LAUREATE EDUCATION, INC. - Quarter Report: 2005 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

ý        Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the quarter ended September 30, 2005 or

 

o        Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from                    to                   .

 

Commission File Number  0-22844

 

LAUREATE EDUCATION, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code:  (410) 843-6100

 

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 ý.   No o.

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý.   No o.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o.   No ý.

 

Circular 230 Notice: In accordance with Treasury Regulations which became applicable to all tax practitioners as of June 20, 2005, please note that any tax advice given herein (and in any attachments) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

 

The registrant had 49,767,477 shares of Common Stock outstanding as of October 28, 2005.

 

 

INDEX

 

 

 

 

PART I. - FINANCIAL INFORMATION
	Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheets — September 30, 2005 and December 31, 2004
		Consolidated Statements of Operations - Three months ended September 30, 2005 and September 30, 2004
		Consolidated Statements of Operations - Nine months ended September 30, 2005 and September 30, 2004
		Consolidated Statements of Cash Flows - Nine months ended September 30, 2005 and September 30, 2004
		Notes to Consolidated Financial Statements — September 30, 2005
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
PART II. - OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits
	SIGNATURE

 

i

 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollar and share amounts in thousands, except per share data)

 

		September 30,			December 31,
		2005			2004
		(Unaudited)			(as restated - Note 3)
Assets
Current assets:
Cash and cash equivalents		$	99,453		$	106,854
Available-for-sale securities		4,699			3,258
Receivables:
Accounts receivable		90,209			126,486
Notes receivable		72,318			85,450
Other receivables		7,385			3,507
		169,912			215,443
Allowance for doubtful accounts		(28,021		)	(25,209		)
		141,891			190,234
Inventory		4,721			4,618
Deferred income taxes		5,103			5,079
Income tax receivable		18,693			33,523
Prepaid expenses and other current assets		21,369			15,230
Net assets of discontinued operations, current		1,840			20,000
Total current assets		297,769			378,796
Notes receivable, less current portion, net of allowance of $8,323 and $5,846 at September 30, 2005 and December 31, 2004, respectively		78,679			50,384
Property and equipment:
Land		101,107			95,153
Buildings		257,594			266,524
Construction in-progress		28,415			3,154
Furniture, computer equipment and software		198,668			161,132
Leasehold improvements		72,909			56,362
		658,693			582,325
Accumulated depreciation and amortization		(121,241		)	(97,163		)
		537,452			485,162
Goodwill		360,667			364,973
Other intangible assets:
Tradenames and accreditations		183,950			174,245
Other intangible assets, net of accumulated amortization of $13,080 and $9,358 at September 30, 2005 and December 31, 2004, respectively		7,643			11,447
		552,260			550,665
Deferred income taxes		1,426			3,335
Deferred costs, net of accumulated amortization of $12,785 and $10,025 at September 30, 2005 and December 31, 2004, respectively		22,250			15,976
Other assets		17,745			16,193
Net assets of discontinued operations		—			30,199
Total assets		$	1,507,581		$	1,530,710

 

1

 

		September 30,			December 31,
		2005			2004
		(Unaudited)			(as restated - Note 3)
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	24,334		$	20,824
Accrued expenses		96,875			108,542
Deferred revenue		193,172			225,747
Current portion of long-term debt		43,453			47,010
Current portion of due to shareholders of acquired companies		10,462			26,861
Income tax payable		1,774			15,423
Deferred income taxes		631			1,205
Other current liabilities		4,823			10,482
Total current liabilities		375,524			456,094
Long-term debt, less current portion		76,196			86,605
Due to shareholders of acquired companies, less current portion		35,343			29,402
Deferred income taxes		20,719			22,446
Other long-term liabilities		19,992			19,990
Total liabilities		527,774			614,537
Commitments and contingent liabilities		—			—
Minority interest		52,668			37,538
Stockholders’ equity:
Preferred stock, par value $.01 per share — authorized 10,000 shares, no shares issued and outstanding as of September 30, 2005 and December 31, 2004		—			—
Common stock, par value $.01 per share — authorized 90,000 shares, issued and outstanding shares of 49,759 and 48,813 as of September 30, 2005 and December 31, 2004, respectively		498			488
Additional paid-in capital		497,027			474,928
Retained earnings		392,209			355,989
Accumulated other comprehensive income		37,405			47,230
Total stockholders’ equity		927,139			878,635
Total liabilities and stockholders’ equity		$	1,507,581		$	1,530,710
See accompanying notes to financial statements.

 

2

 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Dollar amounts in thousands, except per share data)

 

		Three months ended September 30,
		2005			2004
		(Unaudited)
Revenues		$	199,204		$	146,110
Costs and expenses
Direct costs		169,852			122,063
General and administrative expenses		7,173			5,450
Non-cash stock compensation expense (1)		1,335			891
Total costs and expenses		178,360			128,404
Operating income		20,844			17,706
Other income (expense)
Interest and other income		2,876			1,160
Interest expense		(2,611		)	(2,067		)
Foreign currency exchange loss		(90		)	(509		)
		175			(1,416		)
Income from continuing operations before income taxes, minority interest, and equity in net loss of affiliates		21,019			16,290
Income tax expense		(2,977		)	(2,795		)
Minority interest in income of consolidated subsidiaries, net of tax		(5,829		)	(4,192		)
Equity in net loss of affiliates, net of tax		(166		)	—
Income from continuing operations		12,047			9,303
(Loss) income from discontinued operations, net of income tax benefit of $0 in 2005 and $974 in 2004		(229		)	31
Net income		$	11,818		$	9,334
Earnings per common share, basic:
Income from continuing operations		$	0.24		$	0.20
Net income		$	0.24		$	0.20
Earnings per common share, diluted:
Income from continuing operations		$	0.23		$	0.19
Net income		$	0.23		$	0.19
(1) Composition of non-cash stock compensation expense:
Direct costs		$	366		$	714
General and administrative expenses		969			177
Total		$	1,335		$	891
See accompanying notes to financial statements.

 

3

 

		Nine months ended September 30,
		2005			2004
		(as restated - Note 3)
		(Unaudited)
Revenues		$	597,606		$	436,517
Costs and expenses
Direct costs		516,062			373,002
General and administrative expenses		19,074			16,170
Non-cash stock compensation expense (1)		2,529			3,886
Total costs and expenses		537,665			393,058
Operating income		59,941			43,459
Other income (expense)
Interest and other income		8,565			20,505
Interest expense		(7,687		)	(5,220		)
Foreign currency exchange loss		(777		)	(446		)
		101			14,839
Income from continuing operations before income taxes, minority interest, and equity in net loss of affiliates		60,042			58,298
Income tax expense		(8,406		)	(9,911		)
Minority interest in income of consolidated subsidiaries, net of tax		(13,081		)	(12,732		)
Equity in net loss of affiliates, net of tax		(370		)	(8		)
Income from continuing operations		38,185			35,647
Income (loss) from discontinued operations, net of income tax benefit of $285 in 2005 and $155 in 2004		386			(5,887		)
Loss on disposal of discontinued operations, net of income tax expense of $3,131 in 2005 and $0 in 2004		(2,351		)	—
Net income		$	36,220		$	29,760
Earnings per common share, basic:
Income from continuing operations		$	0.77		$	0.78
Net income		$	0.73		$	0.65
Earnings per common share, diluted:
Income from continuing operations		$	0.74		$	0.74
Net income		$	0.70		$	0.62
(1) Composition of non-cash stock compensation expense:
Direct costs		$	960		$	2,105
General and administrative expenses		1,569			1,781
Total		$	2,529		$	3,886
See accompanying notes to financial statements.

 

4

 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

 

		Nine months ended September 30,
		2005			2004
		(Unaudited)
Operating activities
Net income		$	36,220		$	29,760
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of fixed assets		26,861			22,176
Amortization		10,439			8,116
Loss on disposal of discontinued operations		2,351			—
Non-cash stock compensation expense - continuing operations		2,529			3,886
Non-cash stock compensation expense - discontinued operations		—			1,436
Acceleration of original issue discount on note receivable repayment		—			(12,722		)
Minority interest in consolidated subsidiaries		12,961			12,732
Equity in net loss of affiliates		370			8
Deferred income taxes		(666		)	9,466
Other non-cash items		(2,065		)	(1,711		)
Changes in operating assets and liabilities:
Receivables		52,481			7,408
Income tax receivable		15,676			—
Inventory, prepaid expenses and other current assets		(6,406		)	(2,165		)
Accounts payable and accrued expenses		(14,835		)	6,419
Income tax payable		(7,614		)	(15,305		)
Deferred revenue and other current liabilities		(32,373		)	(5,044		)
Net cash provided by operating activities		95,929			64,460
Investing activities
Purchase of available-for-sale securities		(4,393		)	(48,812		)
Proceeds from sales or maturity of available-for-sale securities		2,950			39,605
Change in investment in and advances to affiliates and other investments		—			2,128
Purchase of property and equipment, net		(82,861		)	(74,038		)
Cash loaned in exchange for notes receivable		(5,414		)	(12,000		)
Proceeds from repayment of related party note receivable		—			55,247
Proceeds from sales of discontinued operations, net of cash sold		12,654			—
Cash paid for acquisitions, net of cash acquired		(9,485		)	(19,956		)
Payment of deferred consideration for prior period acquisitions		(25,232		)	(1,349		)
Expenditures for deferred costs		(9,089		)	(7,941		)
Change in other long-term assets		1,578			(321		)
Net cash used in investing activities		(119,292		)	(67,437		)
Financing activities
Proceeds from exercise of options		11,207			11,454
Proceeds from issuance of common stock		—			151
Proceeds from issuance of long-term debt		72,045			31,581
Payments on long-term debt		(80,067		)	(36,975		)
Cash received from minority interest members		—			1,595
Change in long-term liabilities		(1,238		)	2,824
Net cash provided by financing activities		1,947			10,630
Effects of exchange rate changes on cash		3,351			(3,222		)
Net change in cash and cash equivalents		(18,065		)	4,431
Cash and cash equivalents at beginning of period		117,518			98,388
Cash and cash equivalents at end of period		$	99,453		$	102,819
Cash and cash equivalents classified as:
Continuing operations		$	99,453		$	94,164
Discontinued operations		—			8,655
Cash and cash equivalents at end of period		$	99,453		$	102,819
See accompanying notes to financial statements.

 

5

 

Laureate Education, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

(Dollar and share amounts in thousands, except per share data)

 

Note 1 - Description of Business and Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  These financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended December 31, 2004, included in the Company’s Annual Report on Form 10-K.  Operating results for the three- and nine-month periods ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.  The traditional semester programs in the education industry, with a summer break, result in significant seasonality in the operating results of Laureate Education, Inc. and subsidiaries (the “Company”).  The consolidated balance sheet at December 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  Certain amounts previously reported for 2004 have been reclassified to conform to the 2005 presentation.

 

The Company is focused exclusively on providing a superior higher education experience to over 193,000 students through a leading global network of accredited campus-based and online universities and higher education institutions (“higher education institutions”).  The Company’s educational offerings are delivered through three separate reportable segments: Campus Based - Latin America (“Latin America”), Campus Based - Europe (“Europe”) and Laureate Online Education.  The campus-based segments of Latin America and Europe own or maintain controlling interests in eleven and seven separately accredited higher education institutions, respectively. The Latin America segment has locations in Mexico, Chile, Peru, Ecuador, Honduras, Panama, and Costa Rica.  The Europe segment has locations in Spain, Switzerland, and France.  The Laureate Online Education segment provides career-oriented degree programs to working adult students through Walden E-Learning, Inc. (“Walden”), Laureate Online Education BV, and Canter and Associates (“Canter”).

 

Note 2 — Significant Accounting Policies

 

Stock Based Compensation

 

The Company records compensation expense for all employee and director stock-based compensation plans using the intrinsic value method and provides pro forma disclosures of net income and net earnings per common share as if the fair value method had been applied in measuring stock compensation expense.  Under the intrinsic value method, stock compensation expense is defined as the difference between the amount payable upon exercise of an option and the quoted market value of the underlying common stock on the date of grant or measurement date, or in the case of issuances of restricted stock, the quoted market value of unrestricted shares of common stock on the date of grant.   Any resulting compensation expense is recognized ratably over the vesting period, or over the period that the restrictions lapse.

 

The Company records compensation expense for all stock options granted to non-employees who are directors of wholly-owned subsidiary boards in an amount equal to their estimated fair value at the earlier of the performance commitment or the date at which performance is complete, determined using the Black-Scholes option pricing model.  The compensation expense is recognized ratably over the vesting period.

 

The following assumptions were used in calculating pro forma stock compensation expense for the nine months ended September 30:

 

		2005		2004
Risk-free interest rate (weighted average)		3.9	%	3.3	%
Expected dividend yield		0.0	%	0.0	%
Expected lives		5-7.5 years		5-7.5 years
Expected volatility (average)		30.2	%	35.1	%

 

6

 

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods.

 

The Company’s pro forma information is as follows for the three months ended:

 

		September 30,
		2005			2004
Net income, as reported		$	11,818		$	9,334
Stock-based employee compensation expense included in net income as reported, net of tax		801			533
Stock-based employee compensation expense as if the fair value method had been applied, net of tax		(1,092		)	(1,152		)
Pro forma net income		$	11,527		$	8,715
Earnings per share:
Basic - as reported		$	0.24		$	0.20
Basic - pro forma		$	0.23		$	0.19
Diluted — as reported		$	0.23		$	0.19
Diluted — pro forma		$	0.22		$	0.18

 

The Company’s pro forma information is as follows for the nine months ended:

 

		September 30,
		2005			2004
Net income, as reported		$	36,220		$	29,760
Stock-based employee compensation expense included in net income as reported, net of tax		1,518			3,193
Stock-based employee compensation expense as if the fair value method had been applied, net of tax		(3,449		)	(4,014		)
Pro forma net income		$	34,289		$	28,939
Earnings per share:
Basic - as reported		$	0.73		$	0.65
Basic - pro forma		$	0.69		$	0.63
Diluted — as reported		$	0.70		$	0.62
Diluted — pro forma		$	0.66		$	0.60

 

 

Impact of Recently Issued Accounting Standards

 

In June 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 154, Accounting Changes and Error Corrections (“SFAS 154”). SFAS 154 replaces Accounting Principal Board (“APB”) Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle. SFAS 154 also requires that a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for prospectively as a change in estimate, and correction of errors in previously issued financial statements should be termed a restatement. SFAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 to have a material impact on the Company’s consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS 123R”), Share-Based Payment.  SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  As permitted by SFAS 123, the Company currently accounts for share-based payments to employees using APB Opinion 25, which generally recognizes no compensation expense for employee stock options with exercise prices at the date of grant equal to or greater than the quoted market value of the underlying stock.  The adoption of the fair value method under SFAS 123R is expected to have a material impact on the results of operations.  SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a cash flow from

 

7

 

financing activities rather than a cash flow from operating activities.  This requirement will reduce net cash flow from operations and increase net cash flow from financing activities in the periods after adoption.  The effective date is the first annual reporting period beginning after June 15, 2005. The Company is currently evaluating the Black-Scholes and binomial lattice valuation models and the modified-prospective-transition and modified-retrospective-transition provisions of this standard and will begin applying the valuation and transition provisions of SFAS 123R in the first quarter of 2006.

 

Note 3 - Discontinued Operations

 

The Company intends to sell the operations of a non-strategic business in the European segment, accordingly the business has been classified as discontinued operations during the third quarter of 2005.  During the first quarter of 2005, the Company closed the sale of its WSI business.  During 2004, the Company terminated its program in India and sold its remaining K-12 educational services businesses. The operations and cash flows of the business components comprising the non-strategic European segment business, WSI, India, and K-12 educational services businesses were or will be eliminated from ongoing operations as a result of the sale or abandonment and the Company will not have any significant continuing involvement in the operations after the disposal transactions.  Therefore, these operations are classified as discontinued operations for all periods.

 

WSI Business

 

On December 31, 2004, the Company and WSI Education S.a.r.l. executed an Agreement for Purchase of Shares that provided for the sale of substantially all of the Company’s WSI business units and investments.  At that time, the purchase price was estimated to be $40,000 based on eight times the projected 2004 earnings before interest, taxes, depreciation, and amortization (“EBITDA”) of $5,000.  At closing, the consideration for the sale of the shares comprising the WSI business unit consisted of the following:

 

•                  Cash of $15,000;

•                  A $15,000 USD equivalent subordinated note, denominated in Euros, bearing interest at 12.5%; and

•                  An estimated $10,000 other receivables payable in cash.

 

Subsequent to the closing date of February 28, 2005, the final base purchase price was determined to be $40,000 as estimated in December 2004. The Company received a payment in cash for the $10,000 of other receivables in

the third quarter of 2005.  The Company is entitled to additional consideration if the operating results of WSI exceed specified levels of earnings in 2005 and 2006, up to a maximum of $11,500.

 

In addition, the Company agreed to continue to finance the $15,000 subordinated note received at closing with a senior promissory note bearing market interest (initially at 8%) with a step-up provision of 0.5% per annum. The note matures in July 2010.  Additionally, the Company received a payment during the third quarter of 2005 of $2,000 in recognition of net working capital conveyed at closing.

 

During the fourth quarter of 2004, the Company recorded an estimated loss on disposal of WSI of $10,187, net of income tax expense of $3,202.  The loss reflected the change in the net realizable value of the net assets of the WSI business (including changes in the carrying value of the net assets resulting from foreign currency fluctuations) adjusted for estimated costs to close the WSI sale and accrued expenses related to indemnifications specified in the agreement.

 

During the second quarter of 2005, the Company recorded an additional estimated loss on disposal of $3,114, consisting primarily of income tax expense of $2,491.  This additional expense resulted from a change in the Company’s estimate of the tax liabilities incurred in connection with this transaction.  The loss reflected the write off of additional net assets of WSI from the time of the definitive agreement, December 31, 2004, through the close of the transaction.

 

During the third quarter of 2005, WSI Education S.a.r.l. received a preliminary field audit report assessing Italian VAT taxes owed related to services provided by the WSI business unit in 2003 prior to its disposition.  The Company is in the process of reviewing the audit report as a potential claim under the sales agreement and is evaluating its options to resolve this matter, up to and including legal action.

 

8

 

Summarized Financial Information of Discontinued Operations

 

Summarized operating results from the discontinued operations included in the Company’s consolidated statement of operations were as follows for the three months ended September 30:

 

		WSI						Other
		2005			2004			2005			2004
Revenues		$	0		$	15,943		$	1,329		$	—
Pretax loss from discontinued operations		$	(69	)	$	(902	)	$	(160	)	$	(41	)

 

Summarized operating results from the discontinued operations included in the Company’s consolidated statement of operations were as follows for the nine months ended September 30:

 

		WSI						Other
		2005			2004			2005			2004
Revenues		$	12,310		$	50,388		$	4,830		$	—
Pretax income (loss) from discontinued operations		$	411		$	(1,730	)	$	(310	)	$	(4,312	)

 

Assets and liabilities of the discontinued operations were as follows: 

		WSI			Other
		December 31, 2004			September 30, 2005			December 31, 2004
Current assets		$	37,446		$	947		$	2,100
Property and equipment, net		16,311			333			430
Goodwill		27,620			—			—
Other assets		8,773			560			626
Current liabilities		(39,702		)	—			—
Long-term liabilities		(566		)	—			—
Other comprehensive income		(2,841		)	—			—
Net assets of discontinued operations		$	47,041		$	1,840		$	3,156

 

The accompanying balance sheet at September 30, 2005 and December 31, 2004 classifies the assets and liabilities of the disposal groups based on the probable timing of receipt of sales proceeds.  The liabilities of the non-strategic business in the European segment are not included in the other disposal group above because it is not certain that the future buyer of the business will assume those liabilities.

 

Note 4 — Notes Receivable (Long-term)

 

Notes receivable (long-term) consist of the following:

 

		September 30, 2005			December 31, 2004
Trade notes receivable (long-term), net of allowance of $8,323 and $5,846 at September 30, 2005 and December 31, 2004, respectively		$	29,299		$	15,339
Notes receivable (long-term):
Kendall College		24,140			18,026
WSI Education S.a.r.l.		13,654			—
Other		11,586			17,019
		$	78,679		$	50,384

 

The gross increase in long-term other trade notes receivable of $16,437 is due to the primary enrollment at the Chilean universities.  Of this increase, $8,801 was unearned as of September 30, 2005 and the related revenue is included in deferred

 

9

 

revenue on the Company’s balance sheet.  Tuition revenues are generally billable and the full amount of notes receivable and related deferred revenue are recorded when a note agreement is signed by the student.

 

Note 5— Other Intangible Assets

 

The following table summarizes other intangible assets as of September 30, 2005:

 

		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Subject to amortization:
Student rosters		$	18,650		$	(11,476	)	$	7,174
Non-compete agreements		1,291			(960		)	331
Other		782			(644		)	138
Total		$	20,723		$	(13,080	)	$	7,643

 

Amortization expense for intangible assets was $1,751 and $5,223 for the three and nine month periods ended September 30, 2005, respectively, and $1,161 and $3,004 for the three and nine month periods ended September 30, 2004, respectively.  The estimated future amortization expense for intangible assets for the remaining three-month period of 2005 is $1,001. The estimated future amortization expense for intangible assets for each of the five years subsequent to December 31, 2005 is as follows: 2006 - $4,163; 2007 - $2,179; 2008 - $285; 2009 - $15; 2010 and beyond - $0.

 

Note 6 - Long-Term Debt

 

Long-term debt consists of the following:

 

		September 30,			December 31,
		2005			2004
Mortgage notes payable bearing interest at variable rates ranging from 3.17% to 8.5%		$	35,842		$	42,045
Various unsecured lines of credit bearing interest at variable rates ranging from 2.70% to 10.98%		33,278			22,618
Notes payable secured by fixed assets, bearing interest at rates ranging from 3.80% to 10.00%		17,695			18,303
Various notes payable bearing interest at fixed rates ranging from 0.00% to 8.09%		15,769			19,556
Capital lease obligations bearing interest at rates ranging from 2.93% to 8.40%		12,399			16,424
Various notes payable bearing interest at variable rates ranging from 3.32% to 11.02%		4,666			14,669
		119,649			133,615
Less: current portion of long-term debt		43,453			47,010
Total long-term debt, net of current portion		$	76,196		$	86,605

 

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Note 7 - Due to Shareholders of Acquired Companies

 

Due to shareholders of acquired companies consists of the following amounts payable in cash:

 

		September 30,			December 31,
		2005			2004
Amounts payable to former shareholders of Universidad Andres Bello (“UNAB”)		$	23,864		$	27,773
Amounts payable to former shareholders of Universidad Tecnologica Centroamericana (“UNITEC”)		14,117			—
Amounts payable to former shareholders of Universidad Interamericana		4,800			4,800
Amounts payable to former shareholders of Universidad Peruana de Ciencias Aplicadas		2,924			2,984
Amounts payable to former shareholders of Universidad Latinoamericana de Ciencia y Tecnologia		100			100
Amounts payable to former shareholders of Walden		—			19,249
Amounts payable to former shareholders of Institute of Executive Development		—			1,357
		45,805			56,263
Less: current portion of due to shareholders		10,462			26,861
Total due to shareholders, net of current portion		$	35,343		$	29,402

 

In conjunction with the acquisition of UNITEC in July 2005, the Company entered into an agreement with the sellers to finance a portion of the purchase price.  This agreement calls for the Company to make a one-time payment to the sellers of approximately $1,497 on the fourth anniversary of the closing and an annuity payable monthly over a 15-year period beginning immediately, with initial monthly payments of approximately $84, adjusted for inflation.  The Company recorded these obligations at their present value of $14,117.  The amounts payable to the sellers are denominated in Honduran Lempiras, and are subject to foreign currency exchange risk at the dates of payment.

 

Note 8 - Income Taxes

 

The Company’s income tax provisions for all periods consist of federal, state, and foreign income taxes. The tax provisions for the three- and nine-month periods ended September 30, 2005 and 2004 were based on the estimated effective tax rates applicable for the 2005 and 2004 full years, after giving effect to significant items related specifically to the interim periods, including the mix of income for the period between higher and lower taxed jurisdictions. The Company’s effective tax rate from continuing operations was 14.2% and 14.0% for the three- and nine-months ended September 30, 2005, respectively and 17.2% and 17.0% for the three- and nine-months ended September 30, 2004, respectively.  The Company has operations in multiple countries, many of which have statutory tax rates lower than the United States. Generally lower tax rates in these foreign jurisdictions result in an effective tax rate significantly lower than the United States statutory rate.

 

In September of 2003, the IRS (the “Service”) completed their field examination of the Company’s 1997 federal income tax return.  In connection with this examination, the Company disagreed on the tax treatment of a specific item.  The Company has appealed the Service’s treatment of this item throughout the administrative review process.  As a final step in the administrative appeal process, both parties have made proposals to settle the issue.  The Company’s latest settlement proposal was made in July of 2005 and the Service has not responded to the proposal and has no deadline by which it must respond.  The Company believes the final resolution of this issue will not have a material effect on the Company’s consolidation financial position, liquidity, or results of operations.

 

In June of 2004, the Internal Revenue Service (“IRS”) completed their field examination of the Company’s 1998 and 1999 federal income tax returns.  In connection with this examination, the Company received notice of certain adjustments proposed by the IRS, primarily related to transfer pricing and the timing of certain deductions.  The Company is working to reach a resolution with the IRS by the end of fiscal 2005.  Although the final resolution of the proposed adjustments is uncertain, based on current information, in the opinion of the management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations.

 

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Note 9 — Stockholders’ Equity

 

The components of stockholders’ equity are as follows:

											Accumulated
					Additional						Other			Total
		Common			Paid-In			Retained			Comprehensive			Stockholders’
		Stock			Capital			Earnings			Income			Equity
Balance at December 31, 2004		$	488		$	474,928		$	355,989		$	47,230		$	878,635
Options exercised for purchase of 886 shares of common stock, including income tax  benefit of $8,839		9			20,037									20,046
Non-cash stock compensation					2,529									2,529
Other		1			(467		)							(466		)
Comprehensive income:
Net income for the nine months ended September 30, 2005								36,220						36,220
Foreign currency translation adjustment											(9,851		)	(9,851		)
Unrealized gain on available-for-sale securities											48			48
Minimum pension liability adjustment											(22		)	(22		)
Total comprehensive income														26,395
Balance at September 30, 2005		$	498		$	497,027		$	392,209		$	37,405		$	927,139

 

 

 

Note 10 — Comprehensive Income

 

The components of comprehensive income, net of related income taxes, are as follows:

 

		Three months ended September 30,						Nine months ended September 30,
		2005			2004			2005			2004
Net income		$	11,818		$	9,334		$	36,220		$	29,760
Foreign currency translation adjustment		12,699			7,903			(9,851		)	(5,976		)
Unrealized gain (loss) on available-for-sale securities, net of tax		(5		)	—			48			—
Minimum pension liability adjustment		—			189			(22		)	(18		)
Comprehensive income		$	24,512		$	17,426		$	26,395		$	23,766

 

The foreign currency translation adjustment of $12,699 for the three months ended September 30, 2005 relates to the effects of translating the financial statements of the Company’s foreign subsidiaries to U.S. Dollars, and primarily reflects the strengthening of the Chilean peso during that period.

 

The foreign currency translation adjustment of $(9,851) for the nine months ended September 30, 2005 relates to the effects of translating the financial statements of the Company’s foreign subsidiaries to U.S. Dollars, and primarily reflects the devaluation of the Euro and Swiss Franc against the U.S. Dollar, partially offset by the effects of the strengthening Mexican peso and the Chilean peso, during that period.

 

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