the Company believes could reasonably be expected to have a material
adverse effect on the Company's financial condition or results of operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997, through the solicitation of proxies or otherwise.
17
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock began trading publicly on the Nasdaq National
Market under the symbol LTRE effective December 6, 1995. The following table
sets forth, for the periods indicated, the range of high and low sales prices
for the Common Stock on the Nasdaq National Market since December 6, 1995:
HIGH LOW
---- ---
Fiscal 1996
First Quarter (from December 6, 1995)..................... $11 1/2 $ 9 5/32
Second Quarter............................................ 13 1/2 8 27/32
Third Quarter............................................. 21 3/32 13 11/32
Fourth Quarter............................................ 24 27/32 13 11/32
Fiscal 1997
First Quarter............................................. 32 24
Second Quarter............................................ 40 3/4 23 1/4
Third Quarter............................................. 45 1/4 27 1/2
Fourth Quarter............................................ 48 3/8 24 1/2
As of December 16, 1997 there were approximately 900 holders of record of the
Common Stock.
VOLATILITY OF STOCK PRICE
The Company's initial public offering was completed in December 1995 and a
secondary public offering was completed in September 1996. There can be no
assurance that a viable public market for the Common Stock will be sustained.
The market price of the Common Stock has fluctuated significantly since the
initial public offering. The Company believes that factors such as announcements
of developments related to the Company's business, announcements of new products
or enhancements by the Company or its competitors, sales of the Common Stock
into the public market, developments in the Company's relationships with its
customers, shortfalls or changes in revenues, gross margins, earnings or losses
or other financial results which differ from public market analysts'
expectations, fluctuations in results of operations and general conditions in
the Company's market or the markets served by the Company's customers or the
economy could cause the price of the Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general, and the
market for shares of technology-related stocks in particular, have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. There can be no assurance that the market
price of the Common Stock will not continue to experience significant
fluctuations in the future, including fluctuations that are unrelated to the
Company's performance.
DIVIDENDS
In December 1996, the Company declared a stock split which was effected in the
form of a 50% stock dividend to all holders of its Common Stock. To date, the
Company has not paid any cash dividends on its Common Stock and the Company
anticipates that it will not pay cash dividends on the Common Stock for the
foreseeable future and that it will retain any earnings for use in the operation
of its business. The declaration and payment of dividends by the Company are
subject to the discretion of its Board of Directors and to compliance with
applicable laws. Any determination as to the payment of dividends in the future
will depend upon, among other things, general business conditions, the effect of
such payment on the Company's financial condition and other factors the
Company's Board of Directors may in the future consider to be relevant.
18
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company is qualified
by reference to and should be read in conjunction with the consolidated
financial statements and notes thereto and other financial data included
elsewhere in this Annual Report on Form 10-K. The statement of operations data
set forth below for each of the three years in the period ended September 30,
1997 and the balance sheet data as of September 30, 1996 and 1997, are derived
from the Company's consolidated financial statements for those years which have
been audited by Arthur Andersen LLP, independent public accountants, whose
report thereon is included elsewhere herein. The statement of operations data
for each of the two years in the period ended September 30, 1994 and the balance
sheet data at September 30, 1993, 1994 and 1995 are derived from audited
financial statements of the Company not included herein. These historical
results are not necessarily indicative of the results to be expected in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues.................................... $49,329 $58,466 $78,818 $103,575 $164,483
Cost of revenues............................ 19,754 23,665 30,731 40,879 70,439
------- ------- ------- -------- --------
Gross profit............................. 29,575 34,801 48,087 62,696 94,044
------- ------- ------- -------- --------
Operating expenses:
Course development......................... 3,387 3,978 4,954 6,248 11,048
Sales and marketing........................ 17,923 21,243 22,883 31,245 51,284
General and administrative................. 9,625 9,945 12,176 12,850 19,228
------- ------- ------- -------- --------
Total operating expenses................. 30,935 35,166 40,013 50,343 81,560
------- ------- ------- -------- --------
Income (loss) from operations............... (1,360) (365) 8,074 12,353 12,484
Other income (expense), net................. 406 12 272 1,798 3,066
------- ------- ------- -------- --------
Income (loss) before provision
(credit) for income taxes.................. (954) (353) 8,346 14,151 15,550
Provision (credit) for income taxes......... (77) 90 1,866 4,033 5,058
------- ------- ------- -------- --------
Net income (loss)........................... $ (877) $ (443) $ 6,480 $ 10,118 $ 10,492
======= ======= ======= ======== ========
Net income (loss) per common share
and common equivalent share................ $ (0.05) $ (0.03) $ 0.38 $ 0.49 $ 0.47
======= ======= ======= ======== ========
Weighted average number of common
and common equivalent shares
outstanding................................ 17,217 17,268 17,046 20,609 22,099
======= ======= ======= ======== ========
AT SEPTEMBER 30,
---------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 1,770 $ 2,774 $10,029 $ 24,541 $ 32,441
Total current assets........................ 9,210 10,772 21,336 77,610 86,146
Total assets................................ 14,135 16,306 28,427 91,529 122,351
Total current liabilities................... 12,871 16,425 22,843 34,247 55,033
Long-term debt and capital leases,
net of current portion..................... 714 446 272 134 --
Total stockholders' equity (deficit)........ (2,171) (3,054) 3,305 55,506 65,895
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below, elsewhere herein and in the caption "Risk Factors" in the
Company's Registration Statement on Form S-1 filed on September 20, 1996.
OVERVIEW
Learning Tree International, Inc. (the "Company"), is a leading worldwide
provider of education and training for information technology ("IT")
professionals in business and government organizations. The Company's customers
are the companies and government agencies which pay for their employees to
attend the Company's course events. The Company develops, markets and delivers a
broad, proprietary library of instructor-led course titles which are focused on
client/server systems, intranet/Internet technologies, computer networks,
operating systems, databases, programming languages, graphical user interfaces,
object-oriented technology and IT management. The Company also tests and
certifies IT professionals in 21 IT job functions. The Company's courses are
recommended for college credit by the American Council on Education.
During 1997, the Company expanded the breadth of its instructor-led training
activities through the introduction of its Learning Solutions Division. The new
Learning Solutions Division provides custom developed training programs for
larger clients who need to train large numbers of their IT professionals and
end-users. The initial focus of this new division is on training that supports
the roll-out and use of new organization-wide information systems, tools and
applications. In 1997, the Company also introduced a program of "Power
Seminars," which were multi-day conferences comprised of a number of 1-day,
multimedia lecture-style seminars in key information technologies. In November
1997, the Company announced that it was no longer going to offer its Power
Seminars.
In addition to its instructor-led courses, the Company is continuing to expand
its line of interactive computer-based training courses incorporating audio and
graphical elements ("CBT") that are designed for both stand-alone CD-ROM and
network-based delivery.
The Company has historically focused on instructor-led IT training in multi-
vendor, multi-platform computer systems ("open systems") emphasizing computer
technologies such as internetworking, operating systems and advanced programming
languages. Until the early 1990's, these technologies were used almost
exclusively by IT professionals involved in research, development and
engineering. Beginning in the early 1990's and accelerating through the present,
management information systems ("MIS") departments began shifting from legacy
mainframe systems to new client/server technologies, thus expanding the market
for training of MIS personnel in areas covered by the Company's courses. These
technologies have contributed significantly to the increased use of computer
systems by businesses and government organizations.
Beginning in fiscal 1993, in order to increase its market share, the Company
introduced a new marketing initiative by creating multiple enrollment programs,
such as its Training Passport, College Credit and Professional Certification
Programs, which give participants an incentive to enroll in a series of Learning
Tree course events. See "Business--Marketing and Sales." Additionally at that
time and continuing through the present, the Company has increased both its
sales and marketing expenditures and its course development expenditures.
Through its increased investment in course development, the Company has expanded
its curriculum of course titles in client/server technology, networks and
databases covering additional topics relevant to the training market for MIS
professionals.
20
In management's view, these new course titles provided an expanded role for the
Company in the IT training market by attracting MIS participants both to its new
and existing course titles.
The Company's revenues grew to record levels in fiscal 1997, increasing by 59%
over fiscal 1996. In response to the growth in course participants, the Company
has and plans to continue its accelerated rate of development of new course
titles, has expanded its future direct mailing plans to capture additional
market share and has taken steps to expand the number of classrooms in its
education centers. However, there can be no assurance that the Company will be
able to achieve an increase in market share after making such expenditures or
will maintain its growth in revenues, profitability or market share in the
future. The Company's revenues and profitability are subject to general economic
conditions and a significant portion of the Company's revenues are derived from
Fortune 1000-level companies and their international equivalents. Such companies
have historically adjusted their expenditures for external IT training during
economic downturns. Should the economy weaken in any future period, these
companies may not increase or may reduce their expenditures on external IT
training, which would have an adverse impact on the Company.
The Company's instructor-led course events are taught in classrooms and
include extensive, hands-on exercises under the guidance of expert instructors.
The Company has structured its business so that the majority of its instructor-
led course costs depend upon the number of course events it conducts. The
Company schedules its multi-day course events throughout the year as appropriate
to meet demand. Since the Company's instructors typically work full-time in the
IT industry and teach an average of eight to nine Learning Tree course events
each year, as needed, the Company's instructor-related costs are largely
variable. In addition, although the expenses associated with its own Education
Centers are fixed, the Company can impact its overall facility expenses by
varying its use of rented hotel and conference facilities. Because the cost for
each course event does not increase significantly as additional participants are
included, the Company utilizes a variety of techniques to maximize the number of
participants per course event, up to limits designed to preserve the quality of
each course event. These techniques include adding additional events for a
popular course title, combining two or more undersubscribed events into one
course event and adding an assistant instructor to increase the maximum number
of students that can be effectively taught in a course event. The extent to
which these techniques are used is subject to a number of factors within a
particular market segment.
BACKLOG
At September 30, 1997, the Company had a backlog of orders for courses in the
amount of $30.0 million, which represented a 28% increase over the backlog of
$23.5 million at September 30, 1996. Only a portion of the Company's backlog is
funded. There can be no assurance that the growth in the backlog experienced in
fiscal 1997 over fiscal 1996 will continue or that orders comprising the backlog
will be realized as revenue.
21
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's consolidated statements of operations as a percentage of revenues:
YEAR ENDED
SEPTEMBER 30,
--------------------
1995 1996 1997
---- ---- ----
Revenues........................... 100% 100% 100%
Cost of revenues................... 39 39 43
--- --- ---
Gross profit..................... 61 61 57
Operating expenses:
Course development............... 6 6 7
Sales and marketing.............. 29 30 31
General and administrative....... 16 13 12
--- --- ---
Total operating expenses...... 51 49 50
--- --- ---
Income from operations............. 10 12 7
Other income (expense), net........ 0 2 2
--- --- ---
Income before provision for
income taxes...................... 10 14 9
Provision for income taxes......... 2 4 3
--- --- ---
Net income......................... 8% 10% 6%
=== === ===
FISCAL 1997 COMPARED WITH FISCAL 1996
For the fiscal year ended September 30, 1997, revenues increased by $60.9
million or 59% to $164.5 million from $103.6 million for the fiscal year ended
September 30, 1996. The growth of revenues is due, in part, to an increase in
the number of multi-day course participants to 101,141 compared to 71,792 in the
corresponding prior year. The additional course participants are primarily
attributable to increased sales and marketing activities and an increase in the
number of multi-day course titles. The number of multi-day course titles
increased to 139 as of September 30, 1997, compared to 110 a year earlier.
Revenues for fiscal 1997 also reflect a 4% increase in average revenue per
multi-day course participant. The increase in the average revenues per course
participant is attributable to an increase in the average course duration and
increases in prices. The increase in revenues also reflects increased revenues
from the multimedia CBT product line as well as revenues from the Company's new
Learning Solutions Division and, to a lesser extent, from its Power Seminars. A
significant portion of the Company's revenues are denominated in foreign
currencies which have been translated into dollars based upon the exchange rates
prevailing when the revenues were earned. Exchange rate changes during the year
reduced revenues by approximately $375,000 in fiscal 1997 compared to the
exchange rates prevailing during fiscal 1996.
The Company's cost of revenues primarily includes the costs associated with
the course instructor, course materials and equipment, freight, classroom
facilities and refreshments. For the fiscal year ended September 30, 1997, the
cost of revenues increased $29.5 million or 72% to $70.4 million from $40.9
million for the previous fiscal year. The increase in the cost of revenues is
primarily the result of the increased number of course events as well as costs
associated with the increased sales in the multimedia CBT product line, the
costs of delivering Learning Solutions courses and Power Seminars. The number of
multi-day course events increased 39% in fiscal 1997 to 6,278 from 4,512 course
events in fiscal 1996. Costs per multi-day course event increased by
approximately 11% in fiscal 1997 compared to fiscal 1996. The change in the
average cost per course event primarily reflects a 4% increase in the average
course duration, the higher costs
22
of conducting more course events at sites other than education centers due to
education center capacity constraints and the cost of training new instructors.
To accommodate the growth in course enrollments, the Company added additional
education center facilities during fiscal 1997 and is seeking additional
education center facilities in certain locations.
The cost of revenues increased to 43 percent of revenues in fiscal 1997
compared to 39 percent in fiscal 1996, largely because of lower gross margins in
the Power Seminars and Learning Solutions product lines compared with the
Company's traditional multi-day instructor-led courses and multimedia CBT
courses, and also because of the increased cost per multi-day instructor-led
course event as described above.
Course development expense includes the costs of developing new course titles
and updating the Company's existing course library. The principal costs are for
internal product development staff and independent consultants who serve as
subject matter experts. For the fiscal year ended September 30, 1997, course
development expenses increased by $4.8 million or 77% to $11.0 million from $6.2
million for fiscal 1996. This increase reflects the costs associated with the
Company's strategy of rapidly expanding its multimedia CBT and multi-day
instructor-led course libraries to meet its customers' growing technology
training needs, updating and maintaining the growing course title libraries, and
developing courses for Learning Solutions and Power Seminars.
The number of multi-day course titles increased to 139 as of September 30,
1997, compared to 110 a year earlier. The number of multimedia CBT course titles
increased to 72 as of September 30, 1997 compared to 12 a year ago. The Company
plans to continue its strategy of rapidly growing both its instructor-led course
library and its multimedia CBT library, including additional titles in the areas
of intranet/Internet technologies, computer networking, Java, Windows NT,
programming languages and databases. As a result, the amount of course
development expenses are expected to continue to increase in fiscal 1998. The
actual number of instructor-led and multimedia CBT course titles which the
Company will produce and their delivery dates are subject to a number of factors
such as the hiring and training of additional staff, continued refinements in
the CBT development and production process and the availability of subject
matter experts who are also responsible for teaching the Company's instructor-
led courses.
Sales and marketing expense consists of salaries, commissions and travel-
related costs for sales and marketing personnel, the costs of designing,
producing and distributing direct mail marketing and media advertisements, and
the costs of information systems to support these activities. Sales and
marketing expenses increased $20.1 million or 64% to $51.3 million in fiscal
1997 from $31.2 million in fiscal 1996. The increase in sales and marketing
expenses is due to an increase in direct mail marketing to a broader range of
potential multi-day instructor-led customers and to potential Power Seminar
customers, increased telemarketing to support the multi-day instructor-led
courses and Power Seminars and increased field sales staff for multi-day
instructor-led courses and multimedia CBT. Sales and marketing expenses for
fiscal 1997 increased as a percentage of revenues to 31% compared to 30% in
fiscal 1996.
In fiscal 1997, general and administrative expenses increased $6.3 million or
50% to $19.2 million from $12.9 million for fiscal 1996. The increase in general
and administrative expenses reflects increases in information systems and other
administrative staff and facilities which were necessary to support the growth
in revenues. As a percentage of revenue, general and administrative expenses
declined to 12% from 13% in the prior year.
Other income (expense) is primarily comprised of interest income, interest
expense and foreign currency gains and losses. For fiscal 1997, other income
increased $1.3 million to $3.1 million from $1.8 million for fiscal 1996. This
increase was primarily attributable to additional interest income arising from
23
higher average cash balances during the year. In fiscal 1997, the Company
recorded foreign exchange losses of $9,000 compared to $186,000 of foreign
exchange losses in fiscal 1996. These transaction gains and losses arose from
receivables and payables denominated in currencies other than the functional
currencies of the Company's foreign subsidiaries.
Although the Company's consolidated financial statements are stated in U.S.
dollars, several of the Company's subsidiaries have functional currencies other
than the U.S. dollar. Gains and losses arising from the translation of the
balance sheets of the Company's subsidiaries from the functional currencies to
U.S. dollars are reported as an adjustment to stockholders' equity. However,
fluctuations in exchange rates may have an effect on the Company's results of
operations, particularly its revenues and operating income, when translating the
income statements to dollars. The impact of future exchange rates on the
Company's results of operations cannot be accurately predicted. To date, the
Company has not sought to hedge the risks associated with fluctuations in
exchange rates and therefore continues to be subject to such risks. In the
future, the Company may undertake such transactions. 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.
For fiscal 1997, the provision for income taxes increased by $1.1 million to
$5.1 million from $4.0 million for fiscal 1996. This increase, in part, reflects
an increase in income before taxes in fiscal 1997 compared to fiscal 1996. In
addition, in fiscal 1996, certain of the Company's subsidiaries utilized tax
loss carryforwards to offset a portion of their taxable income for the year
whereas there were no loss carryforwards available in fiscal 1997. Learning Tree
International, Inc. operates as a holding company with operating subsidiaries in
several countries, and each subsidiary is taxed based on the laws of the
jurisdiction in which it operates. Since taxes are incurred at the subsidiary
level, and one subsidiary's tax losses cannot offset the taxable income of
subsidiaries in other tax jurisdictions, the Company's consolidated effective
tax rate may vary. Accordingly, the Company's consolidated effective tax rate
may increase in the future. See Note 3 of the Notes to Consolidated Financial
Statements.
The increase in revenues in fiscal 1997 compared to fiscal 1996 were greatest
in the Company's largest geographic segments, the United States and Europe. All
of the Company's geographic segments were profitable in fiscal 1997. The
European segment recording operating income of $10.8 million in fiscal 1997
compared to operating income of $7.6 million in fiscal 1996 as a result of
revenue increases primarily in the United Kingdom and Sweden. The operating
income of the United States segment, which includes the results of the Corporate
headquarters, declined by $3.2 million to a break-even level. This reflects
losses incurred in the Company's Power Seminars activity as well as increased
Corporate costs. See Note 9 of Notes to Consolidated Financial Statements.
In 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share,"
SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." The Company does not
believe that these pronouncements will have a material effect on its reported
financial position or results of operations, and, as permitted by the FASB, will
adopt these new standards in future years.
FISCAL 1996 COMPARED WITH FISCAL 1995
For the fiscal year ended September 30, 1996, revenues increased by $24.8
million or 31% to $103.6 million from $78.8 million for the fiscal year ended
September 30, 1995. The growth of revenues is due, in part, to an increase in
the number of course participants to 71,792 compared to 60,461 in the
corresponding prior year. The additional course participants are primarily
attributable to
24
increased direct mail marketing and an increase in the number of course titles
to 110 as of September 30, 1996, compared to 87 a year earlier. In addition, the
growth in the number of course participants is attributable to the expansion of
the number of Learning Tree-site course events which the Company held at sites
other than its education centers in order to broaden its customer base. Revenues
for fiscal 1996 also reflect higher average revenues per course participant. The
increase in the average revenues per course participant is attributable to the
increase in the proportion of higher-paying single course event participants
over those attending under the discounted Passport Program, increased revenue
per Passport attendee and increased prices for customer-site course events. A
significant portion of the Company's revenues are denominated in foreign
currencies which have been translated into dollars based upon the exchange rates
prevailing when the revenues were earned. Exchange rate changes during the year
reduced revenues by approximately $455,000 in fiscal 1996 compared to what they
would have been if they were translated at the exchange rates prevailing during
fiscal 1995.
For the fiscal year ended September 30, 1996, the cost of revenues increased
$10.2 million or 33% to $40.9 million from $30.7 million for the previous fiscal
year. The increase in the cost of revenues is primarily the result of an
increased number of course events. The number of course events increased 22% in
fiscal 1996 to 4,512 from 3,688 course events in fiscal 1995. Costs per course
event increased by approximately 7% in fiscal 1996 compared to fiscal 1995. The
change in the average cost per course event primarily reflects an increase in
the number of Learning Tree-site courses compared to those held at customer
sites, the higher costs of conducting more course events at sites other than
education centers due to education center capacity constraints and an increase
in the number of courses held in cities where the Company had not established an
education center.
For the fiscal year ended September 30, 1996, course development expenses
increased by $1.2 million or 26% to $6.2 million from $5.0 million for fiscal
1995. This increase reflected the costs associated with the Company's strategy
of expanding its course library to meet its customers' growing technology
training needs, updating and maintaining a growing course title library and
developing a multimedia CBT product line.
In fiscal 1996, the Company introduced its first multimedia CBT course titles.
To obtain greater control over the multimedia CBT development process, course
quality and costs of development, the Company expanded its in-house multimedia
CBT development team and discontinued the use of outside CBT course developers.
As of September 30, 1996, the Company had released 12 CBT course titles and had
an additional 16 titles under development. The Company began the initial
marketing of its multimedia CBT product line in January 1996.
Sales and marketing expenses increased $8.4 million or 37% to $31.2 million in
fiscal 1996 from $22.9 million in fiscal 1995. The increase in sales and
marketing expenses was due to an increase in telemarketing and field sales staff
and direct mail marketing intended to reach a broader range of potential
customers, to expand business with current customers, to expand the Company's
presence in certain U.S. cities and to communicate the availability of new
course titles. Accordingly, sales and marketing expenses for fiscal 1996
increased as a percentage of revenues to 30% compared to 29% in fiscal 1995.
In fiscal 1996, general and administrative expenses increased $674,000 or 6%
to $12.9 million from $12.2 million for fiscal 1995. As a percentage of revenue,
general and administrative expenses declined to 13% from 16% in the prior year
as a result of increased leveraging of the Company's infrastructure to support a
higher sales volume.
For fiscal 1996, other income increased $1.5 million to $1.8 million from
$272,000 for fiscal 1995. This increase was primarily attributable to additional
interest income arising from higher cash balances which were generated by
25
operations and from the proceeds of the Company's initial and secondary public
stock offerings. The increase in interest income was partially offset by foreign
exchange losses of $186,000 in fiscal 1996, compared to foreign exchange gains
of $30,000 in fiscal 1995.
For fiscal 1996, the provision for income taxes increased by $2.2 million to
$4.0 million from $1.9 million for fiscal 1995. This increase reflects an
increase in income before taxes as well as the effect of utilizing tax loss
carryforwards. In fiscal 1996, certain of the Company's subsidiaries utilized
the last of their tax loss carryforwards to offset a portion of their taxable
income for the year whereas they were able to offset a greater portion of their
taxable income in 1995.
The Company's revenues in fiscal 1996 increased in each geographical segment
compared to fiscal 1995. The increases were greatest in the Company's largest
geographic segments, the United States and Europe. All of the Company's
geographic segments were profitable in fiscal 1996. The European segment
recorded operating income of $7.6 million in fiscal 1996 compared to operating
income of $4.1 million in fiscal 1995 as a result of revenue increases primarily
in the United Kingdom and Sweden. In fiscal 1996, the U.S. and Corporate segment
recorded operating income of $3.2 million compared to $3.4 million in fiscal
1995 as a result of increased Corporate costs. See Note 9 of Notes to
Consolidated Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly financial data for each of
the eight consecutive fiscal quarters ended September 30, 1997, including such
data expressed as a percentage of the Company's revenues. The Company believes
that this information includes all adjustments (which consisted solely of normal
recurring adjustments) necessary for a fair presentation of such quarterly
information when read in conjunction with the consolidated financial statements
included elsewhere herein. The operating results for any quarter are not
necessarily indicative of the results for any future period.
26
THREE MONTHS ENDED
------------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
Revenues..................... $23,178 $22,712 $27,714 $29,971 $36,010 $35,759 $43,881 $48,833
Cost of revenues............. 9,232 8,969 10,297 12,381 14,342 15,448 18,468 22,181
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 13,946 13,743 17,417 17,590 21,668 20,311 25,413 26,652
Operating expenses
Course development.......... 1,242 1,432 1,746 1,828 2,382 2,372 3,254 3,040
Sales and marketing......... 6,208 7,936 7,659 9,442 9,891 11,409 13,203 16,781
General and
administrative............. 3,343 2,810 3,306 3,391 3,749 4,151 5,268 6,060
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses................... 10,793 12,178 12,711 14,661 16,022 17,932 21,725 25,881
------- ------- ------- ------- ------- ------- ------- -------
Income from operations....... 3,153 1,565 4,706 2,929 5,646 2,379 3,688 771
Other income (expense)....... 157 470 541 630 587 810 913 756
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes............ 3,310 2,035 5,247 3,559 6,233 3,189 4,601 1,527
Provision for income
taxes....................... 943 634 1,547 909 2,119 1,085 1,564 290
------- ------- ------- ------- ------- ------- ------- -------
Net income................... $ 2,367 $ 1,401 $ 3,700 $ 2,650 $ 4,114 $ 2,104 $ 3,037 $ 1,237
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF
REVENUES:
Revenues..................... 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues............. 40 40 37 41 40 43 42 45
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................ 60 60 63 59 60 57 58 55
Operating Expenses
Course development.......... 5 6 6 6 7 7 7 6
Sales and marketing......... 27 35 28 32 27 32 30 35
General and
administrative............. 14 12 12 11 10 11 12 12
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses................... 46 53 46 49 44 50 49 53
------- ------- ------- ------- ------- ------- ------- -------
Income from operations....... 14 7 17 10 16 7 9 2
Other income (expense)....... 0 2 2 2 1 2 2 1
------- ------- ------- ------- ------- ------- ------- -------
Income before provision
for income taxes............ 14 9 19 12 17 9 11 3
Provision for income
taxes....................... 4 3 6 3 6 3 4 1
------- ------- ------- ------- ------- ------- ------- -------
Net income................... 10% 6% 13% 9% 11% 6% 7% 2%
======= ======= ======= ======= ======= ======= ======= =======
The Company has in the past experienced fluctuations in its quarterly
operating results and expects such fluctuations to continue in the future. The
Company's course development and sales and marketing expenses are incurred based
on its expectations regarding future market conditions and there can be no
assurance that the attendant revenues will occur. Specifically, the Company
intends to increase the amount of its expenditures for course development and
sales and marketing in the future. The Company may be unable to adjust its
expenditures in a timely manner to compensate for any unexpected revenue
shortfall. Any significant revenue shortfall would therefore have a material
adverse effect on the Company's results of operations. In addition, the
Company's operating results may fluctuate based on other factors including: the
frequency and availability of course events; the number of weeks in a quarter
during which courses can be conducted; the frequency, size of and response to
the Company's direct mail marketing campaigns; the timing of the introduction of
new course titles and alternate delivery methods; the mix between customer-site
course events and Learning Tree-site course events; competitive forces within
the current and anticipated future markets served by the Company; the spending
patterns of its customers; currency fluctuations; inclement weather; and general
economic conditions. Fluctuations in quarter-to-quarter
27
results may also occur depending on differences in the timing of, and the time
period between, the Company's expenditures on the development and marketing of
its courses and the receipt of revenues.
The Company's revenues and income have also varied significantly from quarter
to quarter due to seasonal factors. The Company generally has greater revenue
and operating income in the second half of its fiscal year (April through
September) than in the first half of its fiscal year. This seasonality is due in
part to seasonal spending patterns of the Company's customers, and in part to
quarterly differences in the frequency and size of the Company's direct mail
marketing campaigns, as well as weather, holiday and vacation patterns. There
can be no assurance that these seasonal effects will remain the same in the
future.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased to $32.4 million at September 30, 1997
from $24.5 million at September 30, 1996. In addition, the Company had $24.3
million of short-term interest-bearing investments at September 30, 1997
compared to $37.0 million at September 30, 1996. The change in the combined
total of cash, cash equivalents and short-term interest-bearing investments in
fiscal 1997 primarily reflects the cash provided by operations and cash used for
additions to equipment, property and leasehold improvements.
For fiscal 1997, cash provided by operations was approximately $23.9 million
compared to $20.2 million during fiscal 1996. The increase in cash provided by
operations reflects the increase in profitability and increases in deferred
revenues arising from prepaid multi-enrollment programs. At September 30, 1997,
the Company had working capital of $31.1 million.
During fiscal 1997, the Company invested $22.2 million in equipment, property
and leasehold improvements compared to $9.2 million in fiscal 1996. This
increase is primarily related to additional course equipment to support the
growth in the number of course events and to upgrade course equipment
capabilities, the build-out of new education center and office facilities and
the purchase of office computer equipment. Although the Company expects to
continue to invest in additional equipment and facilities in fiscal 1998, as of
September 30, 1997, the Company had no material future purchase obligations,
capital commitments or debt. Accordingly, management believes that its cash,
cash equivalents and short-term interest-bearing investments together with the
cash provided by operations will be sufficient to meet the Company's cash
requirements at least until the end of fiscal 1998.
It is contemplated that part of the Company's cash, cash equivalents and
short-term interest-bearing investments may be used for acquisitions. While the
Company has no current agreements in place or negotiations underway with respect
to any acquisition, the Company plans to regularly evaluate acquisition
opportunities that fit within its business plan. Acquisitions involve numerous
risks, including potential difficulties in the assimilation of acquired
operations, diversion of management's attention away from normal operating
activities, negative financial impacts based on the amortization of acquired
intangible assets, the dilutive effects of the issuance of Common Stock in
connection with an acquisition, and potential loss of key employees of the
acquired operation. The Company has had no experience in executing and
implementing acquisitions and no assurance can be given as to the success of the
Company in executing and implementing acquisitions in the future.
The Company has not paid any cash dividends since its inception and does not
anticipate paying cash dividends in the foreseeable future.
28
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Public Accountants.................................. 30
Consolidated Balance Sheets at September 30, 1996 and 1997................ 31
Consolidated Statements of Operations for the fiscal years ended
September 30, 1995, 1996 and 1997....................................... 32
Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended September 30, 1995, 1996 and 1997.................... 33
Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 1995, 1996 and 1997....................................... 34
Notes to Consolidated Financial Statements................................ 35
29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Learning Tree International, Inc.:
We have audited the accompanying consolidated balance sheets of Learning
Tree International, Inc. (a Delaware corporation) and subsidiaries as of
September 30, 1996 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Learning
Tree International, Inc. and subsidiaries as of September 30, 1996 and 1997, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended September 30, 1997, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
November 20, 1997
30
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
--------------------------
1996 1997
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 24,541,000 $ 32,441,000
Short-term interest-bearing investments........... 37,000,000 24,330,000
Trade accounts receivable, less allowances of
$254,000 and $312,000, respectively.............. 12,652,000 23,201,000
Prepaid marketing expenses........................ 1,084,000 1,356,000
Prepaid expenses and other........................ 2,333,000 4,818,000
------------ ------------
Total current assets........................... 77,610,000 86,146,000
------------ ------------
Equipment, property and leasehold improvements:
Education and office equipment.................... 18,721,000 33,299,000
Transportation equipment.......................... 65,000 110,000
Property and leasehold improvements............... 4,287,000 9,858,000
------------ ------------
23,073,000 43,267,000
Less: accumulated depreciation and amortization... (11,427,000) (15,838,000)
------------ ------------
11,646,000 27,429,000
Deferred income taxes............................... 279,000 710,000
Other assets........................................ 1,994,000 8,066,000
------------ ------------
Total assets................................... $ 91,529,000 $122,351,000
============ ============
LIABILITIES
Current liabilities:
Current portion of debt and capital leases........ $ 125,000 $ 19,000
Trade accounts payable............................ 10,599,000 17,993,000
Deferred revenue.................................. 15,611,000 27,531,000
Accrued payroll, benefits and related taxes....... 2,149,000 3,250,000
Other accrued liabilities......................... 3,563,000 2,514,000
Income taxes payable.............................. 2,200,000 3,726,000
------------ ------------
Total current liabilities...................... 34,247,000 55,033,000
Long-term debt and capital leases, net of current
portion............................................ 134,000 --
Deferred facilities rent............................ 1,642,000 1,423,000
------------ ------------
Total liabilities.............................. 36,023,000 56,456,000
------------