UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

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

 

Commission File Number  0-22844

 

LAUREATE EDUCATION, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

52-1492296

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

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.

 

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

 

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

 

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

 

 



 

INDEX

 

 

 

 

PART I. - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets — September 30, 2005 and December 31, 2004 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations - Three months ended September 30, 2005 and September 30, 2004 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations - Nine months ended September 30, 2005 and September 30, 2004 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows - Nine months ended September 30, 2005 and September 30, 2004 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements — September 30, 2005

 

 

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

 

 

 

PART II. - OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

 

 

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

 

 

 

 

Item 5.

Other Information

 

 

 

 

 

 

 

 

Item 6.

Exhibits

 

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURE

 

 

 

i



 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

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

 

 

 

September 30,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Unaudited)

 

(as restated - Note 3)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

99,453

 

$

106,854

 

Available-for-sale securities

 

4,699

 

3,258

 

 

 

 

 

 

 

Receivables:

 

 

 

 

 

Accounts receivable

 

90,209

 

126,486

 

Notes receivable

 

72,318

 

85,450

 

Other receivables

 

7,385

 

3,507

 

 

 

169,912

 

215,443

 

Allowance for doubtful accounts

 

(28,021

)

(25,209

)

 

 

141,891

 

190,234

 

 

 

 

 

 

 

Inventory

 

4,721

 

4,618

 

Deferred income taxes

 

5,103

 

5,079

 

Income tax receivable

 

18,693

 

33,523

 

Prepaid expenses and other current assets

 

21,369

 

15,230

 

Net assets of discontinued operations, current

 

1,840

 

20,000

 

Total current assets

 

297,769

 

378,796

 

 

 

 

 

 

 

Notes receivable, less current portion, net of allowance of $8,323 and $5,846 at September 30, 2005 and December 31, 2004, respectively

 

78,679

 

50,384

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land

 

101,107

 

95,153

 

Buildings

 

257,594

 

266,524

 

Construction in-progress

 

28,415

 

3,154

 

Furniture, computer equipment and software

 

198,668

 

161,132

 

Leasehold improvements

 

72,909

 

56,362

 

 

 

658,693

 

582,325

 

Accumulated depreciation and amortization

 

(121,241

)

(97,163

)

 

 

537,452

 

485,162

 

 

 

 

 

 

 

Goodwill

 

360,667

 

364,973

 

Other intangible assets:

 

 

 

 

 

Tradenames and accreditations

 

183,950

 

174,245

 

Other intangible assets, net of accumulated amortization of $13,080 and $9,358 at September 30, 2005 and December 31, 2004, respectively

 

7,643

 

11,447

 

 

 

552,260

 

550,665

 

 

 

 

 

 

 

Deferred income taxes

 

1,426

 

3,335

 

Deferred costs, net of accumulated amortization of $12,785 and $10,025 at September 30, 2005 and December 31, 2004, respectively

 

22,250

 

15,976

 

Other assets

 

17,745

 

16,193

 

Net assets of discontinued operations

 

 

30,199

 

Total assets

 

$

1,507,581

 

$

1,530,710

 

 

1



 

 

 

September 30,

 

December 31,

 

 

 

2005

 

2004

 

 

 

(Unaudited)

 

(as restated - Note 3)

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

24,334

 

$

20,824

 

Accrued expenses

 

96,875

 

108,542

 

Deferred revenue

 

193,172

 

225,747

 

Current portion of long-term debt

 

43,453

 

47,010

 

Current portion of due to shareholders of acquired companies

 

10,462

 

26,861

 

Income tax payable

 

1,774

 

15,423

 

Deferred income taxes

 

631

 

1,205

 

Other current liabilities

 

4,823

 

10,482

 

Total current liabilities

 

375,524

 

456,094

 

 

 

 

 

 

 

Long-term debt, less current portion

 

76,196

 

86,605

 

Due to shareholders of acquired companies, less current portion

 

35,343

 

29,402

 

Deferred income taxes

 

20,719

 

22,446

 

Other long-term liabilities

 

19,992

 

19,990

 

Total liabilities

 

527,774

 

614,537

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Minority interest

 

52,668

 

37,538

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $.01 per share — authorized 10,000 shares, no shares issued and outstanding as of September 30, 2005 and December 31, 2004

 

 

 

Common stock, par value $.01 per share — authorized 90,000 shares, issued and outstanding shares of 49,759 and 48,813 as of September 30, 2005 and December 31, 2004, respectively

 

498

 

488

 

Additional paid-in capital

 

497,027

 

474,928

 

Retained earnings

 

392,209

 

355,989

 

Accumulated other comprehensive income

 

37,405

 

47,230

 

Total stockholders’ equity

 

927,139

 

878,635

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,507,581

 

$

1,530,710

 

 

 

 

 

 

 

See accompanying notes to financial statements.

 

 

 

 

 

 

2



 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Dollar amounts in thousands, except per share data)

 

 

 

Three months ended September 30,

 

 

 

2005

 

2004

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Revenues

 

$

199,204

 

$

146,110

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Direct costs

 

169,852

 

122,063

 

General and administrative expenses

 

7,173

 

5,450

 

Non-cash stock compensation expense (1)

 

1,335

 

891

 

Total costs and expenses

 

178,360

 

128,404

 

 

 

 

 

 

 

Operating income

 

20,844

 

17,706

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest and other income

 

2,876

 

1,160

 

Interest expense

 

(2,611

)

(2,067

)

Foreign currency exchange loss

 

(90

)

(509

)

 

 

175

 

(1,416

)

Income from continuing operations before income taxes, minority interest, and equity in net loss of affiliates

 

21,019

 

16,290

 

Income tax expense

 

(2,977

)

(2,795

)

Minority interest in income of consolidated subsidiaries, net of tax

 

(5,829

)

(4,192

)

Equity in net loss of affiliates, net of tax

 

(166

)

 

 

 

 

 

 

 

Income from continuing operations

 

12,047

 

9,303

 

(Loss) income from discontinued operations, net of income tax benefit of $0 in 2005 and $974 in 2004

 

(229

)

31

 

 

 

 

 

 

 

Net income

 

$

11,818

 

$

9,334

 

 

 

 

 

 

 

Earnings per common share, basic:

 

 

 

 

 

Income from continuing operations

 

$

0.24

 

$

0.20

 

Net income

 

$

0.24

 

$

0.20

 

 

 

 

 

 

 

Earnings per common share, diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.23

 

$

0.19

 

Net income

 

$

0.23

 

$

0.19

 


 

 

 

 

 

(1) Composition of non-cash stock compensation expense:

 

 

 

 

 

Direct costs

 

$

366

 

$

714

 

General and administrative expenses

 

969

 

177

 

Total

 

$

1,335

 

$

891

 

 

 

 

 

 

 

See accompanying notes to financial statements.

 

 

 

 

 

 

3



 

 

 

Nine months ended September 30,

 

 

 

2005

 

2004

 

 

 

(as restated - Note 3)

 

 

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Revenues

 

$

597,606

 

$

436,517

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Direct costs

 

516,062

 

373,002

 

General and administrative expenses

 

19,074

 

16,170

 

Non-cash stock compensation expense (1)

 

2,529

 

3,886

 

Total costs and expenses

 

537,665

 

393,058

 

 

 

 

 

 

 

Operating income

 

59,941

 

43,459

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest and other income

 

8,565

 

20,505

 

Interest expense

 

(7,687

)

(5,220

)

Foreign currency exchange loss

 

(777

)

(446

)

 

 

101

 

14,839

 

Income from continuing operations before income taxes, minority interest, and equity in net loss of affiliates

 

60,042

 

58,298

 

Income tax expense

 

(8,406

)

(9,911

)

Minority interest in income of consolidated subsidiaries, net of tax

 

(13,081

)

(12,732

)

Equity in net loss of affiliates, net of tax

 

(370

)

(8

)

 

 

 

 

 

 

Income from continuing operations

 

38,185

 

35,647

 

Income (loss) from discontinued operations, net of income tax benefit of $285 in 2005 and $155 in 2004

 

386

 

(5,887

)

Loss on disposal of discontinued operations, net of income tax expense of $3,131 in 2005 and $0 in 2004

 

(2,351

)

 

 

 

 

 

 

 

Net income

 

$

36,220

 

$

29,760

 

 

 

 

 

 

 

Earnings per common share, basic:

 

 

 

 

 

Income from continuing operations

 

$

0.77

 

$

0.78

 

Net income

 

$

0.73

 

$

0.65

 

 

 

 

 

 

 

Earnings per common share, diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.74

 

$

0.74

 

Net income

 

$

0.70

 

$

0.62

 


 

 

 

 

 

(1) Composition of non-cash stock compensation expense:

 

 

 

 

 

Direct costs

 

$

960

 

$

2,105

 

General and administrative expenses

 

1,569

 

1,781

 

Total

 

$

2,529

 

$

3,886

 

 

 

 

 

 

 

See accompanying notes to financial statements.

 

 

 

 

 

 

4



 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

 

 

 

Nine months ended September 30,

 

 

 

2005

 

2004

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

Net income

 

$

36,220

 

$

29,760

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization of fixed assets

 

26,861

 

22,176

 

Amortization

 

10,439

 

8,116

 

Loss on disposal of discontinued operations

 

2,351

 

 

Non-cash stock compensation expense - continuing operations

 

2,529

 

3,886

 

Non-cash stock compensation expense - discontinued operations

 

 

1,436

 

Acceleration of original issue discount on note receivable repayment

 

 

(12,722

)

Minority interest in consolidated subsidiaries

 

12,961

 

12,732

 

Equity in net loss of affiliates

 

370

 

8

 

Deferred income taxes

 

(666

)

9,466

 

Other non-cash items

 

(2,065

)

(1,711

)

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

52,481

 

7,408

 

Income tax receivable

 

15,676

 

 

Inventory, prepaid expenses and other current assets

 

(6,406

)

(2,165

)

Accounts payable and accrued expenses

 

(14,835

)

6,419

 

Income tax payable

 

(7,614

)

(15,305

)

Deferred revenue and other current liabilities

 

(32,373

)

(5,044

)

Net cash provided by operating activities

 

95,929

 

64,460

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchase of available-for-sale securities

 

(4,393

)

(48,812

)

Proceeds from sales or maturity of available-for-sale securities

 

2,950

 

39,605

 

Change in investment in and advances to affiliates and other investments

 

 

2,128

 

Purchase of property and equipment, net

 

(82,861

)

(74,038

)

Cash loaned in exchange for notes receivable

 

(5,414

)

(12,000

)

Proceeds from repayment of related party note receivable

 

 

55,247

 

Proceeds from sales of discontinued operations, net of cash sold

 

12,654

 

 

Cash paid for acquisitions, net of cash acquired

 

(9,485

)

(19,956

)

Payment of deferred consideration for prior period acquisitions

 

(25,232

)

(1,349

)

Expenditures for deferred costs

 

(9,089

)

(7,941

)

Change in other long-term assets

 

1,578

 

(321

)

Net cash used in investing activities

 

(119,292

)

(67,437

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from exercise of options

 

11,207

 

11,454

 

Proceeds from issuance of common stock

 

 

151

 

Proceeds from issuance of long-term debt

 

72,045

 

31,581

 

Payments on long-term debt

 

(80,067

)

(36,975

)

Cash received from minority interest members

 

 

1,595

 

Change in long-term liabilities

 

(1,238

)

2,824

 

Net cash provided by financing activities

 

1,947

 

10,630

 

Effects of exchange rate changes on cash

 

3,351

 

(3,222

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(18,065

)

4,431

 

Cash and cash equivalents at beginning of period

 

117,518

 

98,388

 

Cash and cash equivalents at end of period

 

$

99,453

 

$

102,819

 

 

 

 

 

 

 

Cash and cash equivalents classified as:

 

 

 

 

 

Continuing operations

 

$

99,453

 

$

94,164

 

Discontinued operations

 

 

8,655

 

Cash and cash equivalents at end of period

 

$

99,453

 

$

102,819

 

 

 

 

 

 

 

See accompanying notes to financial statements.

 

 

 

 

 

 

5



 

Laureate Education, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

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

 

Note 1 - Description of Business and Basis of Presentation

 

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

 

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

 

Note 2 — Significant Accounting Policies

 

Stock Based Compensation

 

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

 

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

 

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

 

 

 

2005

 

2004

 

Risk-free interest rate (weighted average)

 

3.9

%

3.3

%

Expected dividend yield

 

0.0

%

0.0

%

Expected lives

 

5-7.5 years

 

5-7.5 years

 

Expected volatility (average)

 

30.2

%

35.1

%

 

6



 

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

 

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

 

 

 

September 30,

 

 

 

2005

 

2004

 

Net income, as reported

 

$

11,818

 

$

9,334

 

Stock-based employee compensation expense included in net income as reported, net of tax

 

801

 

533

 

Stock-based employee compensation expense as if the fair value method had been applied, net of tax

 

(1,092

)

(1,152

)

Pro forma net income

 

$

11,527

 

$

8,715

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic - as reported

 

$

0.24

 

$

0.20

 

Basic - pro forma

 

$

0.23

 

$

0.19

 

Diluted — as reported

 

$

0.23

 

$

0.19

 

Diluted — pro forma

 

$

0.22

 

$

0.18

 

 

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

 

 

 

September 30,

 

 

 

2005

 

2004

 

Net income, as reported

 

$

36,220

 

$

29,760

 

Stock-based employee compensation expense included in net income as reported, net of tax

 

1,518

 

3,193

 

Stock-based employee compensation expense as if the fair value method had been applied, net of tax

 

(3,449

)

(4,014

)

Pro forma net income

 

$

34,289

 

$

28,939

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic - as reported

 

$

0.73

 

$

0.65

 

Basic - pro forma

 

$

0.69

 

$

0.63

 

Diluted — as reported

 

$

0.70

 

$

0.62

 

Diluted — pro forma

 

$

0.66

 

$

0.60

 

 

 

Impact of Recently Issued Accounting Standards

 

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

 

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

 

7



 

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

 

Note 3 - Discontinued Operations

 

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

 

WSI Business

 

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

 

                  Cash of $15,000;

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

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

 

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

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

 

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

 

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

 

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

 

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

 

8



 

Summarized Financial Information of Discontinued Operations

 

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

 

 

 

WSI

 

Other

 

 

 

2005

 

2004

 

2005

 

2004

 

Revenues

 

$

0

 

$

15,943

 

$

1,329

 

$

 

Pretax loss from discontinued operations

 

$

(69

)

$

(902

)

$

(160

)

$

(41

)

 

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

 

 

 

WSI

 

Other

 

 

 

2005

 

2004

 

2005

 

2004

 

Revenues

 

$

12,310

 

$

50,388

 

$

4,830

 

$

 

Pretax income (loss) from discontinued operations

 

$

411

 

$

(1,730

)

$

(310

)

$

(4,312

)

 

Assets and liabilities of the discontinued operations were as follows: 

 

 

WSI

 

Other

 

 

 

December 31,
2004

 

September 30,
2005

 

December 31,
2004

 

Current assets

 

$

37,446

 

$

947

 

$

2,100

 

Property and equipment, net

 

16,311

 

333

 

430

 

Goodwill

 

27,620

 

 

 

Other assets

 

8,773

 

560

 

626

 

Current liabilities

 

(39,702

)

 

 

Long-term liabilities

 

(566

)

 

 

Other comprehensive income

 

(2,841

)

 

 

Net assets of discontinued operations

 

$

47,041

 

$

1,840

 

$

3,156

 

 

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

 

Note 4 — Notes Receivable (Long-term)

 

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

 

 

 

September 30,
2005

 

December 31,
2004

 

Trade notes receivable (long-term), net of allowance of $8,323 and $5,846 at September 30, 2005 and December 31, 2004, respectively

 

$

29,299

 

$

15,339

 

Notes receivable (long-term):

 

 

 

 

 

Kendall College

 

24,140

 

18,026

 

WSI Education S.a.r.l.

 

13,654

 

 

Other

 

11,586

 

17,019

 

 

 

$

78,679

 

$

50,384

 

 

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

 

9



 

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

 

Note 5— Other Intangible Assets

 

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

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Subject to amortization:

 

 

 

 

 

 

 

Student rosters

 

$

18,650

 

$

(11,476

)

$

7,174

 

Non-compete agreements

 

1,291

 

(960

)

331

 

Other

 

782

 

(644

)

138

 

Total

 

$

20,723

 

$

(13,080

)

$

7,643

 

 

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

 

Note 6 - Long-Term Debt

 

Long-term debt consists of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2005

 

2004

 

Mortgage notes payable bearing interest at variable rates ranging from 3.17% to 8.5%

 

$

35,842

 

$

42,045

 

Various unsecured lines of credit bearing interest at variable rates ranging from 2.70% to 10.98%

 

33,278

 

22,618

 

Notes payable secured by fixed assets, bearing interest at rates ranging from 3.80% to 10.00%

 

17,695

 

18,303

 

Various notes payable bearing interest at fixed rates ranging from 0.00% to 8.09%

 

15,769

 

19,556

 

Capital lease obligations bearing interest at rates ranging from 2.93% to 8.40%

 

12,399

 

16,424

 

Various notes payable bearing interest at variable rates ranging from 3.32% to 11.02%

 

4,666

 

14,669

 

 

 

119,649

 

133,615

 

Less: current portion of long-term debt

 

43,453

 

47,010

 

Total long-term debt, net of current portion

 

$

76,196

 

$

86,605

 

 

10



 

Note 7 - Due to Shareholders of Acquired Companies

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2005

 

2004

 

Amounts payable to former shareholders of Universidad Andres Bello (“UNAB”)

 

$

23,864

 

$

27,773

 

Amounts payable to former shareholders of Universidad Tecnologica Centroamericana (“UNITEC”)

 

14,117

 

 

Amounts payable to former shareholders of Universidad Interamericana

 

4,800

 

4,800

 

Amounts payable to former shareholders of Universidad Peruana de Ciencias Aplicadas

 

2,924

 

2,984

 

Amounts payable to former shareholders of Universidad Latinoamericana de Ciencia y Tecnologia

 

100

 

100

 

Amounts payable to former shareholders of Walden

 

 

19,249

 

Amounts payable to former shareholders of Institute of Executive Development

 

 

1,357

 

 

 

45,805

 

56,263

 

Less: current portion of due to shareholders

 

10,462

 

26,861

 

Total due to shareholders, net of current portion

 

$

35,343

 

$

29,402

 

 

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

 

Note 8 - Income Taxes

 

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

 

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

 

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

 

11



 

Note 9 — Stockholders’ Equity

 

The components of stockholders’ equity are as follows:

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Stock

 

Capital

 

Earnings

 

Income

 

Equity

 

Balance at December 31, 2004

 

$

488

 

$

474,928

 

$

355,989

 

$

47,230

 

$

878,635

 

Options exercised for purchase of 886 shares of common stock, including income tax  benefit of $8,839

 

9

 

20,037

 

 

 

 

 

20,046

 

Non-cash stock compensation

 

 

 

2,529

 

 

 

 

 

2,529

 

Other

 

1

 

(467

)

 

 

 

 

(466

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income for the nine months ended September 30, 2005

 

 

 

 

 

36,220

 

 

 

36,220

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

(9,851

)

(9,851

)

Unrealized gain on available-for-sale securities

 

 

 

 

 

 

 

48

 

48

 

Minimum pension liability adjustment

 

 

 

 

 

 

 

(22

)

(22

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

26,395

 

Balance at September 30, 2005

 

$

498

 

$

497,027

 

$

392,209

 

$

37,405

 

$

927,139

 

 

 

 

Note 10 — Comprehensive Income

 

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

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Net income

 

$

11,818

 

$

9,334

 

$

36,220

 

$

29,760

 

Foreign currency translation adjustment

 

12,699

 

7,903

 

(9,851

)

(5,976

)

Unrealized gain (loss) on available-for-sale securities, net of tax

 

(5

)

 

48

 

 

Minimum pension liability adjustment

 

 

189

 

(22

)

(18

)

Comprehensive income

 

$

24,512

 

$

17,426

 

$

26,395

 

$

23,766

 

 

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

 

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

 

12



 

Note 11 - Earnings (Loss) Per Share

 

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

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Numerator used in basic and diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

12,047

 

$

9,303

 

$

38,185

 

$

35,647

 

Income (loss) from discontinued operations, net of tax

 

(229

)

31

 

386

 

(5,887

)

Loss on disposal of discontinued operations, net of tax

 

 

 

(2,351

)

 

Net income

 

$

11,818

 

$

9,334

 

$

36,220

 

$

29,760

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings (loss) per share — weighted-average common shares outstanding

 

49,801

 

46,524

 

49,539

 

45,598

 

Net effect of dilutive stock options and restricted stock based on treasury stock method

 

2,272

 

2,600

 

2,409

 

2,649

 

Denominator for diluted earnings (loss) per share — weighted average common shares outstanding

 

52,073

 

49,124

 

51,948

 

48,247

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share, basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.24

 

$

0.20

 

$

0.77

 

$

0.78

 

Income (loss) from discontinued operations, net of tax

 

0.00

 

0.00

 

0.01

 

(0.13

)

Loss on disposal of discontinued operations, net of tax

 

0.00

 

0.00

 

(0.05

)

0.00

 

Earnings per common share

 

$

0.24

 

$

0.20

 

$

0.73

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share, diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.23

 

$

0.19

 

$

0.74

 

$

0.74

 

Income (loss) from discontinued operations, net of tax

 

0.00

 

0.00

 

0.01

 

(0.12

)

Loss on disposal of discontinued operations, net of tax

 

0.00

 

0.00

 

(0.05

)

0.00

 

Earnings per common share

 

$

0.23

 

$

0.19

 

$

0.70

 

$

0.62

 

 

Per share amounts may not sum due to rounding differences.

 

Note 12 — Commitments and Contingencies

 

Purchase Obligations

 

As part of the 2004 acquisition of Ecole Centrale d’Electronique (“ECE”), the Company committed to purchase the remaining 30% ownership from the sellers on December 31, 2008 for approximately $8,415.  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 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 $1,507 and $2,245, respectively, 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 $962.  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.

 

13



 

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 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 Universidad de Las Americas (“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 recurring 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 recurring 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 4.5 times average recurring EBIT for certain specified periods. Effective April 1, 2009 the Company has a call right to acquire the remaining 20% interest for a variable purchase price based on 5.0 times average EBIT for certain specified periods.

 

Effective April 1, 2009 the minority owners of UNAB and Academia de Idiomas y Estudios Profesionales (“AIEP”) have the right to require the Company to purchase their 20% interest for a variable purchase price based on average recurring 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 $4,676 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, the Company entered into an agreement to guarantee equipment lease payments owed by Kendall College to Key Equipment Finance. Equipment leases with remaining payments of $4,529 through December 2011 are guaranteed by the Company.  The fair value of the guarantees have been recorded as other long-term liabilities in the consolidated balance sheets.

 

Standby Letters of Credit

 

The Company has $15,070 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 $1,100.  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 $2,197 at September 30, 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.

 

14



 

Commitments

 

Under terms of note agreements with Kendall College, the Company has committed to provide additional funding to Kendall College of up to $2,600.

 

Note 13 - Business and Geographic Segment Information

 

The Company is focused exclusively on providing a superior higher education experience to its over 193,000 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:  Campus Based - Latin America, Campus Based - Europe and Laureate Online Education.

 

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 nine separately accredited universities and two accredited professional institutes, and has operations in Mexico, Chile, Peru, Ecuador, Honduras, Panama, and Costa Rica.  Latin America higher education institutions currently enroll approximately 152,000 full-time students and offer more than 100 degree programs through 38 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, Laureate Online Education BV, and Canter, which collectively offer degree programs including education, psychology, health and human services, management, engineering, and information technology.  Laureate Online Education institutions currently enroll approximately 26,000 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 customer profile with different economic characteristics through a different delivery system.  The Latin America and Europe segments are managed separately and have certain differences in customer profile 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- and nine- month periods ended September 30, 2004 has been reclassified to conform to current year presentation.

 

15



 

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

 

Three months ended
September 30, 2005

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

131,574

 

$

21,821

 

$

45,809

 

$

199,204

 

Segment profit

 

35,586

 

(7,653

)

7,054

 

34,987

 

 

 

 

 

 

 

 

 

 

 

Three months ended
September 30, 2004

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

93,668

 

$

17,284

 

$

35,158

 

$

146,110

 

Segment profit

 

26,053

 

(4,465

)

5,105

 

26,693

 

 

 

 

 

 

 

 

 

 

 

Nine months ended
September 30, 2005

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

338,812

 

$

127,944

 

$

130,850

 

$

597,606

 

Segment profit

 

69,975

 

9,039

 

13,653

 

92,667

 

 

 

 

 

 

 

 

 

 

 

Nine months ended
September 30, 2004

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

243,082

 

$

98,958

 

$

94,477

 

$

436,517

 

Segment profit

 

50,412

 

10,736

 

10,313

 

71,461

 

 

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:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Total profit for reportable segments

 

$

34,987

 

$

26,693

 

$

92,667

 

$

71,461

 

Campus-based segment’s overhead

 

(5,635

)

(2,646

)

(11,123

)

(7,946

)

General and administrative expense

 

(7,173

)

(5,450

)

(19,074

)

(16,170

)

Non-cash compensation expense

 

(1,335

)

(891

)

(2,529

)

(3,886

)

Net non-operating income (loss)

 

175

 

(1,416

)

101

 

14,839

 

Income from continuing operations before income taxes, minority interest and equity in net income (loss) of affiliates

 

$

21,019

 

$

16,290

 

$

60,042

 

$

58,298

 

 

Revenue information of continuing operations by geographic area is as follows:

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2005

 

2004

 

2005

 

2004

 

Revenues

 

 

 

 

 

 

 

 

 

Chile

 

$

57,423

 

$

43,772

 

$

129,767

 

$

103,208

 

Mexico

 

57,280

 

43,618

 

162,658

 

123,402

 

United States

 

42,715

 

32,699

 

121,773

 

89,659

 

Spain

 

3,846

 

4,845

 

65,109

 

60,448

 

Other foreign countries

 

37,940

 

21,176

 

118,299

 

59,800

 

Consolidated total

 

$

199,204

 

$

146,110

 

$

597,606

 

$

436,517

 

 

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

 

16



 

Note 14 — Subsequent Event

 

On October 26, 2005, the Company, entered into a 364-day, $120,000 Credit Agreement (the “Agreement”) with Bank of America, N.A. (“Bank of America”).  The Agreement expires on October 25, 2006 and is comprised of two tranches: Tranche A for $90,000 and Tranche B for $30,000.  Tranche B has a $20,000 sublimit for standby letters of credit.  The Agreement effectively supercedes the existing $30,000 Credit Agreement dated June 30, 2003 by incorporating it as Tranche B in the Agreement.

 

The Agreement states that borrowings made under Tranche A may be denominated in U.S. Dollars or foreign currency; however, borrowings denominated in foreign currency may not exceed $50,000. All borrowings made under Tranche B must be denominated in U.S. Dollars.  At the Borrower’s option, borrowings under Tranche A of the facility will bear interest at (a) 1.75% per annum plus the applicable LIBOR rate, or (b) 0.25% per annum plus the higher of (1) 0.50% per annum plus the Federal Funds Rate, or (2) the prime rate publicly announced by Bank of America.  Tranche A borrowings made in currencies other than the U.S. Dollar must be made under the LIBOR rate option.  Also at the Borrower’s option, borrowings under Tranche B will bear interest at (a) 1.50% per annum plus the applicable LIBOR rate, or (b) the higher of (1) 0.50% per annum plus the Federal Funds Rate, or (2) the prime rate publicly announced by Bank of America.  U.S. Dollar borrowings bear an interest rate equal to the greater of (a) Federal Fund rate plus 0.50% and (b) prime rate publicly announced by Bank of America.  Foreign currency borrowings bear an interest rate equal to LIBOR plus 1.75%.  All borrowings made under Tranche B must be denominated in U.S. Dollars.

 

The Agreement has a material covenant, which states that the Company is limited in total net debt, defined as debt minus unrestricted cash, to 2.5 times consolidated EBITDA.  The Agreement is fully guaranteed by the equity interests of the following subsidiaries: Walden E-Learning, Inc., Walden University, Inc., The Canter Group of Companies, and Canter and Associates, Inc.

 

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 its over 193,000 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 eleven and seven separately accredited higher education institutions, respectively.  The Latin America segment has locations in Mexico, Chile, Peru, Ecuador, Honduras, Panama, and Costa Rica. The Europe segment has locations in Spain, Switzerland, and France.  The Laureate Online Education segment provides career-oriented degree

 

17



 

programs to approximately 26,000 students through Walden E-Learning, Inc. (“Walden”), Laureate Education Online BV, and Canter and Associates (“Canter”).

 

Discontinued Operations

 

The Company intends to sell the operations of a non-strategic business in the European segment, accordingly the business has been classified as discontinued operations during the third quarter of 2005.  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 a discontinued operation in both 2004 and 2005. See Note 3 to the unaudited consolidated financial statements for more information regarding these transactions.

 

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 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).  Enrollment and revenue recognition are year round for the Online segment.

 

 

18



 

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 September 30, 2005 and 2004:

 

 

 

 

 

 

 

Laureate

 

 

 

 

 

 

 

Latin

 

 

 

Online

 

 

 

 

 

 

 

America

 

Europe

 

Education

 

Unallocated

 

Consolidated

 

 

 

(in thousands)

 

September 30, 2005

 

 

 

 

 

 

 

 

 

 

 

Segment revenues

 

$

131,574

 

$

21,821

 

$

45,809

 

$

 

$

199,204

 

Segment direct costs

 

(95,988

)

(29,474

)

(38,755

)

 

(164,217

)

Campus-based segment’s overhead

 

 

 

 

(5,635

)

(5,635

)

Segment profit (loss)

 

35,586

 

(7,653

)

7,054

 

(5,635

)

29,352

 

General and administrative expenses

 

 

 

 

(7,173

)

(7,173

)

Non-cash stock compensation expense

 

 

 

 

(1,335

)

(1,335

)

Operating income (loss)

 

$

35,586

 

$

(7,653

)

$

7,054

 

$

(14,143

)

$

20,844

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2004

 

 

 

 

 

 

 

 

 

 

 

Segment revenues

 

$

93,668

 

$

17,284

 

$

35,158

 

$

 

$

146,110

 

Segment direct costs

 

(67,615

)

(21,749

)

(30,053

)

 

(119,417

)

Campus-based segment’s overhead

 

 

 

 

(2,646

)

(2,646

)

Segment profit (loss)

 

26,053

 

(4,465

)

5,105

 

(2,646

)

24,047

 

General and administrative expenses

 

 

 

 

(5,450

)

(5,450

)

Non-cash stock compensation expense

 

 

 

 

(891

)

(891

)

Operating income (loss)

 

$

26,053

 

$

(4,465

)

$

5,105

 

$

(8,987

)

$

17,706

 

 

The following table is derived from the Company’s consolidated financial statements and represents financial information of the Company’s reportable segments for the nine months ended September 30, 2005 and 2004, respectively:

 

 

 

 

 

 

 

Laureate

 

 

 

 

 

 

 

Latin

 

 

 

Online

 

 

 

 

 

 

 

America

 

Europe

 

Education

 

Unallocated

 

Consolidated

 

 

 

(in thousands)

 

September 30, 2005

 

 

 

 

 

 

 

 

 

 

 

Segment revenues

 

$

338,812

 

$

127,944

 

$

130,850

 

$

 

$

597,606

 

Segment direct costs

 

(268,837

)

(118,905

)

(117,197

)

 

(504,939

)

Campus-based segment’s overhead

 

 

 

 

(11,123

)

(11,123

)

Segment profit

 

69,975

 

9,039

 

13,653

 

(11,123

)

81,544