LAUREATE EDUCATION, INC. - Quarter Report: 2007 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x                                  Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2007 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       000-22844        

 

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 x No o.

 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x                            Accelerated filer  o                       Non-accelerated filer  o

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

The registrant had 51,582,558 shares of Common Stock, par value [$.01] per share, outstanding as of April 30, 2007.

 

INDEX

				Page No.
PART I. - FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Consolidated Balance Sheets — March 31, 2007 and December 31, 2006
		Consolidated Statements of Operations — Three months ended March 31, 2007 and March 31, 2006
		Consolidated Statements of Cash Flows — Three months ended March 31, 2007 and March 31, 2006
		Notes to Consolidated Financial Statements — March 31, 2007
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 1A.		Risk Factors
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		N/A
Item 3.		Defaults Upon Senior Securities		N/A
Item 4.		Submission of Matters to a Vote of Security Holders		N/A
Item 5.		Other Information		N/A
Item 6.		Exhibits
SIGNATURES

 

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LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar and share amounts in thousands, except per share data)

		March 31,			December 31,
		2007			2006
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	113,493		$	96,987
Restricted cash		—			33,602
Available-for-sale securities		1,081			62
Receivables:
Accounts receivable		218,686			188,567
Notes receivable		134,912			110,157
Other receivables		11,160			12,430
		364,758			311,154
Allowance for doubtful accounts		(49,246		)	(51,460		)
		315,512			259,694
Inventory, net		6,888			5,803
Deferred income taxes		7,931			5,830
Income tax receivable		25,149			2,633
Prepaid expenses and other current assets		24,200			30,776
Total current assets		494,254			435,387
Notes receivable, less current portion, net of allowance of $10,051
and $11,761 at March 31, 2007 and December 31, 2006, respectively		103,016			96,958
Property and equipment:
Land		127,583			126,598
Buildings		349,760			334,702
Construction in-progress		51,048			58,510
Furniture, computer equipment and software		314,463			295,902
Leasehold improvements		107,019			98,848
		949,873			914,560
Accumulated depreciation and amortization		(199,397		)	(185,248		)
		750,476			729,312
Goodwill		561,982			579,811
Other intangible assets:
Tradenames and accreditations		288,239			261,009
Other intangible assets, net of accumulated amortization of $23,244
and $21,184 at March 31, 2007 and December 31, 2006, respectively		21,717			4,209
		871,938			845,029
Deferred income taxes		57,103			34,870
Deferred costs, net of accumulated amortization of $20,668 and $19,418
at March 31, 2007 and December 31, 2006, respectively		28,512			26,928
Other assets		34,855			34,529
Total assets		$	2,340,154		$	2,203,013

 

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LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(Dollar and share amounts in thousands, except per share data)

		March 31,			December 31,
		2007			2006
		(unaudited)
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	55,287		$	40,788
Accrued expenses		63,461			60,987
Accrued compensation and benefits		62,695			68,497
Deferred revenue		374,968			290,242
Current portion of long-term debt		34,798			95,668
Current portion of due to shareholders of acquired companies		8,086			21,781
Income tax payable		21,546			23,141
Deferred income taxes		2,188			1,571
Other current liabilities		7,429			6,679
Total current liabilities		630,458			609,354
Long-term debt, less current portion		399,341			327,734
Due to shareholders of acquired companies, less current portion		26,511			23,484
Deferred income taxes		32,621			28,159
Income tax payable		66,983			—
Other long-term liabilities		40,126			38,163
Total liabilities		1,196,040			1,026,894
Commitments and contingent liabilities		—			—
Minority interest and minority ownership put arrangements		61,193			45,424
Stockholders’ equity:
Preferred stock, par value $.01 per share — authorized 10,000 shares, no
shares issued and outstanding as of March 31, 2007 and December 31, 2006		—			—
Common stock, par value $.01 per share — authorized 90,000 shares,
issued and outstanding shares of 51,610 and 51,426 as of March 31, 2007 and December 31, 2006, respectively		516			514
Additional paid-in capital		542,542			538,541
Retained earnings		488,822			537,144
Accumulated other comprehensive income		51,041			54,496
Total stockholders’ equity		1,082,921			1,130,695
Total liabilities and stockholders’ equity		$	2,340,154		$	2,203,013

 

The accompanying notes are an integral part of these consolidated financial statements.

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LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollar and share amounts in thousands, except per share data)

		Three months ended March 31,
		2007			2006
					(as restated - Note 2)
		(Unaudited)
Revenues		$	283,524		$	235,110
Costs and expenses
Direct costs		272,931			225,360
General and administrative expenses		11,036			9,851
Transaction costs		9,303			—
Total costs and expenses		293,270			235,211
Operating loss		(9,746		)	(101		)
Other income (expense)
Interest and other income		6,095			3,722
Interest expense		(7,598		)	(4,121		)
Foreign currency exchange loss		(332		)	(111		)
		(1,835		)	(510		)
Loss from continuing operations before income taxes, minority interest, and equity in net (loss) income of affiliates		(11,581		)	(611		)
Income tax benefit (expense)		1,646			(232		)
Minority interest in income of consolidated subsidiaries, net of tax		(1,492		)	(2,318		)
Equity in net (loss) income of affiliates, net of tax		(189		)	(109		)
Loss from continuing operations		(11,616		)	(3,270		)
Loss from discontinued operations, net of income tax expense of $0 in 2007 and 2006		(9		)	(169		)
Gain on disposal of discontinued operations, net of income tax
(expense) benefit of ($265) in 2007 and $576 in 2006		440			261
Net loss		$	(11,185	)	$	(3,178	)
Earnings available to common shareholders:
Loss from continuing operations		$	(11,616	)	$	(3,270	)
Effect of minority put arrangements		(14,761		)	—
Loss from continuing operations available to common shareholders		$	(26,377	)	$	(3,270	)
Net loss		$	(11,185	)	$	(3,178	)
Effect of minority put arrangements		(14,761		)	—
Net loss available to common shareholders		$	(25,946	)	$	(3,178	)
Earnings per common share, basic and diluted:
Loss from continuing operations available to common shareholders		$	(0.51	)	$	(0.06	)
Net loss available to common shareholders		$	(0.50	)	$	(0.06	)

 

The accompanying notes are an integral part of these consolidated financial statements.

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LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)

		Three Months Ended March 31,
		2007			2006
					(as restated - Note 2)
		(Unaudited)
Operating activities
Net loss		$	(11,185	)	$	(3,178	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of fixed assets		12,874			11,856
Amortization		5,193			2,951
Gain on disposal of discontinued operations		(440		)	(261		)
Gain on sale of investment and settlement of lease obligations		(829		)	—
Non-cash interest expense		653			515
Non-cash stock compensation expense		3,283			3,429
Bad debt expense		3,230			2,239
Minority interest in consolidated subsidiaries		1,492			2,318
Equity in net loss of affiliates		189			109
Deferred income taxes		(9,579		)	(1,524		)
Other non-cash items		2,653			(1,030		)
Changes in operating assets and liabilities:
Receivables		(61,805		)	(6,240		)
Inventory, prepaid expenses and other current assets		6,343			(5,637		)
Accounts payable and accrued expenses		11,458			6,352
Income tax receivable		(520		)	—
Income tax payable		4,936			57
Deferred revenue and other current liabilities		86,979			52,142
Net cash provided by operating activities		54,925			64,098
Investing activities
Purchase of available-for-sale securities		(1,073		)	(1,799		)
Proceeds from sales or maturity of available-for-sale securities		57			3,642
Change in restricted cash		33,602			—
Change in investment in and advances to affiliates and other investments		(83		)	—
Purchase of property and equipment, net		(30,230		)	(31,984		)
Cash loaned in exchange for notes receivable		(650		)	(1,642		)
Proceeds from sale of investment and settlement of lease obligation		651			—
Cash paid for acquisitions, including deferred consideration, net of cash acquired		(45,589		)	—
Expenditures for deferred costs		(5,115		)	(1,061		)
Change in other long-term assets		(1,309		)	2,045
Net cash used in investing activities		(49,739		)	(30,799		)
Financing activities
Proceeds from exercise of options		1,269			17,534
Proceeds from issuance of long-term debt		104,973			27,107
Payments on long-term debt		(97,044		)	(41,756		)
Change in other long-term liabilities and other financing activities		(512		)	1,564
Net cash provided by financing activities		8,686			4,449
Effects of exchange rate changes on cash and cash equivalents		2,634			(1,220		)
Net change in cash and cash equivalents		16,506			36,528
Cash and cash equivalents at beginning of period		96,987			105,106
Cash and cash equivalents at end of period		$	113,493		$	141,634

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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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, Basis of Presentation and Recent Events

Laureate Education, Inc. and subsidiaries (the “Company”) provides higher education programs and services to students through the leading global network of licensed 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 thirteen and ten separately licensed higher education institutions, respectively. The Latin America segment has locations in Mexico, Chile, Brazil, Peru, Ecuador, Panama, Costa Rica, and Honduras.  The Europe segment has locations in Spain, Switzerland, France, and Cyprus.  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”).

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, 2006, included in the Company’s Annual Report on Form 10-K.  Operating results for the three-month period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

Certain amounts previously reported for 2006, including a reclassification of $4,214 from additional paid in capital to retained earnings, have been reclassified to conform to the 2007 presentation.  As discussed more fully in Note 4, certain business components are classified as discontinued operations in the accompanying consolidated financial statements.

On January 28, 2007, the Company entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”) with Wengen Alberta, Limited Partnership, an Alberta limited partnership (“Wengen”) and L Curve Sub Inc., a direct subsidiary of Wengen (“Merger Sub”), under which Merger Sub will merge (the “Merger”) with and into Laureate, with Laureate surviving.  Wengen is owned by an investment group consisting of Douglas L. Becker, Laureate’s Chairman and Chief Executive Officer, Kohlberg Kravis Roberts & Co., Citigroup Private Equity, S.A.C. Capital Management, LLC, SPG Partners, Bregal Investments, Caisse de depot et placement du Quebec, Sterling Capital, Makena Capital, Torreal S.A. and Southern Cross Capital.  Under the terms of the Merger Agreement, Laureate shareholders will receive $60.50 in cash for each share of Laureate common stock they own.

Completion of the Merger is subject to customary conditions, including, among others, the approval of the Merger and the Merger Agreement by Laureate’s shareholders, the availability to Wengen and the Merger Sub of debt financing, and certain responses from the United States Department of Education.

The Merger Agreement was filed in a Current Report on Form 8-K filed with the Securities and Exchange Commission on January 29, 2007.  The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement.

Note 2 — Significant Accounting Policies

Minority Share Ownership Purchase Arrangements and Restatement of 2006 Quarterly Information

The Company’s acquisition strategy when acquiring a target company is to initially acquire a majority ownership of the target company with the ultimate goal of acquiring the remaining minority ownership of the target company sometime afterward.  Concurrent with the initial acquisition, the Company typically enters into a series of put and call arrangements with the minority partner of the target company, which will eventually enable or require the Company to purchase the

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remaining ownership interest of the acquired target company.  The Company has used four types of minority ownership purchase arrangements to acquire the minority ownership of the target company including:  Minority Put Arrangements, Similar Exchange Contract Arrangements, Fixed Purchase Price Obligation Arrangements and Combination Exchange Contract Arrangements.  These arrangements are accounted for as follows.

Minority Put Arrangements — An arrangement which provides the minority partner the option to require the Company to purchase the shares from the minority partner (i.e. “Put”), generally based on a future multiple of trailing non-generally accepted accounting principles based (“non-GAAP”) earnings.  The Company accounts for these combined minority interest and put arrangements as mandatorily redeemable securities under Accounting Series Release 268 (“ASR 268”) and Emerging Issues Task Force (“EITF”) Abstract Topic No. D-98 (“D-98”), as redemption is outside of the control of the Company.  In this accounting model, to the extent the value of the minority Put option is greater than the minority interest reflected on its balance sheet (“traditional minority interest”), the Company increases the value of the minority interest and minority put arrangements (similar to the mezzanine classification in ASR 268) with an offset to retained earnings and a similar reduction to the numerator in the earnings per share available to common shareholders calculation.  The Company also reflects any decreases to the amount in the same manner, with the floor in all cases being the traditional minority interest balance. The Company values the Put option by using the most current period earnings (i.e. the latest calendar year’s baseline non-GAAP earnings amount as defined in the Put agreement). Also as part of a methodology election, the Company has chosen to adopt an accretion method as described in Paragraph 16a of D-98 which allows the Company to accrete changes in the redemption value over the period from the date of issuance to the Put’s exercise date.  As such, the Company has elected to only reflect a pro-rata portion of the change in liability based on the time elapsed in the Put instrument.  Annually, the Company revalues the Put and compares that value to the current traditional minority interest value and to the extent the Put value exceeds the traditional minority interest, that shortfall considered earned by the minority partner would be recognized as additional minority interest and minority put arrangements with an equivalent offset in retained earnings and a reduction in earnings available to common shareholders.  At the point in time when the Company settles the obligation (or the Put expires unexercised), the cumulative reduction taken through equity and corresponding reductions to earnings available to common shareholders are reversed and purchase accounting is applied. A line item reconciling net income and income from common shareholders on the statement of operations titled, “Effect of Minority Put Arrangements” reflects this impact, which was $14,761 in the first quarter of 2007. Of this amount, $1,254 or $0.02 per share relates to the effects of the accretion of the redemption value that occurred in the fourth quarter of 2006, based on the nine days of December that this arrangement was outstanding.  This adjustment is not material in either the current year or prior year financial statements. Previously, the Company used an end of month convention to record the accretion effect.

Similar Exchange Contract Arrangements - An arrangement which provides the Company with the right to purchase the remaining shares of the target company (i.e. a “Call”) and provides the minority partner the right to require the Company to purchase its remaining ownership of the target company (i.e. a “Put”).  Generally, the terms of the Company’s Call and the minority partner’s Put, are based on the same multiple of trailing annual non-GAAP earnings and are both exercisable during the same periods in the future.  The Company has concluded that these Put and Call arrangements are not free standing derivatives (or embedded derivatives) as defined under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” or free standing instruments under SFAS 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” and has accounted for these arrangements under EITF Issue No. 00-4 (“EITF 00-4”) “Majority owner’s accounting for a transaction in the shares of a consolidated subsidiary and a derivative indexed to the minority interest in that subsidiary”.

In applying EITF 00-4, under the terms of the arrangement, at inception of the acquisition the Company is certain that the Put or Call will be exercised in the future and it will ultimately own 100% of the target subsidiary.  Either the Company or the Minority partner will have an economic incentive to exercise their respective Call or Put options.  In addition, the fixed formula results in a sufficient transfer of the risks and rewards of ownership. As a result, and regardless of the Company’s legal ownership of the target subsidiary, the Company accounts for the subsidiary on a combined basis as if it owned 100% of the venture and applies purchase accounting at inception.  Under this accounting model, the Company treats the Similar Exchange Contract arrangements as a financing mechanism that enables the Company to own 100% of the target subsidiary and thus accounts for the value of the combined arrangement as debt.  This has the effect of increasing the company’s assets as a result of the additional purchase accounting required at the date of acquisition with a corresponding increase to debt.

The Company values this debt by taking the present value of the calculated liability, using the same formula of non-GAAP earnings as described in the Similar Exchange Contract Arrangements applied to current non-GAAP earnings.  In certain instances, use of the implied value not acquired by the Company is the inception date value of the Similar Exchange Contract arrangements, which is then discounted using the company’s incremental borrowing rate from the earliest exercise

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date of the Put to the acquisition date.  On an ongoing basis, interest expense is accreted quarterly and then at the end of the calendar year when the new non-GAAP value is determined (the Similar Exchange Contract arrangements are generally based on a multiple of annual non-GAAP earnings) the debt balance is increased (or decreased) with this impact generally taken as a fourth quarter interest charge or benefit.  At maturity, the value of the debt associated with the Similar Exchange Contract arrangements instrument will be equivalent to its redemption value, so when the instrument is settled it is treated as a retirement of debt and classified as a financing outflow in the cash flow statement.  As of March 31, 2007 the Company had recorded $7,639 of debt for these arrangements which is reflected on the consolidated balance sheet and in Note 8.

Fixed Purchase Price Arrangements — An arrangement which obligates the Company to acquire the remaining ownership of the target company sometime in the future at a price that is fixed at the acquisition date.  The Company accounts for the combined minority interest and fixed purchase price arrangements under EITF 00-4.  In applying EITF 00-4, since the Company has obligated itself to purchase the remaining shares of the target company at a point in the future, it accounts for the fixed purchase price as debt and employs purchase accounting at inception of the acquisition.  The Company values the debt by taking the present value of the obligation using the Company’s incremental borrowing rate at the time of the acquisition.  On an ongoing basis, interest expense is accreted quarterly until the maturity of the obligation.  As of March 31, 2007, the Company recorded $8,644 of debt for these arrangements which is reflected on the consolidated balance sheet and in Note 8.

Combination Exchange Contract Arrangements - An arrangement which provides the Company with the ability to gradually increase its ownership of the subsidiary based on a series of fixed price or formulaic calls (normally a multiple of non-GAAP earnings) exercisable at certain dates in the future.  After the Company reaches a stated ownership threshold, the minority partner then would have the right to require the Company to purchase the remaining shares owned by the minority partner (Put).  Prior to the Company acquiring a certain ownership percentage, the minority partner’s Put right is not exercisable.  Management does not account for these arrangements until it believes it is probable that it will exercise the final Call which would cause the minority partner’s Put option to become exercisable.  Once it is probable the Put would become exercisable, the Company would then begin accounting for the arrangement at that point.  Depending on the minority partner’s Put arrangement, the accounting would either follow the accounting model of the Similar Exchange Contract Arrangements or the Minority Put Arrangements.

Effect of Minority Share Ownership Purchase Arrangements on 2006 Financial Statements

In the fourth quarter of 2006, the Company reevaluated the accounting for and the financial statement presentation of new and pre-existing put and call option agreements entered into in connection with certain acquisitions. The first quarter of 2006 has been restated to reflect the proper accounting of these pre-existing put and call agreements.

The following amounts represent the impact on each financial statement line affected by the Company’s accounting of the minority share ownership purchase arrangements on the statement of operations for the quarter ended March 31, 2006.

 

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Income Taxes

The Company accounts for income taxes using the liability method.  Under the liability method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e. temporary differences) and are measured at prevailing enacted tax rates that will be in effect when these differences are expected to be settled or realized.

The Company also measures its interim income tax provision using Financial Accounting Standards Board Interpretation No. (“FIN”) 18, Accounting for Income Taxes in Interim Periods.  FIN 18 measures the seasonality of any subsidiary, or controlled entity, that operates at an annual loss for which no income tax benefit is recognized.  This seasonality can cause volatility in the interim effective rates.  FIN 18, however, has no effect on the Company’s annual effective tax rate.

As more fully described in Note 10, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes (“FIN 48’) effective January 1, 2007.  FIN 48 is a significant change to accounting for income taxes.  FIN 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Inherent in this calculation are critical judgments by management related to the determination of the basis for the Company’s tax positions.

Deferred Costs

During the first quarter of 2007, the Company identified errors in accounting for certain deferred costs.  As a result, the Company wrote off $2,609 net of taxes of $1,207 of prior period expenses that were improperly capitalized.  The write off is not material to either the current year or prior year results.

Impact of Recently Issued Accounting Standards

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities at fair value.  SFAS 159 is effective in fiscal years beginning after November 15, 2007.  The Company will adopt SFAS 159 on January 1, 2008.  The Company does not expect that the adoption of this standard will have a material effect on the Company’s financial position or results of operations.

Note 3 — Equity-Based Compensation

The Company recognizes equity-based compensation under the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment”.  The total compensation expense recognized related to stock options for the three months ended March 31, 2007 and 2006 was $1,862 and $1,289, net of the impact of estimated forfeitures, respectively. The total compensation expense recognized related to nonvested restricted stock and unit awards was $1,421 and $1,879 for the three months ended March 31, 2007 and 2006, respectively. The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, for all awards in which service is the only vesting condition. The Company has awarded restricted stock and unit awards in which the vesting is based on Company performance metrics. The compensation cost for performance based awards is recognized when it is probable that the performance levels will be met.

Note 4 — Discontinued Operations

WSI Business

During the first quarter of 2005, the Company closed the sale of its Wall Street Institute (“WSI”) business.  During 2006 and 2005, WSI Education S.a.r.l. received preliminary field audit reports assessing Italian value added taxes (“VAT”) owed related to services provided by the WSI business unit in 2004 and 2003 and prior to its disposition.  Under the terms of the sale agreement with WSI, the Company agreed to indemnify WSI from obligations that may arise as a result of an Italian VAT assessment related to periods prior to the closing of the sale of the WSI business unit on February 28, 2005. However, the Company is entitled to the value of the tax benefit of any indemnification.  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.  The Company has filed, on behalf of WSI Education S.a.r.l., an appeal with the Italian authorities and a complaint against the Italian Republic at the European Union Commission for restraint of trade based on the VAT exemption only

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being available to Italian owned companies.  In the third quarter of 2006, the Company received notification that the Italian Court denied the stay of payment request, which sought to defer payment of the tax and interest portion of the obligation that is normally required to commence court proceedings.  As a result, the Company deposited approximately $3,000 with the Italian tax authority, representing approximately 50% of the 2003 and prior total tax and interest assessed to date. The Company believes that a loss from this matter is not probable, nor is it possible to estimate the ultimate outcome of this issue.  No expense for any potential adverse outcome of this matter has been recorded in the consolidated financial statements.  The Company intends to vigorously pursue these cases.

Other

During the first quarter of 2007, the Company recorded a gain on disposal of discontinued operations of approximately $411, net of $265 of tax, due to the termination of a lease.  The Company entered into an agreement to terminate a lease in which rental payments had been accrued in discontinued operations, related to a 2000 business sale.  See Note 14, Material Guarantees, for further discussion of the lease termination transaction.

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:

Note 5 — Acquisitions

During first quarter 2007, the Company purchased Instituto de Cultura Superior Valle del Bravo de Reynosa, A.C. (“UVB”), an educational institution in Mexico. The acquired institution will be combined into Universidad del Valle de Mexico (“UVM”). This acquisition was made to extend UVM’s geographical scope into eastern Mexico into key markets targeted by UVM, expand the Health Sciences platform, and provide further national scale to UVM’s operations. This transaction had a total purchase price of $35,840, paid in cash of $32,525 plus $3,315 to be paid through a promissory note.  UVB’s results of operations are included in the Company’s Statement of Operations since the date of the acquisition.

The Company accounted for this acquisition using the purchase method of accounting, allocating the purchase price to its acquired identifiable intangible assets and liabilities assumed based on estimated fair values at the date of acquisition, with the excess of $9,626 recorded as goodwill. The preliminary allocation of the purchase price is subject to revision based on final determination of fair values.

Note 6 — Notes Receivable (Long-term)

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

 

Of the balance of long-term other trade notes receivable, $14,720 and $10,373 was unearned as of March 31, 2007 and December 31, 2006, respectively 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.

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Note 7— Other Intangible Assets

The following table summarizes other intangible assets as of March 31, 2007:

 

The following tables summarizes other intangible assets as of December 31, 2006:

 

Amortization expense for intangible assets subject to amortization for the three months ended March 31, 2007 and 2006 was $2,173 and $745, respectively. The estimated future amortization expense for intangible assets for the remaining nine-month period of 2007 is $2,934. The estimated future amortization expense for intangible assets for each of the five years subsequent to December 31, 2007 is as follows: 2008 - $2,975; 2009 - $2,510; 2010 - $2,280; 2011 and beyond - $11,018.

Note 8 — Long-Term Debt

Long-term debt consists of the following:

		March 31,			December 31,
		2007			2006
Long-term credit lines under the $350,000 credit agreement with JPMorgan Chase Bank, national Association and certain other parties thereto bearing interest at rates ranging from 6.83% to 6.90%		$	255,471		$	208,040
Mortgage notes payable bearing interest at variable rates ranging from 3.35% to 8.50%		51,553			52,220
Various notes payable bearing interest at variable rates ranging from 6.50% to 9.15%		28,720			2,988
Notes payable secured by fixed assets, bearing interest at rates ranging from 3.95% to 10.00%		27,844			27,981
Capital lease obligations bearing interest at rates ranging from 2.60% to 9.00%		22,401			22,699
Various notes payable bearing interest at fixed rates ranging from 3.00% to 8.09%		18,443			18,638
Various unsecured lines of credit bearing interest at variable rates ranging from 3.45% to 10.0%		13,424			74,923
Fixed Purchase Price Arrangement (See Notes 2 and 14)		8,644			8,446
Similar Exchange Contract Arrangements (See Notes 2 and 14)		7,639			7,467
		434,139			423,402
Less: current portion of long-term debt		34,798			95,668
Total long-term debt, net of current portion		$	399,341		$	327,734

 

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Note 9 — Due to Shareholders of Acquired Companies

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

		March 31, 2007			December 31, 2006
Amounts payable to former shareholders of:
Universidad Tecnologica Centroamericana (“UNITEC”)		$	14,903		$	15,038
Universidade Anhembi Morumbi (“UAM”)		10,871			10,831
Instituto de Cultura Superior Valle del Bravo de Reynosa, A.C. (“UVB”)		3,352			—
Universidad Peruana de Ciencias Aplicadas (“UPC”)		3,071			3,059
Universidad del Noroeste (“UNO”)		1,873			1,882
Compania de Servicios Educativos (“CSE”)		427			528
Universidad Latinoamericana de Ciencia y Tecnologia (“ULACIT”)		100			100
Universidad Andres Bello (“UNAB”)		—			13,827
		34,597			45,265
Less: current portion of due to shareholders		8,086			21,781
Total due to shareholders, net of current portion		$	26,511		$	23,484

 

Note 10 — Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a charge of approximately $22,376 to the January 1, 2007 balance of retained earnings.  The total amount of gross unrecognized tax benefits as of January 1, 2007 was $73,291 and related accrued interest and penalties was $10,178. If these unrecognized tax benefits and related interest and penalties were recognized, approximately $83,469, net of tax benefits, would be recorded as a component of income tax expense.  Some portion of any such reduction might be reported as discontinued operations. The Company will continue its practice to recognize interest and penalties related to uncertain tax positions as a component of income tax expense.

The Company files numerous consolidated and separate income tax returns in the United States federal jurisdiction along with various state and foreign jurisdictions.  With few exceptions, as noted below, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2000.  The Company is currently under examination for the 2003 federal income tax return and has open audits for 1997 through 2000.  The Company is also currently under examination in the Netherlands for the years 2000 through 2003. It is reasonably possible that within the next 12 months the Company will resolve some tax matters with taxing authorities that could result in a reduction in our FIN 48 liability up to $12.0 million.

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, 2007 and 2006 were based on the estimated effective tax rates applicable for the 2007 and 2006 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 (38.0)% for the three months ended March 31, 2007 and 2006, respectively. For the three months ended March 31, 2007 and 2006, the effective rate includes the impact of FIN 18.  FIN 18 only applies to interim periods and has no effect on the Company’s annual effective rate. 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 along with the Company’s intent and ability to permanently reinvest foreign earnings outside of the United States results in an effective tax rate significantly lower than the United States statutory rate.

On February 8, 2006, the Company received notice of certain adjustments proposed by the Internal Revenue Service (the “IRS”) with respect to the Company’s 2000 federal income tax return. The proposed adjustments primarily relate to the gain on the sale of the Company’s Prometric testing subsidiary in 2000 for $775,000. The IRS claims that the Company owes additional taxes of approximately $54,600 plus penalties and interest. The Company filed a protest with the IRS during the second quarter of 2006 and will vigorously contest the IRS’s determination and believes that it has properly reported the

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transaction.  Based on current information, the Company has adequately accrued for identified risks associated with this issue.  The Company can provide no assurance that the eventual outcome will not result in a material adverse amount.

On February 23, 2006, the Company received a Notice of Deficiency from the IRS for the Company’s 1997 federal income tax return disagreeing with the Company’s exclusion from income of a break up fee it received in its attempted acquisition of National Education Corporation. The Company is appealing the Notice of Deficiency and paid the current amount of the assessment, $8,100, and the associated interest due of $5,900, in May 2006.   These amounts had been previously accrued by the Company.  The Company is preparing its appeal to be appropriately filed in the United States Court of Claims.  The Company believes that it properly excluded the break up fee from income and intends to vigorously contest the IRS’s determination. Although the ultimate disposition of this issue is uncertain, based on current information, the Company believes that the outcome of this issue will not have a material adverse effect on the Company’s consolidated financial position, liquidity, or results of operations.

In April 2006, the IRS began a field examination of the Company’s 2003 income tax return.  In addition, there are several other income tax audits in progress, which includes an IRS examination of Walden for the 2003 federal income tax return; a Dutch tax examination of two of the Company’s Dutch subsidiaries, Laureate I BV and Laureate International BV for the 2000 through 2003 income tax returns; and a Dutch tax examination of the net operating loss carryforwards that Laureate Online Education BV inherited when it was purchased from third parties in 2004.  No assurance can be given as to the eventual outcome of these audits. Based on current information, the Company has adequately accrued for identified risks associated with these tax authority inquiries.  The Company can provide no assurance that the eventual outcome will not result in a material adverse amount.

Note 11 — Stockholders’ Equity

The components of stockholders’ equity are as follows:

LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Dollar and share amounts in thousands)

		Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total Stockholders’ Equity
Balance at December 31, 2006		$	514		$	538,541		$	537,144		$	54,496		$	1,130,695
Options exercised for purchase of 61 shares of common stock, net of 4 replenishment shares		1			1,269									1,270
Non-cash stock compensation					3,283									3,283
Change in redemption value of minority ownership put arrangements								(14,761		)				(14,761		)
Cumulative impact of change in accounting for uncertainties in income taxes (FIN 48—see notes 2 and 10)								(22,376		)				(22,376		)
Other		1			(551		)				288			(262		)
Comprehensive loss:
Net loss for the three months ended March 31, 2007								(11,185		)				(11,185		)
Foreign currency translation adjustment											(3,743		)	(3,743		)
Total comprehensive loss														(14,928		)
Balance at March 31, 2007		$	516		$	542,542		$	488,822		$	51,041		$	1,082,921

 

 

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Note 12 — Comprehensive Income (Loss)

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

 

Note 13 — Earnings (Loss) Per Common Share

The following table summarizes the computations of basic and diluted loss per common share:

		Three-months ended
		March 31,
		2007			2006
					(as restated – Note 2)
Numerator used in basic and diluted loss per common share:
Loss from continuing operations		$	(11,616	)	$	(3,270	)
Loss from discontinued operations, net of tax		(9		)	(169		)
Gain on disposal of discontinued operations, net of tax		440			261
Net loss		$	(11,185	)	$	(3,178	)
Loss from continuing operations		$	(11,616	)	$	(3,270	)
Effect of minority put arrangements		(14,761		)	—
Loss from continuing operations available to common shareholders		$	(26,377	)	$	(3,270	)
Net loss		$	(11,185	)	$	(3,178	)
Effect of minority put arrangements		(14,761		)	—
Net loss available to common stockholders		$	(25,946	)	$	(3,178	)
Denominator for basic earnings per share - weighted-average common shares outstanding		51,614			50,436
Net effect of dilutive stock options based on treasury stock method		—			—
Denominator for diluted earnings per share - weighted-average common shares outstanding and assumed conversions		51,614			50,436
Loss per common share basic and diluted:
Loss from continuing operations		$	(0.23	)	$	(0.06	)
Effect of minority put arrangements		(0.29		)	—
Loss from continuing operations available to common shareholders		(0.51		)	(0.06		)
Loss from discontinued operations, net of tax		—			—
Gain on disposal of discontinued operations, net of tax		0.01			0.01
Net loss available to common shareholders		$	(0.50	)	$	(0.06	)

 

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Outstanding stock options, unvested restricted shares and restricted stock units were not included in the computation of loss per diluted common share for the three months ended March 31, 2007 and 2006 because they were anti-dilutive.  The number of shares of common stock issuable upon the exercise of stock options and the lapse of restricted shares was 5,158 and 537, respectively, as of March 31, 2007 and 4,872 and 591, respectively, as of March 31, 2006.

Per share amounts may not sum due to rounding differences.

Note 14 — Commitments and Contingencies

This chart provides a high-level summary of the various Minority Share Ownership Purchase Arrangements the Company had outstanding as of March 31, 2007.  Also, in connection with certain acquisitions, variable amounts of contingent consideration are payable to the sellers based upon specified terms.

Higher Education Institution				Date of Contingency		Additional Ownership Share		Terms of Contingent Transaction
Company Call Right Arrangements:
UAM(1)				March 1, 2009		29%		The greater of 4 times recurring earnings before interest, taxes, depreciation and amortization (“EBITDA”) for certain specified periods or equivalent per share valuation of the Company’s initial 51% acquisition of UAM, adjusted for inflation
				Beginning March 1, 2013 through March 1, 2023		20%		The greater of 4 times recurring EBITDA for certain specified periods or equivalent per share valuation of the Company’s initial 51% acquisition of UAM, adjusted for inflation
Minority Put Right Arrangements:
UAM(2), (5)				March 1, 2009		29%		Approximately 4 times recurring EBITDA for certain specified periods
				Beginning March 1, 2013 through March 1, 2023		20%		Variable purchase price based on recurring EBITDA for certain specified periods
UVM(3), (5)				Beginning when minority owners receive the December 31, 2006 audited UVM financial statements through December 31, 2011		Up to 10%		Approximately 7 times earnings before interest and taxes (“EBIT”) of the previous calendar year times the percentage of shares being sold by minority owners
				Beginning January 1, 2012 through December 31, 2012		Up to 10%		Approximately 7 times EBIT of the previous calendar year times the percentage of shares being sold by minority owners

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Institut Francais de Gestion (“ IFG”)(4), (5)	July through September 2008	10%	$1,069
Combination Exchange Arrangements:
Company Call Right Arrangements:
Cyprus College(6)	Beginning July 1, 2006	35%	6% - Based on 6.25 times 2006 audited recurring EBITDA
			29% - Payable April 2012 based on a variable scale for new enrollments and 2011 EBITDA
	January 1, 2012 or up to five years thereafter	20%	Payable April in the year following exercise based on a variable scale for new enrollments and EBITDA related to the year prior to exercise
CH Holdings Netherlands BV(7)	On or before October 31, 2008	8.75%	$10,200 plus an amount equal to CH Holdings Netherlands BV’s total cash minus its long-term debt multiplied by the Sellers ownership percentage
	On or before October 31, 2008	21.25%	$10,200 plus an amount equal to CH Holdings  JV’s total cash minus its long-term debt multiplied by the Sellers ownership percentage
	Beginning November 1, 2008 through November 1, 2018	20%	Approximately 6 times prior twelve months EBITDA plus CH Holdings Netherlands BV’s cash minus long-term debt multiplied by the Sellers ownership percentage with a minimum payment of $20,000 divided by the total number of shares representing the 20% plus CH Holdings Netherlands BV’s cash minus long-term debt multiplied by the Sellers ownership percentage
Minority Put Right Arrangements:
Cyprus College(6)	April 1, 2012 or up to five years thereafter	20%	Payable based on a variable scale for new enrollments and EBITDA related to the year prior to exercise
CH Holdings Netherlands BV(7)	Beginning November 1, 2008 through November 1, 2018	20%	Approximately 6 times prior twelve months EBITDA plus CH Holdings  JV’s cash minus long-term debt multiplied by the Sellers ownership percentage

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Similar Exchange Contract Arrangements:
UPC(8)	Period from April 1st to June 30th of each calendar year following 2006	20%	Approximately 4.25 times audited EBITDA for the preceding calendar year adjusted for a predefined rent formula minus the outstanding balance of all UPC’s long-term interest bearing debt plus the market value of any real estate owned by UPC multiplied by the Sellers ownership percentage
Fixed Purchase Price Arrangements:
Ecole Centrale d’Electronique (“ECE”)(9)	December 31, 2008	30%	$9,351
Capital Contribution Obligations:
IFG(10)	On or before July 31, 2007	16%	$1,675
	July 31, 2007	23%	$2,495
Contingent Earnouts (cash payments):
Laureate Online Education BV(11)	April 1, 2007		Approximately 75% of 4 times 2006 EBITDA, not to exceed $10,000
	April 1, 2008		Approximately 4 times the average of 2006 and 2007 EBITDA, not to exceed $10,000, less the April 1, 2007 payment

 

Obligations and contingent payments (except for the contingent earnout on Laureate Online Education BV) are denominated in foreign currency and are subject to foreign currency risk.

Company Call Right Arrangements

(1) Effective March 1, 2009, the Company has a call right to acquire a 29% interest from the minority owners for a variable purchase price equal to the greater of 4.0 times recurring EBITDA for certain specified periods with a minimum payment of the equivalent per share valuation of the Company’s initial 51% acquisition of UAM, as adjusted for local inflation. Beginning March 1, 2013, and continuing for ten years, the Company has another call right on the remaining 20% interest of the minority owners, with the purchase price determined based on a similar formula.  No accounting for this arrangement is included in the Company’s financial statements.

Minority Put Right Arrangements

The below arrangements are accounted for as Minority Put Right Arrangements as described in Note 2.

(2) Effective March 1, 2009 the minority owners of UAM have a put right to require the Company to purchase an equity interest of 29% from the minority owners at a variable purchase price based on 4.0 times recurring EBITDA for certain specified periods. Beginning March 1, 2013, and continuing for ten years, the minority owners hold a second put right to require the Company to purchase the remaining 20% interest from the minority owners, with the purchase price determined based on a similar formula.  As of March 31, 2007, the Company has recorded $5,133 in minority interest and minority ownership put arrangements on the consolidated balance sheet for this arrangement.

(3) As a part of the 10% step acquisition of UVM in 2006, there are two put options held by the minority owners for the remaining 10% interest.  The first put option covers the time after which the minority owners receive the December 31, 2006 audited financial statements of UVM through December 31, 2011.  During this period, the minority owners may exercise the first put option one time for each calendar year with the minimum shares transferred to the Company on each occasion equal to 25% of the shares held by the minority shareholder.  Beginning January 1, 2012 through December 31, 2012, the minority owners have a second put right to require the Company to purchase all remaining shares.  The put price for both put options is equal to approximately 7.0 times EBIT of the previous calendar year times the percentage of shares being sold by the minority owners.  As of March 31, 2007, the Company has recorded $13,205 in minority interest and minority ownership put arrangements on the consolidated balance sheet for this arrangement.

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(4) During the period July through September 2008, the sellers of IFG may exercise a put option requiring the Company to purchase the remaining 10% ownership for approximately $1,069.  As of March 31, 2007 the Company recorded $637 in minority interest and minority ownership put arrangements on the consolidated balance sheet for this arrangement.

(5) The $18,975 related to Minority Put right arrangements is the present value of the Redeemable Minority Interests associated with the Brazilian, Mexican and French acquisitions that is in excess of the minority interest for those entities.  Also as part of a methodology election, the Company has chosen to adopt an accretion method which allows the Company to accrete changes in the redemption value over the period from the date of issuances to the earliest redemption date.  As such, the Company has elected to only reflect a pro-rata portion of the change in liability based on the time elapsed in the Put instrument which is significantly lower than the final amount that will be required to settle the minority put arrangement.  If the Minority put arrangements were all exercisable at March 31, 2007, the Company would be obligated to pay the minority shareholders $75,436.

Combination Exchange Contract Arrangements

As described in Note 2, there is no accounting for Combination Exchange Contract Arrangements described below as it is not probable that the Company will exercise its Call rights.

(6) As of March 31, 2007 the Company has not exercised its 6% share purchase option. Effective April 1, 2012 and exercisable up to five years thereafter, the minority owners of Cyprus College have a put right to require the Company to purchase an equity interest of 20% from the minority owners at a variable purchase price based on a variable scale for new enrollments and EBITDA for the calendar year preceding the exercise date.  Beginning July 1, 2006, the Company has a call right to acquire up to a 35% interest from the minority owners for a variable purchase price based on a variable scale for new enrollment and 2006 EBITDA.  Effective January 1, 2012 and exercisable up to five years thereafter, the Company has the call right to acquire the remaining 20% interest from the minority owners for a variable purchase price based on a variable scale for new enrollment and EBITDA for the calendar year preceding the exercise date.

(7) As a part of the acquisition of CH Holdings Netherlands BV, there are three purchase obligations that enable the Company to increase its ownership interest to 100%.  The first option allows the Company to increase its ownership in CH Holdings Netherlands BV to 58.75% if by October 30, 2008 it makes an additional $10,200 payment plus an amount equal to CH Holdings Netherlands BV’s total cash minus its total long-term debt multiplied by the seller’s ownership percentage.  After exercising the first call option and before October 30, 2008, the Company has a second call right to increase its ownership to 80% for an additional $10,200 plus an amount equal to CH Holdings Netherlands BV’s total cash minus its total long-term debt multiplied by the seller’s ownership percentage.  There is a put/call option for the final 20% ownership that can be exercised prior to November 1, 2018 following the exercise of the second call option.  The put option will be calculated at 6.0 times the prior twelve months EBITDA plus CH Holdings Netherlands BV’s total cash minus its total long-term debt multiplied by the seller’s ownership percentage.  The call option will be calculated at 6.0 times the prior twelve months EBITDA plus CH Holdings Netherlands BV’s total cash minus its total long-term debt multiplied by the seller’s ownership percentage, with a minimum payment of $20,000 plus CH Holdings Netherlands BV’s cash minus its total long-term debt multiplied by the seller’s percentage.

Similar Exchange Contract Arrangements

The below arrangement is accounted for as a Similar Exchange Contract as described in Note 2.

(8) During the period of April 1st through June 30th of each calendar year following 2006, there are put and call options with similar terms which enable the Company to acquire or the minority owners to require the Company to purchase the remaining 20% ownership in UPC.  The put and call options are set at approximately 4.25 times the audited EBITDA for the preceding calendar year adjusted for a predefined rent formula minus the outstanding balance of all long-term interest bearing debt at UPC plus the market value of any real estate owned by UPC at the time of the option multiplied by the seller’s ownership percentage.  As of March 31, 2007, the value of the debt reflected on the Company’s balance sheet is $7,639 for this Similar Exchange Contract.

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Fixed Price Purchase Contract Arrangements

The below arrangement is accounted for as a Fixed Price Purchase Contract as described in Note 2.

(9) As part of the acquisition of ECE, the Company committed to purchase the remaining 30% ownership from the sellers on December 31, 2008 for approximately $9,351.  The purchase obligation is denominated in Euros, and is subject to foreign currency exchange rate risk on the date of payment.  As of March 31, 2007, the value of the debt reflected on the Company’s balance sheet is $8,644.

Capital Contribution Obligations

(10) As part of the acquisition of IFG, the Company committed to additional capital contributions, which will increase the Company’s share of ownership by diluting the present minority ownership.  The agreement provides that, no later than July 31, 2006 and July 31, 2007, the Company shall contribute approximately $1,675 and $2,495 resulting in an increase in ownership share of 16% and 23%, respectively. During the second quarter of 2006, the Company negotiated an amendment to the agreement that provides that the first additional capital contribution of $1,675 can be extended up to July 31, 2007, instead of July 31, 2006. As of March 31, 2007, the 2007 contributions have not been made. The purchase obligation is denominated in Euros, and is subject to foreign currency exchange rate risk on the dates of payment.  This arrangement is not accounted for in the Company’s balance sheet as of March 31, 2007.

Contingent Earnouts (cash payments)

(11) Additional amounts of contingent consideration, not to exceed $10,000, are due the sellers of Laureate Online Education BV equal to four times the average of the audited EBITDA for the calendar years ending December 31, 2006 and 2007.   The April 1, 2007 payment is calculated at $0 based on 2006 earnings. Excluding adjustments of EBITDA items and other negotiated amounts and using 2006 results to estimate the 2007 results, the Company would be obligated to the sellers for $0.

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, results of operations or cash flows.  See additional discussion in Note 4 and Note 10.

Material 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 $4,860 through December 2010 are guaranteed by the Company.  Under the terms of an asset purchase agreement with Educate, the Company is indemnified against any losses suffered as a result of these lease guarantees.  During 2004, the Company entered into an agreement to guarantee equipment lease payments owed by Kendall to Key Equipment Finance. Equipment leases with remaining payments of $3,442 through December 2011 are guaranteed by the Company. In connection with a lease termination agreement, entered into in first quarter of 2007, the Company has been released its guaranteed rental payments of a co-tenant.  The Company recognized a loss of approximately $374 due to the lease termination fee agreed upon.  However, along with the termination agreement the Company has guaranteed the sublease payments of two tenants within the building in which the Company vacated. If the sublease tenant is delinquent on any payment, the Company will be responsible for the delinquent amount.  The total delinquent payments over the term of the guarantee cannot exceed $646.  The fair values of the guarantees have been recorded as other long-term liabilities in the consolidated balance sheets.

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