LAUREATE EDUCATION, INC. - Quarter Report: 2005 March (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 March 31, 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)

 

Maryland		52-1492296
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1001 Fleet Street, Baltimore, Maryland		21202
(Address of principal executive offices)		(Zip Code)

 

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.

 

The registrant had 49,398,959 shares of Common Stock outstanding as of April 29, 2005.

 

 

INDEX

 

PART I. - FINANCIAL INFORMATION
Item 1.				Financial Statements (Unaudited)
				Consolidated Balance Sheets – March 31, 2005 and December 31, 2004
				Consolidated Statements of Operations - Three months ended March 31, 2005 and March 31, 2004
				Consolidated Statements of Cash Flows - Three months ended March 31, 2005 and March 31, 2004
				Notes to Consolidated Financial Statements – March 31, 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)

 

		March 31, 2005			December 31, 2004
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	104,812		$	105,629
Available-for-sale securities		11,816			4,515
Receivables:
Accounts receivable		114,252			128,523
Notes receivable		100,867			85,450
Other receivables		4,328			3,507
		219,447			217,480
Allowance for doubtful accounts		(23,233		)	(25,214		)
		196,214			192,266
Inventory		4,855			4,647
Deferred income taxes		6,521			5,079
Income tax receivable		18,269			33,523
Prepaid expenses and other current assets		20,889			15,238
Current assets of discontinued operations		—			20,000
Total current assets		363,376			380,897
Other notes receivable, less current portion, net of allowance of $5,478 and $5,846 at March 31, 2005 and December 31, 2004, respectively		71,898			50,384
Property and equipment:
Land		90,714			95,153
Buildings		259,091			266,524
Construction in-progress		7,575			3,154
Furniture, computer equipment and software		163,437			161,153
Leasehold improvements		59,813			56,788
		580,630			582,772
Accumulated depreciation and amortization		(102,900		)	(97,180		)
		477,730			485,592
Intangible assets:
Goodwill		360,921			364,973
Tradenames and accreditations		174,776			174,694
Other intangible assets, net of accumulated amortization of $10,484 and $9,358 at March 31, 2005 and December 31, 2004, respectively		9,796			11,447
		545,493			551,114
Deferred income taxes		3,280			3,335
Deferred costs, net of accumulated amortization of $11,112 and $10,025 at March 31, 2005 and December 31, 2004, respectively		16,460			15,976
Other assets		23,255			16,371
Assets of discontinued operations		—			27,041
Total assets		$	1,501,492		$	1,530,710

 

See accompanying notes to financial statements.

 

1

 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets (continued)

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

 

		March 31, 2005			December 31, 2004
		(Unaudited)
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	23,862		$	20,824
Accrued expenses		97,971			108,542
Income tax payable		14,369			15,423
Current portion of long-term debt		25,292			47,010
Current portion of due to shareholders of acquired companies		5,946			26,861
Deferred revenue		260,876			225,747
Deferred income taxes		497			1,205
Other current liabilities		9,526			10,482
Total current liabilities		438,339			456,094
Long-term debt, less current portion		81,208			86,605
Due to shareholders of acquired companies, less current portion		28,182			29,402
Deferred income taxes		21,979			22,446
Other long-term liabilities		19,960			19,990
Total liabilities		589,668			614,537
Commitments and contingent liabilities		—			—
Minority interest		37,971			37,538
Stockholders’ equity:
Preferred stock, par value $.01 per share – authorized 10,000 shares, no shares issued and outstanding as of March 31, 2005 and December 31, 2004		—			—
Common stock, par value $.01 per share – authorized 90,000 shares, issued and outstanding shares of 49,318 and 48,813 as of March 31, 2005 and December 31, 2004, respectively		493			488
Additional paid-in capital		482,056			474,928
Retained earnings		360,585			355,989
Accumulated other comprehensive income		30,719			47,230
Total stockholders’ equity		873,853			878,635
Total liabilities and stockholders’ equity		$	1,501,492		$	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 March 31,
		2005			2004
		(Unaudited)
Revenues		$	184,114		$	132,156
Costs and expenses
Direct costs		171,884			122,563
General and administrative expenses		6,214			5,289
Non-cash stock compensation expense (1)		780			712
Total costs and expenses		178,878			128,564
Operating income		5,236			3,592
Other income (expense)
Interest and other income		2,416			3,302
Interest expense		(2,374		)	(1,558		)
Foreign currency exchange gain		249			360
		291			2,104
Income from continuing operations before income taxes, minority interest, and equity in net loss of affiliates		5,527			5,696
Income tax expense		(691		)	(707		)
Minority interest in income of consolidated subsidiaries, net of tax		(892		)	(2,474		)
Equity in net loss of affiliates, net of tax		(90		)	(8		)
Income from continuing operations		3,854			2,507
Income (loss) from discontinued operations, net of income tax benefit (expense) of $285 in 2005 and $(186) in 2004		742			(2,891		)
Net income (loss)		$	4,596		$	(384	)
Earnings (loss) per common share, basic:
Income from continuing operations		$	0.08		$	0.06
Net income (loss)		$	0.09		$	(0.01	)
Earnings (loss) per common share, diluted:
Income from continuing operations		$	0.07		$	0.05
Net income (loss)		$	0.09		$	(0.01	)
(1) Composition of non-cash stock compensation expense:
Direct costs		$	297		$	695
General and administrative expenses		483			17
Total		$	780		$	712

 

See accompanying notes to financial statements.

 

3

 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

 

		Three months ended March 31,
		2005			2004
		(Unaudited)
Operating activities
Net income (loss)		$	4,596		$	(384	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization of fixed assets		8,974			7,038
Amortization		2,644			1,488
Non-cash stock compensation expense		780			712
Minority interest in consolidated subsidiaries		892			2,474
Equity in net loss of affiliates		90			8
Deferred income taxes		(1,570		)	(660		)
Other non-cash items		(1,126		)	(41		)
Changes in operating assets and liabilities:
Receivables		(21,854		)	(48,720		)
Income tax receivable		15,676			—
Inventory, prepaid expenses and other current assets		(938		)	(3,768		)
Accounts payable and accrued expenses		(5,806		)	7,370
Income tax payable		(977		)	7
Deferred revenue and other current liabilities		43,738			55,775
Net cash provided by operating activities		45,119			21,299
Investing activities
Purchase of available-for-sale securities		(8,451		)	(8		)
Proceeds from sale or maturity of available-for-sale securities		897			16,446
Purchase of property and equipment, net		(14,358		)	(12,631		)
Cash loaned in exchange for notes receivable		(2,752		)	—
Proceeds from sale of investments		—			2,175
Proceeds from sale of discontinued operations, net of cash sold		12,654			—
Cash paid for acquisitions, net of cash acquired		(5,957		)	(4,784		)
Payment of contingent consideration for prior period acquisitions		(20,312		)	(1,349		)
Expenditures for deferred costs		(1,714		)	(1,212		)
Increase in other assets		(808		)	(143		)
Net cash used in investing activities		(40,801		)	(1,506		)
Financing activities
Proceeds from exercise of options		5,542			3,396
Proceeds from issuance of common stock		—			151
Proceeds from issuance of long-term debt		28,580			20,487
Payments on long-term debt		(47,995		)	(22,606		)
Change in long-term liabilities		(944		)	1,647
Net cash (used in) provided by financing activities		(14,817		)	3,075
Effects of exchange rate changes on cash		(950		)	1,211
Net change in cash and cash equivalents		(11,449		)	24,079
Cash and cash equivalents at beginning of period		116,261			98,388
Cash and cash equivalents at end of period		$	104,812		$	122,467
Cash and cash equivalents classified as:
Continuing operations		$	104,812		$	114,294
Discontinued operations		—			8,173
Cash and cash equivalents at end of period		$	104,812		$	122,467

 

See accompanying notes to financial statements.

 

4

 

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-month period ended March 31, 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 168,000 students through the 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 nine and seven separately accredited higher education institutions, respectively. The Latin America segment has locations in Mexico, Chile, Peru, Ecuador, 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 (loss) and net earnings (loss) 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 not directors in an amount equal to their estimated fair value at the earlier of the performance commitment date 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.

 

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

 

5

 

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

 

		March 31,
		2005			2004
Net income (loss), as reported		$	4,596		$	(384	)
Stock-based employee compensation expense included in net income (loss) as reported, net of tax		468			427
Stock-based employee compensation expense as if the fair value method had been applied, net of tax		(1,443		)	(1,333		)
Pro forma net income (loss)		$	3,621		$	(1,290	)
Earnings (loss) per share:
Basic - as reported		$	0.09		$	(0.01	)
Basic - pro forma		$	0.07		$	(0.03	)
Diluted – as reported		$	0.09		$	(0.01	)
Diluted - pro forma		$	0.06		$	(0.03	)

 

Impact of Recently Issued Accounting Standards

 

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), 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 Accounting Principles Board 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 could have a significant 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 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 pricing models and the transition provisions of this standard and will begin expensing stock options in the first quarter of 2006.

 

Note 3 - Discontinued Operations

 

During the first quarter of 2005, the Company closed the sale of its Wall Street Institute (“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 WSI, India, and K-12 educational services businesses were 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

 

The WSI business owns and operates English-language learning centers in four countries and is a franchisor of English language learning centers in 21 countries.  On December 31, 2004, the Company and WSI Education S.a.r.l. executed an Agreement for Purchase of Shares that provided for the acquisition of substantially all of the Company’s WSI business units and investments.  The consideration for the sale of the shares comprising the WSI business unit consisted of the following at closing:

 

•                  Cash of $15,000;

•                  A subordinated note in the amount of $15,000, bearing interest at 12.5%.

 

The final purchase price will be based on the lesser of eight times 2004 audited earnings before interest, taxes, depreciation, and amortization (“EBITDA”) or $51,000. The Company closed the sale of WSI on February 28, 2005, however the Company and the buyer are in the process of completing the process required to provide for a final determination of the sales proceeds. At the time of settlement, the Company committed to finance up to 50% of the purchase price, capped at four

 

6

 

times audited EBITDA, with a note bearing market interest and a step up provision of 0.5% per annum. Additionally, the proceeds received by the Company are subject to post closing adjustments based on working capital on the closing date.  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 $10,000, subject to an overall cap on total consideration received of $51,000.

 

During the fourth quarter of 2004, the Company recorded an estimated loss on disposal 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 deal and accrued expenses related to indemnifications specified in the agreement. The accrued expenses and closing costs represent management’s best estimate based on the facts and circumstances of the transaction.  These estimates are subject to change based on new information that may arise in connection with fulfilling the terms of the agreement, and such changes could be material.  To date, there have been no significant changes to the estimates recorded as of December 31, 2004.

 

Other

 

In the first quarter of 2004, due to the unfavorable regulatory climate for private educational enterprises in India, the Company decided to terminate its current programs there, including the cessation of the educational activities of South Asia International Institute.  In conjunction with this decision, the Company reduced the carrying value of its assets in India to expected realizable value upon final disposition.

 

In the first quarter of 2004, the Company completed the sale of the Sylvan Learning Center operations in France for solely contingent consideration.   To date, no proceeds have been received.

 

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 March 31:

 

		WSI						Other
		2005			2004			2005			2004
Revenues		$	12,310		$	17,562		$	—		$	—
Pretax income (loss) from discontinued operations		$	480		$	(429	)	$	(23	)	$	(2,276	)

 

The accompanying balance sheet at December 31, 2004 classifies the net assets of the WSI disposal group based on the probable timing of receipt of sales proceeds.  Net assets of WSI at December 31, 2004 were as follows:

 

Current assets		$	37,446
Property and equipment, net		16,311
Goodwill		27,620
Other assets		8,773
Current liabilities		(39,702		)
Long-term liabilities		(566		)
Other comprehensive income		(2,841		)
Net assets of discontinued operations		$	47,041

 

7

 

Note 4 – Other Notes Receivable (Long-term)

 

Other notes receivable (long-term) consist of the following:

 

		March 31, 2005			December 31, 2004
Other trade notes receivable (long-term), net of allowance of $5,478 and $5,846 at March 31, 2005 and December 31, 2004, respectively		$	25,893		$	15,339
Other notes receivable (long-term):
Kendall College		21,151			18,026
WSI Education S.a.r.l.		15,000			—
Other		9,854			17,019
		$	71,898		$	50,384

 

The gross increase in long-term other trade notes receivable of $10,186 is due to the primary enrollment at the southern hemisphere universities.  Of this increase, $9,234 was unearned as of March 31, 2005 and is included in deferred 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 March 31, 2005:

 

		Gross Carrying Amount			Accumulated Amortization			Net Carrying Amount
Subject to amortization:
Student rosters		$	18,157		$	(8,916	)	$	9,241
Non-compete agreements		1,320			(955		)	365
Other		803			(613		)	190
Total		$	20,280		$	(10,484	)	$	9,796

 

Amortization expense for intangible assets subject to amortization for the three months ended March 31, 2005 and 2004 was $1,362 and $967, respectively. The estimated future amortization expense for intangible assets for the remaining nine-month period of 2005 is $3,383. The estimated future amortization expense for intangible assets for each of the five years subsequent to December 31, 2005 is as follows: 2006 - $3,881; 2007 - $2,148; 2008 - $367; 2009 - $17; 2010 and beyond - $0.

 

8

 

Note 6 - Long-Term Debt

 

Long-term debt consists of the following:

 

		March 31, 2005			December 31, 2004
Mortgage notes payable bearing interest at variable rates ranging from 3.25% to 8.5%		$	39,553		$	42,045
Notes payable secured by fixed assets, bearing interest at rates ranging from 3.80% to 6.46%		17,380			18,303
Capital lease obligations bearing interest at rates ranging from 4.99% to 8.64%		14,293			16,424
Various notes payable bearing interest at fixed rates ranging from 0.00% to 8.09%		15,875			19,556
Various notes payable bearing interest at variable rates ranging from 5.25% to 22.68%		5,605			14,669
Various unsecured lines of credit bearing interest at variable rates ranging from 2.52% to 11.41%		13,794			22,618
		106,500			133,615
Less: current portion of long-term debt		25,292			47,010
Total long-term debt, net of current portion		$	81,208		$	86,605

 

Note 7 - Due to Shareholders of Acquired Companies

 

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

 

		March 31, 2005			December 31, 2004
Amounts payable to former shareholders of Universidad Andres Bello (“UNAB”)		$	26,229		$	27,773
Amounts payable to former shareholders of Institute of Executive Development (“IEDE”)		—			1,357
Amounts payable to former shareholders of Universidad Interamericana (“UI”)		4,800			4,800
Amounts payable to former shareholders of Universidad Latinoamericana de Ciencia y Tecnologia (“ULACIT”)		100			100
Amounts payable to former shareholders of Universidad Peruana de Ciencias Aplicadas (“UPC”)		2,999			2,984
Amounts payable to former shareholders of Walden		—			19,249
		34,128			56,263
Less: current portion of due to shareholders		5,946			26,861
Total due to shareholders, net of current portion		$	28,182		$	29,402

 

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-month periods ended March 31, 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 12.5% and 12.4% for the three months ended March 31, 2005 and 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 results in an effective tax rate significantly lower than the United States statutory rate.

 

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.

 

9

 

The Company vigorously disagrees with the proposed adjustments and intends to aggressively contest the proposed adjustments through applicable IRS and judicial procedures, as appropriate.  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.

 

Note 9 – Stockholders’ Equity

 

The components of stockholders’ equity are as follows:

 

		Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance at December 31, 2004		$	488		$	474,928		$	355,989		$	47,230		$	878,635
Options exercised for purchase of 504 shares of common stock, including income tax benefit of $857		5			6,394									6,399
Non-cash stock compensation					780									780
Other					(46		)							(46		)
Comprehensive income (loss):
Net income for the three months ended March 31, 2005								4,596						4,596
Foreign currency translation adjustment											(16,503		)	(16,503		)
Unrealized gain on available-for-sale securities											14			14
Minimum pension liability adjustment											(22		)	(22		)
Total comprehensive loss														(11,915		)
Balance at March 31, 2005		$	493		$	482,056		$	360,585		$	30,719		$	873,853

 

Note 10 – Comprehensive Income (Loss)

 

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

 

		Three months ended March 31,
		2005			2004
Net income (loss)		$	4,596		$	(384	)
Foreign currency translation adjustment		(16,503		)	(5,874		)
Unrealized gain on available-for-sale securities, net of tax		14			6
Minimum pension liability adjustment		(22		)	—
Comprehensive loss		$	(11,915	)	$	(6,252	)

 

10

 

Note 11 - Earnings (Loss) Per Share

 

The following table summarizes the computations of basic and diluted earnings (loss) per share:

 

		Three months ended March 31,
		2005			2004
Numerator used in basic and diluted earnings (loss) per common share:
Income from continuing operations		$	3,854		$	2,507
Income (loss) from discontinued operations, net of tax		742			(2,891		)
Net income (loss)		$	4,596		$	(384	)
Denominator for basic earnings (loss) per share – weighted-averagecommon shares outstanding		49,237			44,925
Net effect of dilutive stock options based on treasury stock method		2,577			2,559
Denominator for diluted earnings (loss) per share – weighted average common shares outstanding		51,814			47,484
Earnings (loss) per common share, basic:
Income from continuing operations		$	0.08		$	0.06
Income (loss) from discontinued operations, net of tax		0.02			(0.06		)
Earnings (loss) per common share		$	0.09		$	(0.01	)
Earnings (loss) per common share, diluted:
Income from continuing operations		$	0.07		$	0.05
Income (loss) from discontinued operations, net of tax		0.01			(0.06		)
Earnings (loss) per common share		$	0.09		$	(0.01	)

 

Per share amounts may not sum due to rounding differences.

 

Note 12 – Commitments and Contingencies

 

Purchase Obligations

 

As part of the fourth quarter 2004 acquisition of Ecole Centrale d’Electonique (“ECE”), the Company committed to purchase the remaining 30% ownership from the sellers on December 31, 2008 for approximately $9,072.  The purchase obligation is denominated in Euros, and is subject to foreign currency exchange rate risk on the date of payment.

 

As part of the fourth quarter 2004 acquisition of Institut Francais de Gestion, SAS (“IFG”), the Company committed to additional capital contributions, which will increase the Company’s share of ownership.  The agreement provides that, no later than July 31, 2006 and July 31, 2007, the Company must contribute approximately $1,625 and $2,421, resulting in an increase in ownership share of 16% and 23%, respectively. In addition, during the period October through November 2008, the sellers may exercise a put option requiring the Company to purchase the remaining 10% ownership for approximately $1,037.  The purchase obligation is denominated in Euros, and is subject to foreign currency exchange rate risk on the dates of payment.

 

Loss Contingencies

 

The Company is subject to legal actions arising in the ordinary course of its business. In management’s opinion, the Company has adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions and does not believe any settlement would materially affect the Company’s financial position.

 

Contingent Payments

 

In connection with certain acquisitions, variable amounts of contingent consideration are payable to the seller based upon specified terms.  All existing contingent consideration agreements are predicated upon improved operating profitability of

 

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the acquired entities and utilize multiples consistent with those used to calculate the initial purchase price.  The Company will record the contingent consideration when the contingencies are resolved and the additional consideration is payable.

 

Additional amounts of contingent consideration are due the sellers of UDLA based on operating results for the three years ending December 31, 2006.  On the later of March 31, 2006 or 45 days after the Company receives the audited financial statements of Decon, the holding company that controls and operates UDLA, the Company is obligated to the sellers for an amount equal to 60% of six times (i) average EBIT for 2004 and 2005, less (ii) 2000 EBIT; this result is reduced by (iii) 42% of certain specified debt.  Assuming EBIT remains at 2004 levels for 2005, the Company would be obligated to the sellers for approximately $60,866.  No later than March 31, 2007, the Company is obligated to the sellers for an amount equal to 20% of four times (i) average EBIT for 2005 and 2006; this result is reduced by (ii) 20% of certain specified debt and (iii), $6,500.   Assuming EBIT remains at 2004 levels for 2005 and 2006, the Company would be obligated to the sellers for approximately $12,559.  The Company has pledged its shares of Decon to satisfy its payment obligations to the sellers.  The Company cannot dispose of, lien or encumber the shares without the prior approval of the sellers.

 

Effective April 1, 2008 the minority owners of UDLA have the right to require the Company to purchase their remaining 20% interest in Decon for a variable purchase price based on average EBIT for certain specified periods. Effective April 1, 2009 the Company has a call right to acquire the remaining 20% interest under a similar methodology for certain specified periods.

 

Effective April 1, 2009 the minority owners of UNAB and AIEP have the right to require the Company to purchase their 20% interest for a variable purchase price based on average EBIT for certain specified periods. Effective April 1, 2009 the Company has a call right to acquire this 20% interest under a similar methodology for certain specified periods.

 

Additional amounts of contingent consideration, not to exceed $10,000, are due the sellers of KIT eLearning BV equal to four times the average of the audited earnings before interest, income taxes, depreciation and amortization for the calendar years ending December 31, 2006 and 2007.  KIT eLearning BV was acquired on March 31, 2004 and is operated as Laureate Online Education BV.

 

Guarantees

 

Subsequent to the June 2003 divestiture of the Company’s K-12 business segments, all leases related to Sylvan Learning Centers were renegotiated or assigned in the name of Educate, Inc. (“Educate”) during the third quarter of 2003.  Leases with remaining payments of $6,927 through December 2008 are guaranteed by the Company.  Under the terms of the Asset Purchase Agreement with Educate, the Company is indemnified against any losses suffered as a result of these lease guarantees.  During 2004, Laureate entered into an agreement to guarantee lease payments owed by Kendall College to Key Equipment Finance. Leases with remaining payments of $4,892 through December 2011 are guaranteed by the Company.

 

Standby Letters of Credit

 

The Company has $15,228 outstanding in standby letters of credit.  The Company is self-insured for workers compensation and other insurable risks up to predetermined amounts above which third party insurance applies.  The Company is contingently liable to insurance carriers under certain of these policies and has provided a letter of credit in favor of the insurance carriers for $1,258.  The Company has also issued a standby letter of credit in the amount of $1,400 assuring the collectibility of a line of credit at AIEP, which is being used for working capital purposes.  The outstanding balance on the line of credit was $1,386 at March 31, 2005.  In the first quarter of 2005, the company issued a $12,000 standby letter of credit in favor of WSI Education S.a.r.l. for a tax indemnification related to the sale of WSI.

 

Commitments

 

Under terms of note agreements with Kendall College, the Company has committed to provide additional funding to Kendall College of up to $2,550.

 

Note 13 - Business and Geographic Segment Information

 

The Company is focused exclusively on providing a superior higher education experience to over 168,000 students through a leading global network of accredited campus-based and online higher education institutions. The Company’s educational services are offered through three reportable segments:  Latin America, Europe and Laureate Online Education.

 

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The accounting policies of the segments are the same as those described in the significant accounting policies.  The Company evaluates performance based on profit or loss from operations before income taxes, corporate general and administrative expenses, non-cash stock compensation expense and campus-based overhead expenses.

 

The Latin America segment consists of eight separately accredited universities and one accredited professional institute, and has operations in Mexico, Chile, Peru, Ecuador, Panama, and Costa Rica.  Latin America higher education institutions currently enroll approximately 130,000 full-time students and offer more than 100 degree programs through 35 campuses.  The schools primarily serve 18- to 24-year-old students as well as working adults and offer an education that emphasizes career-oriented fields of study with undergraduate and graduate degrees in a wide range of disciplines, including international business, law, health sciences, information technology and engineering.

 

The Europe segment consists of one accredited university and several other accredited post-secondary institutions, and has operations in Spain, Switzerland, and France.  Europe higher education institutions currently enroll approximately 15,000 full-time students and offer more than 75 degree programs through 8 campuses.  The schools primarily serve 18- to 24-year-old students and offer an education that emphasizes career-oriented fields of study with undergraduate and graduate degrees in a wide range of disciplines, including international business, hotel management, health sciences, architecture and engineering.

 

The Company believes that all of its campus-based higher education institutions benefit from strong academic reputations and brand awareness, and established operating histories.  Each school also has flexible, non-tenured, teaching-focused faculty and is led by an experienced local management team.

 

The Laureate Online Education segment offers undergraduate and graduate degree programs to working professionals through distance learning.  Laureate Online Education consists of Walden, Canter, and Laureate Online Education BV, which collectively offer degree programs including education, psychology, health and human services, management, engineering, and information technology.  Laureate Online Education institutions currently enroll approximately 23,000 students.

 

These reportable segments are business units that offer distinct services and are managed separately.  The campus-based reportable segments of Latin America and Europe are not aggregated with Laureate Online Education as Laureate Online Education offers services to a different class of customer, through a different delivery system, and with different economic characteristics.  The Latin America and Europe segments are managed separately and have certain differences in classes of customer and economic characteristics, and thus are not aggregated together.

 

Prior to 2004, the Company's reportable segments consisted of Campus Based and Laureate Online Education.  The segment information for the three month period ended March 31, 2004 has been reclassified to conform to current year presentation.

 

The following table sets forth information on the Company’s reportable segments:

 

Three months ended March 31, 2005		Latin America			Europe			Laureate Online Education			Total
Revenues		$	88,015		$	56,636		$	39,463		$	184,114
Segment profit		4,744			8,863			1,213			14,820

 

Three months ended March 31, 2004		Latin America			Europe			Laureate Online Education			Total
Revenues		$	66,273		$	41,199		$	24,684		$	132,156
Segment profit		3,563			8,775			164			12,502

 

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The following tables reconcile the reported information on segment profit to income from continuing operations before income taxes, minority interest, and equity in net loss of affiliates reported in the statements of operations for the three months ended March 31:

 

		2005			2004
Total profit for reportable segments		$	14,820		$	12,502
Campus-based segments’ overhead		(2,590		)	(2,909		)
General and administrative expense		(6,214		)	(5,289		)
Non-cash compensation expense		(780		)	(712		)
Net non-operating income		291			2,104
Income from continuing operations before income taxes, minority interest and equity in net loss of affiliates		$	5,527		$	5,696

 

Revenue information of continuing operations by geographic area for the three months ended March 31 is as follows:

 

		2005			2004
Revenues
Mexico		$	59,442		$	45,332
United States		36,582			24,684
Spain		31,368			27,911
Chile		17,307			15,991
France		13,726			2,635
Switzerland		11,542			10,643
Other foreign countries		14,147			4,960
Consolidated total		$	184,114		$	132,156

 

Revenues are attributed to countries based on the location of the customer.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The statements contained herein include forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.  Forward-looking statements include information about possible or assumed results of operations, business strategies, financing plans, competitive position and potential growth opportunities.  Forward-looking statements include all statements that are not historical facts and are generally accompanied by words such as “may,” “will,” “intend,” “anticipate,” “believe,” “estimate,” “expect,” “should” or similar expressions.  These statements also relate to the Company’s contingent payment obligations relating to acquisitions, future capital requirements, potential acquisitions and the Company’s future development plans and are based on current expectations.  Forward-looking statements involve various risks, uncertainties and assumptions.

 

Future events and actual results could differ materially from those set forth in the forward-looking statements as a result of many factors.  These factors may include, without limitation: the Company’s ability to continue to make acquisitions and to successfully integrate and operate acquired businesses; changes in student enrollment; the effect of new technology applications in the educational services industry; failure to maintain or renew required regulatory approvals, accreditations or authorizations; the Company’s ability to effectively manage business growth; possible increased competition from other educational service providers; the effect on the business and results of operations of fluctuations in the value of foreign currencies; and the many risks associated with the operation of an increasingly global business, including complicated legal structures, legal, tax and economic risks and the risk of changes in the business climate in the markets where the Company operates.  These forward-looking statements are based on estimates, projections, beliefs and assumptions of management and speak only as of the date made and are not guarantees of future performance.

 

Overview

 

Laureate is focused exclusively on providing a superior higher education experience to over 168,000 students through the leading global network of accredited campus-based and online higher education institutions.  The Company’s educational services are offered through three separate reportable segments: Campus Based - Latin America (“Latin America”), Campus Based - Europe (“Europe”) and Laureate Online Education.  Latin America and Europe own or maintain controlling interests in nine and seven separately accredited higher education institutions, respectively.  The Latin America segment has locations in Mexico, Chile, Peru, Ecuador, 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 approximately 23,000 students through Walden E-Learning, Inc. (“Walden”), Laureate Education Online BV, and Canter and Associates (“Canter”).

 

Sale of Business Units

 

On February 28, 2005, the Company closed the sale of its Wall Street Institute (“WSI”) business to WSI Education S.a.r.l..  The WSI business was classified as discontinued in both the first quarter of 2004 and the first quarter of 2005. See Note 3 to the consolidated financial statements for more information regarding this transaction.

 

Seasonality

 

Most of the schools in the Company’s network have a summer break when classes are generally not in session and during which minimal revenues are recognized.  Operating expenses, however, do not fully correlate to the enrollment and revenue cycles, as the schools continue to incur fixed costs during summer breaks.  As a result, the fourth quarter is the Company’s strongest quarter because all of its higher education institutions are in session.  The second quarter is also strong as most schools have classes in session, although the Company’s largest school, located in Mexico, is in session for only part of that quarter.  The first and third quarters are weaker quarters because the majority of the Company’s schools have summer breaks for some portion of one of these two quarters. Due to this seasonality, revenues and profits in any quarter are not necessarily indicative of results in subsequent quarters.

 

The following chart shows the enrollment cycles for each higher education institution.  In the chart, shaded areas represent periods when classes are generally in session and revenues are recognized.  Areas that are not shaded represent summer breaks during which revenues are not typically recognized.  The large circles indicate the Primary Enrollment start dates of the Company’s schools, and the small circles represent Secondary Enrollment start dates (smaller intake cycles).

 

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Reportable Segments

 

The following table is derived from the Company’s consolidated financial statements and represents financial information of the Company’s reportable segments for the three months ended March 31, 2005 and 2004, excluding discontinued operations:

 

		Latin America			Europe			Laureate Online Education			Unallocated			Consolidated
		(in thousands)
March 31, 2005
Segment revenues		$	88,015		$	56,636		$	39,463		$	—		$	184,114
Segment direct costs		(83,271		)	(47,773		)	(38,250		)	—			(169,294		)
Campus-based segments’ overhead		—			—			—			(2,590		)	(2,590		)
Segment profit (loss)		4,744			8,863			1,213			(2,590		)	12,230
General and administrative expenses		—			—			—			(6,214		)	(6,214		)
Non-cash stock compensation expense		—			—			—			(780		)	(780		)
Operating income (loss)		$	4,744		$	8,863		$	1,213		$	(9,584	)	$	5,236
March 31, 2004
Segment revenues		$	66,273		$	41,199		$	24,684		$	—		$	132,156
Segment direct costs		(62,710		)	(32,424		)	(24,520		)	—			(119,654		)
Campus-based segments’ overhead		—			—			—			(2,909		)	(2,909		)
Segment profit (loss)		3,563			8,775			164			(2,909		)	9,593
General and administrative expenses		—			—			—			(5,289		)	(5,289		)
Non-cash stock compensation expense		—			—			—			(712		)	(712		)
Operating income (loss)		$	3,563		$	8,775		$	164		$	(8,910	)	$	3,592

 

The Company’s direct costs include all expenses incurred by operating units including selling and administrative expenses.  The Company’s campus-based segments’ overhead represents centralized costs incurred in support of the international network of universities, relating primarily to strategic planning, resource allocation, identification of acquisition targets, and oversight of acquisition transactions.  As such, these costs are not properly allocable to the operating results of Latin America and Europe.

 

The following comparison of results of operations focuses on the continuing operations of the Company.

 

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