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 June 30, 2006 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)

 

 

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 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 51,390,469 shares of Common Stock, par value [$.01] per share, outstanding as of July 31, 2006.

 

 



 

INDEX

 

 

 

 

 

Page No.

PART I. - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets — June 30, 2006 and December 31, 2005

 

1

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations — Three-months ended June 30, 2006 and June 30, 2005

 

3

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations — Six-months ended June 30, 2006 and June 30, 2005

 

4

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows — Six-months ended June 30, 2006 and June 30, 2005

 

5

 

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements — June 30, 2006

 

6

 

 

 

 

 

 

 

 

 

Item 2.

 

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

 

23

 

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

35

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

36

 

 

 

 

 

 

 

PART II. - OTHER INFORMATION

 

 

 

 

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

37

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

37

 

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

 

 

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

37

 

 

 

 

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

37

 

 

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

38

 

 

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

10

 

 

i



 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

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

 

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(unaudited)

 

(as restated - Note 2)

 

 

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

113,859

 

$

105,106

 

Available-for-sale securities

 

5,274

 

4,768

 

 

 

 

 

 

 

Receivables:

 

 

 

 

 

Accounts receivable

 

143,740

 

181,211

 

Notes receivable

 

104,901

 

104,880

 

Other receivables

 

15,197

 

14,208

 

 

 

263,838

 

300,299

 

Allowance for doubtful accounts

 

(45,186

)

(39,006

)

 

 

218,652

 

261,293

 

 

 

 

 

 

 

Inventory

 

5,448

 

5,282

 

Deferred income taxes

 

18,251

 

16,978

 

Income tax receivable

 

1,645

 

2,373

 

Prepaid expenses and other current assets

 

25,336

 

17,836

 

Total current assets

 

388,465

 

413,636

 

 

 

 

 

 

 

Notes receivable, less current portion, net of allowance of $9,106 and $9,328 at June 30, 2006 and December 31, 2005, respectively

 

86,315

 

83,813

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land

 

115,537

 

101,993

 

Buildings

 

302,104

 

256,941

 

Construction in-progress

 

49,220

 

40,856

 

Furniture, computer equipment and software

 

249,243

 

223,143

 

Leasehold improvements

 

87,146

 

81,336

 

 

 

803,250

 

704,269

 

Accumulated depreciation and amortization

 

(154,735

)

(130,332

)

 

 

648,515

 

573,937

 

 

 

 

 

 

 

Goodwill

 

416,899

 

412,215

 

Other intangible assets:

 

 

 

 

 

Tradenames and accreditations

 

216,373

 

215,112

 

Other intangible assets, net of accumulated amortization of $16,654 and $14,397 at June 30, 2006 and December 31, 2005, respectively

 

5,229

 

7,163

 

 

 

638,501

 

634,490

 

 

 

 

 

 

 

Deferred income taxes

 

29,381

 

25,760

 

Deferred costs, net of accumulated amortization of $16,696 and $14,041 at June 30, 2006 and December 31, 2005, respectively

 

21,205

 

21,935

 

Other assets

 

22,784

 

19,651

 

Net assets of discontinued operations

 

 

2,906

 

Total assets

 

$

1,835,166

 

$

1,776,128

 

 

 

1



 

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

(unaudited)

 

(as restated - Note 2)

 

 

 

 

 

(unaudited)

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

37,681

 

$

30,078

 

Accrued expenses

 

58,750

 

50,739

 

Accrued compensation and benefits

 

62,617

 

55,724

 

Deferred revenue

 

233,261

 

273,030

 

Current portion of long-term debt

 

59,460

 

63,044

 

Current portion of due to shareholders of acquired companies

 

23,428

 

18,737

 

Income tax payable

 

27,041

 

31,615

 

Deferred income taxes

 

28,880

 

28,644

 

Other current liabilities

 

2,397

 

3,543

 

Total current liabilities

 

533,515

 

555,154

 

 

 

 

 

 

 

Long-term debt, less current portion

 

114,710

 

99,997

 

Due to shareholders of acquired companies, less current portion

 

29,087

 

46,686

 

Deferred income taxes

 

2,759

 

583

 

Other long-term liabilities

 

24,213

 

22,876

 

Total liabilities

 

704,284

 

725,296

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Minority interest

 

89,280

 

72,354

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $.01 per share — authorized 10,000 shares, no shares issued and outstanding as of June 30, 2006 and December 31, 2005

 

 

 

Common stock, par value $.01 per share — authorized 90,000 shares, issued and outstanding shares of 51,353 and 49,861 as of June 30, 2006 and December 31, 2005, respectively

 

514

 

499

 

Additional paid-in capital

 

528,357

 

503,791

 

Retained earnings

 

473,033

 

435,735

 

Accumulated other comprehensive income

 

39,698

 

38,453

 

Total stockholders’ equity

 

1,041,602

 

978,478

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

1,835,166

 

$

1,776,128

 

 

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 June 30,

 

 

 

2006

 

2005

 

 

 

 

 

(as restated - Note 2)

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Revenues

 

$

303,119

 

$

226,969

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Direct costs

 

234,718

 

176,559

 

General and administrative expenses

 

11,420

 

5,800

 

Total costs and expenses

 

246,138

 

182,359

 

 

 

 

 

 

 

Operating income

 

56,981

 

44,610

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Gain on sale of Chancery Software, Ltd.

 

9,322

 

 

Interest and other income

 

4,282

 

3,273

 

Interest expense

 

(3,142

)

(2,703

)

Foreign currency exchange loss

 

(203

)

(936

)

 

 

10,259

 

(366

)

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

 

67,240

 

44,244

 

Income tax expense

 

(12,134

)

(4,955

)

Minority interest in income of consolidated subsidiaries, net of tax

 

(14,345

)

(7,865

)

Equity in net loss of affiliates, net of tax

 

(102

)

(114

)

 

 

 

 

 

 

Income from continuing operations

 

40,659

 

31,310

 

(Loss) Income from discontinued operations, net of income tax expense of $314 in 2006 and $0 in 2005

 

(1,504

)

3

 

Loss from disposal of discontinued operations, net of income tax benefit (expense of $415 in 2006 and ($10,531) in 2005

 

(1,182

)

(9,751

)

 

 

 

 

 

 

Net income

 

$

37,973

 

$

21,562

 

 

 

 

 

 

 

Earnings per common share, basic:

 

 

 

 

 

Income from continuing operations

 

$

0.79

 

$

0.63

 

Net income

 

$

0.74

 

$

0.44

 

 

 

 

 

 

 

Earnings per common share, diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.77

 

$

0.60

 

Net income

 

$

0.72

 

$

0.42

 

 

See accompanying notes to financial statements.

 

3



 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(Dollar amounts in thousands, except per share data)

 

 

 

Six months ended June 30,

 

 

 

2006

 

2005

 

 

 

 

 

(as restated - Note 2)

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Revenues

 

$

538,229

 

$

405,646

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Direct costs

 

459,950

 

346,806

 

General and administrative expenses

 

21,271

 

12,496

 

Total costs and expenses

 

481,221

 

359,302

 

 

 

 

 

 

 

Operating income

 

57,008

 

46,344

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Gain on sale of Chancery Software, Ltd.

 

9,322

 

 

Interest and other income

 

8,004

 

5,689

 

Interest expense

 

(6,748

)

(5,076

)

Foreign currency exchange loss

 

(314

)

(687

)

 

 

10,264

 

(74

)

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

 

67,272

 

46,270

 

Income tax expense

 

(12,367

)

(5,182

)

Minority interest in income of consolidated subsidiaries, net of tax

 

(14,802

)

(8,246

)

Equity in net loss of affiliates, net of tax

 

(211

)

(204

)

 

 

 

 

 

 

Income from continuing operations

 

39,892

 

32,638

 

(Loss) Income from discontinued operations, net of income tax (expense) benefit of $(314) in 2006 and $285 in 2005

 

(1,673

)

615

 

Loss from disposal of discontinued operations, net of income tax benefit (expense) of $991 in 2006 and $(10,531) in 2005

 

(921

)

(9,751

)

 

 

 

 

 

 

Net income

 

$

37,298

 

$

23,502

 

 

 

 

 

 

 

Earnings per common share, basic:

 

 

 

 

 

Income from continuing operations

 

$

0.78

 

$

0.66

 

Net income

 

$

0.73

 

$

0.48

 

 

 

 

 

 

 

Earnings per common share, diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.75

 

$

0.63

 

Net income

 

$

0.71

 

$

0.45

 

 

See accompanying notes to financial statements.

 

4



 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2006

 

2005

 

 

 

 

 

(as restated - Note 2)

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

Net income

 

$

37,298

 

$

23,502

 

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

 

 

 

 

 

Depreciation and amortization of fixed assets

 

23,408

 

17,636

 

Amortization

 

6,367

 

6,816

 

Loss on disposal of discontinued operations

 

921

 

9,751

 

Gain on sale of Chancery Software, Ltd.

 

(9,322

)

 

Non-cash stock compensation expense

 

6,711

 

1,194

 

Minority interest in consolidated subsidiaries

 

14,802

 

8,246

 

Equity in net loss of affiliates

 

211

 

204

 

Deferred income taxes

 

(4,558

)

(8,585

)

Other non-cash items

 

(2,076

)

(1,587

)

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

49,549

 

34,000

 

Income tax receivable

 

1,241

 

15,676

 

Inventory, prepaid expenses and other current assets

 

(7,855

)

(3,722

)

Accounts payable and accrued expenses

 

19,142

 

(1,366

)

Income tax payable

 

(4,504

)

(8,413

)

Deferred revenue and other current liabilities

 

(35,508

)

(24,305

)

Net cash provided by operating activities

 

95,827

 

69,047

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchase of available-for-sale securities

 

(4,943

)

(25,144

)

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

 

4,512

 

11,640

 

Purchase of property and equipment, net

 

(85,867

)

(44,126

)

Proceeds from sales of discontinued operations, net of cash sold

 

 

12,654

 

Cash loaned in exchange for notes receivable

 

(3,123

)

(4,233

)

Proceeds from repayment of notes receivable

 

261

 

 

Cash paid for acquisitions, net of cash acquired

 

 

(5,996

)

Payment of deferred consideration for prior period acquisitions

 

(10,440

)

(25,232

)

Expenditures for deferred costs

 

(2,068

)

(5,048

)

Change in other long-term assets

 

571

 

(403

)

Net cash used in investing activities

 

(101,097

)

(85,888

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from exercise of options

 

17,862

 

8,536

 

Proceeds from issuance of long-term debt

 

63,240

 

47,775

 

Payments on long-term debt

 

(69,043

)

(67,665

)

Change in other long-term liabilities

 

1,876

 

(1,377

)

Net cash provided by (used in) financing activities

 

13,935

 

(12,731

)

Effects of exchange rate changes on cash

 

88

 

(923

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

8,753

 

(30,495

)

Cash and cash equivalents at beginning of period

 

105,106

 

116,261

 

Cash and cash equivalents at end of period

 

$

113,859

 

$

85,766

 

 

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 of Laureate Education, Inc. and subsidiaries (the “Company”) 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, 2005, included in the Company’s Annual Report on Form 10-K/A.  Operating results for the three- and six-month periods ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.  The traditional semester programs in the education industry, with a summer break, result in significant seasonality in the operating results of the Company.  The consolidated balance sheet at December 31, 2005 has been restated to reflect the retrospective application of the Company’s change in revenue recognition policies effective January 1, 2006 as described in Note 2.  In addition, it does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  Certain amounts previously reported for 2005, including certain current and non-current notes receivable and deferred revenue balances, have been reclassified to conform to the 2006 presentation.

 

The Company is focused exclusively on providing a superior higher education experience to approximately 228,500 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 ten separately accredited higher education institutions, respectively. The Latin America segment has locations in Mexico, Chile, Brazil, Peru, Ecuador, Honduras, Panama, and Costa Rica.  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”).

 

Note 2 — Significant Accounting Policies

 

Revenue Recognition and Accounting Change

 

Effective January 1, 2006, the Company made a voluntary preferential change in its revenue recognition policies regarding semester-based tuition for its campus-based universities.  The universities now recognize tuition revenue ratably on a weekly straight-line basis over each academic session instead of the previously used monthly straight-line basis. This change was made to improve transparency and the correlation between the Company’s enrollments, revenues, and actual academic calendars. Tuition revenue is reported net of scholarships and other discounts. Tuition paid in advance or unpaid and unearned tuition included in accounts receivable is recorded as deferred revenue.

 

All other revenue is recognized as earned over the appropriate service period, including the Company’s online business. Dormitory revenues are recognized over the occupancy period.  Revenue from the sale of educational products is generally recognized when shipped and collectibility is reasonably assured.

 

The Company has applied this change retrospectively to all prior period financial statements presented in accordance with Statement of Financial Accounting Standard (“SFAS”) No. 154, Accounting Changes and Error Corrections, including retroactive application to all reporting periods presented.  There is no material impact on the previously issued annual results of the Company as a result of this change.

 

 

6



 

The following amounts represent the changes to each financial statement line affected by the Company’s preferential change in revenue recognition for the consolidated balance sheet as of December 31, 2005 and the statement of operations for the three- and six-month periods ended June 30, 2005:

 

 

 

December 31, 2005

 

Balance Sheet

 

 

 

Goodwill

 

$

100

 

Total assets

 

$

100

 

 

 

 

 

Deferred revenue

 

$

656

 

Total liabilities

 

656

 

 

 

 

 

Minority interest

 

(325

)

 

 

 

 

Retained earnings

 

181

 

Accumulated other comprehensive income

 

(412

)

Total stockholders’ equity

 

(231

)

 

 

 

 

Total liabilities and stockholders’ equity

 

$

100

 

 

 

 

Three-months ended
June 30, 2005

 

Six-months ended
June 30, 2005

 

Statement of Operations

 

 

 

 

 

Revenues

 

$

11,000

 

$

7,247

 

 

 

 

 

 

 

Operating income

 

11,000

 

7,247

 

 

 

 

 

 

 

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

 

11,000

 

7,247

 

 

 

 

 

 

 

Minority interest in income of consolidated subsidiaries, net of tax

 

(1,628

)

(994

)

Income tax expense

 

(216

)

247

 

 

 

 

 

 

 

Income from continuing operations

 

9,156

 

6,500

 

Net income

 

$

9,156

 

$

6,500

 

 

 

 

 

 

 

Earnings per share, basic:

 

 

 

 

 

Income from continuing operations

 

$

0.18

 

$

0.13

 

Net income

 

$

0.18

 

$

0.13

 

 

 

 

 

 

 

Earnings per share, diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.18

 

$

0.13

 

Net income

 

$

0.18

 

$

0.13

 

 

Income Taxes

 

The Company accounts for income taxes using the liability method pursuant to Financial Accounting Standards Board (“FAS No. 109”).  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 settled or realized.

 

 

7



 

For interim purposes, the Company also applies Financial Accounting Standards Board Interpretation (“FIN”) No. 18, Accounting for Income Taxes in Interim Periods (an interpretation of APB Opinion No. 28).  FIN No. 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.  However, FIN No. 18 has no effect on the Company’s annual effective tax rate.

 

Equity-Based Compensation

 

Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), using the modified prospective transition method and therefore has not restated results for prior periods. Under this transition method, equity-based compensation expense for the three- and six-months ended June 30, 2006 includes compensation expense for all equity-based compensation awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). Equity-based compensation expense for all equity-based compensation awards granted after January 1, 2006 is based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.  The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award.  SFAS No. 123R clarifies and expands the guidance in SFAS No. 123 in several areas, including measuring fair value and attributing compensation cost to reporting periods.  Changes to SFAS No. 123 fair value measurement and service period provisions prescribed by SFAS 123R include a requirement to estimate forfeitures of share-based awards at the date of grant, rather than recognizing forfeitures as incurred as permitted by SFAS No. 123.  The Company estimates the forfeiture rate based on the historical experience subsequent to the sale of the K-12 business units on June 30, 2003.

 

The Company uses the Black-Scholes-Merton method to calculate the fair value of stock options.  The use of option valuation models requires the input of highly subjective assumptions, including the expected stock price volatility and the expected term of the option.  In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 (“SAB No. 107”) regarding the SEC’s interpretation of SFAS No. 123R and the valuation of share-based payments for public companies.  For options issued subsequent to January 1, 2006, the Company has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123R.  Under SAB No. 107, the Company has estimated the expected term of granted options to be the weighted average mid-point between the vesting date and the end of the contractual term.  The Company estimates the volatility rate based on the weekly historical closing stock price since the sale of the K-12 business units on June 30, 2003.

 

Prior to the adoption of SFAS No. 123R, the Company recognized equity-based compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”.  In addition, the Company presented the cash flows related to income tax deductions in excess of the compensation cost recognized on stock options exercised during the period (“excess tax benefits”) as operating cash flows in the consolidated statement of cash flows. SFAS No. 123R requires excess tax benefits to be classified as financing cash flows.

 

The Company records compensation expense for stock options granted to non-employees who are not directors in an amount equal to their estimated fair value at the earlier of the performance commitment date or the date at which performance is complete, determined using the Black-Scholes-Merton option pricing model.  The compensation expense is recognized ratably over the vesting period.

 

Impact of Recently Issued Accounting Standards

 

On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company will adopt FIN 48 on January 1, 2007.  An enterprise is required to disclose the cumulative effect of the change on retained earnings in the statement of financial position as of the date of adoption and such disclosure is required only in the year of adoption.  The Company is in the process of analyzing the implications of FIN 48.

 

 

8



 

Note 3 — Equity-Based Compensation

 

Equity-Based Compensation Plans

 

The Board of Directors may grant options under six equity-based compensation plans to selected employees, officers and directors of the Company to purchase shares of the Company’s common stock at a price not less than the fair market value of the stock at the date of the grant.  The 2005 Stock Incentive Plan (“2005 Plan”) is the only plan with significant stock option awards available for grant.  Options outstanding under all six of the Company’s stock option plans have been granted at prices which are equal to or exceed the market value of the stock on the date of grant and vest ratably over periods not exceeding five years.

 

At the Company’s annual shareholder meeting on June 28, 2006, approval was obtained to increase the number of shares reserved under the 2005 Plan by 4,000 shares, with no more than 1,000 of that increased number being granted in the form of non-options (referred to as “2005 Plan Amendment No. 1”).  Approval of the 2005 Plan Amendment No. 1 added 4,000 issuable shares, increasing available shares from 1,250 to 5,250 shares, of which no more than a total of 1,313 shares can be granted in the form of restricted shares or units.

 

Stock option awards under plans prior to the 2005 Plan are subject to time-based vesting over five years with a life of ten years.   Stock options awards under the 2005 Plan are subject to time-based vesting generally over four years with a life of seven years.  Stock options under the 2005 Plan vest ratably over a four year period; the first year vests on the first anniversary date and the remaining three years vest quarterly.  Stock options granted to non-employee Directors vested immediately prior to January 1, 2006.  Subsequent to January 1, 2006, options granted to non-employee Directors vest monthly over a one year period.  Restricted stock and restricted stock unit (“RSU”) awards granted prior to December 2005 are subject to time-based vesting generally over five years.  Restricted stock and restricted stock unit awards granted subsequent to December 2005 are performance-based and are generally eligible for vesting over four years.

 

Stock Options

 

The following table summarizes the stock option activity of the Company for the six-month period ended June 30:

 

 

 

Options

 

Weighted-
Average
Exercise
Price

 

Aggregate
Intrinsic
Value

 

Outstanding at December 31, 2005

 

6,188

 

$

19.45

 

 

 

Granted

 

125

 

$

47.98

 

 

 

Exercised

 

(1,425

)

$

13.34

 

 

 

Forfeited

 

 

 

 

 

Outstanding at June 30, 2006

 

4,888

 

$

22.01

 

$

132,402

 

Exercisable at June 30, 2006

 

3,663

 

$

15.43

 

$

123,156

 

Vested and expected to vest at June 30, 2006

 

4,680

 

$

22.01

 

$

126,651

 

 

The weighted average remaining contractual term of options outstanding is 4.2 years.  The weighted average contractual term of exercisable options outstanding is 3.4 years.  The total intrinsic value, measured as the pre-tax difference between the exercise price and the market price on the date of exercise, of all options exercised during the six-month period ended June 30, 2006 was $55,818.

 

The Company uses the Black-Scholes-Merton option pricing model to fair value stock options.  The use of option valuation models requires the input of highly subjective assumptions, including the expected term and the expected stock price volatility.  The weighted average estimated fair values of stock options granted for the three- and six-months ended June 30, 2006 was $14.45 and $14.53 respectively.  The total compensation expense related to stock options was $1,371 and $2,685 net of the impact of estimated forfeitures, for the three- and six-month periods ended June 30, 2006, respectively.

 

As of June 30, 2006, $14,770 of total unrecognized equity-based compensation cost related to stock options is expected to be recognized over a weighted average period of 2.5 years.

 

 

9



 

Nonvested Restricted Stock and Restricted Stock Units

 

Nonvested restricted stock and RSU awards as of June 30, 2006 and changes during the six-month period ended June 30, 2006 is as follows:

 

 

 

Number of
Shares

 

Weighted-
Average
Grant Date
Fair Value

 

Nonvested at December 31, 2005

 

594

 

$

38.18

 

Granted

 

44

 

$

44.62

 

Lapsed

 

(64

)

$

22.20

 

Forfeited

 

 

 

Nonvested at June 30, 2006

 

574

 

$

40.48

 

 

Of the nonvested restricted stock and RSU awards above, 239 shares with a weighted-average grant date fair value of $51.49 per share, are subject solely to performance-based conditions.  The awards are eligible for lapse annually on the anniversary date of the award over a four year period.  A fixed percentage of shares are eligible for vesting each year, with the potential to fully vest in subsequent years if performance warrants.  No shares will vest if required performance levels are not achieved during the four-year period and the applicable catch up period.  The compensation expense associated with these awards is evaluated on a quarterly basis for progress toward achievement of pre-determined performance targets. The compensation expense is recognized when it is probable that the performance levels will be met.

 

As of June 30, 2006, there was $16,176 of unrecognized equity-based compensation expense related to nonvested restricted stock and RSU awards.  The cost is expected to be recognized over a weighted-average period of 3.1 years, assuming that all performance conditions are met.

 

The fair value of the nonvested restricted stock and RSU awards is measured using the close price of the Company’s stock on the date of grant.  The total compensation expense related to restricted stock and RSU awards was $1,781 and $3,661 for the three- and six-month periods ended June 30, 2006, respectively.

 

For the three-months ended June 30, 2006 and 2005, total equity-based compensation expense was allocated as follows:

 

 

 

2006

 

2005

 

Direct costs

 

$

1,780

 

$

296

 

General and administrative expenses

 

1,476

 

118

 

Equity-based compensation expense before income taxes

 

3,256

 

414

 

Income tax benefit

 

(1,195

)

(142

)

Total equity-based compensation expense after income taxes

 

$

2,061

 

$

272

 

 

 

For the six-months ended June 30, 2006 and 2005, total equity-based compensation expense was allocated as follows:

 

 

 

2006

 

2005

 

Direct costs

 

$

3,585

 

$

594

 

General and administrative expenses

 

3,126

 

600

 

Equity-based compensation expense before income taxes

 

6,711

 

1,194

 

Income tax benefit

 

(2,464

)

(435

)

Total equity-based compensation expense after income taxes

 

$

4,247

 

$

759

 

 

Prior to January 1, 2006, the Company provided pro forma disclosure amounts in accordance with SFAS No. 123, as if the fair value method defined by SFAS No. 123 had been applied to its equity-based compensation.

 

The following average assumptions were used in calculating pro forma equity-based compensation expense for the six-months ended June 30, 2005 and recorded equity-based compensation for the six-months ended June 30, 2006:

 

10



 

 

 

2006

 

2005

 

Average risk-free interest rate

 

4.8

%

3.9

%

Expected dividend yield

 

0.0

%

0.0

%

Expected lives

 

1-4.75 years

 

0-5 years

 

Average expected volatility

 

27.8

%

30.7

%

 

The pro forma table below reflects net income and basic and diluted net earnings per share for the three- and six-months ended June 30, 2005 had the Company applied the fair value recognition provisions of SFAS No. 123:

 

 

 

Three-months ended
June 30, 2005

 

Six-months ended
June 30, 2005

 

Net income, as reported (as restated — Note 2)

 

$

21,562

 

$

23,502

 

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

 

272

 

759

 

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

 

(795

)

(2,259

)

Pro forma net income

 

$

21,039

 

$

22,002

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic - as reported

 

$

0.44

 

$

0.48

 

Basic - pro forma

 

$

0.42

 

$

0.45

 

Diluted - as reported

 

$

0.42

 

$

0.45

 

Diluted - pro forma

 

$

0.41

 

$

0.42

 

 

Pro forma compensation expense recognized under SFAS No. 123 does not consider estimated forfeitures.  The terms and nature of the 2006 equity-based compensation awards create computational differences between the pro forma compensation presented above and the equity compensation recognized in 2006 that render the calculations incomparable.

 

As a result of adopting SFAS No. 123R, for the three-month period ended June 30, 2006, income before income taxes and net income was $1,371 and $861 lower, respectively, than if the Company had continued to account for equity-based compensation under APB No. 25. For the six-month period ended June 30, 2006, income before income taxes and net income was $2,685 and $1,686 lower, respectively, than if the Company had continued to account for equity-based compensation under APB No. 25.  The impact on both basic and diluted earnings per share using the Company’s effective tax rate for the three- and six-month periods ended June 30, 2006 was $0.02 and $0.05 per share, respectively. In addition, prior to the adoption of SFAS No. 123R, the Company presented the tax benefit of stock option exercises as operating cash flows.  Upon the adoption of SFAS No. 123R, tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options are classified as financing cash flows.  Under SFAS No. 123R, these excess tax benefits are not recognized until the tax deductions result in a reduction of tax liability instead of creating or increasing net operating losses.  There was no excess tax benefit recorded for the three- and six-months ended June 30, 2006.

 

 Note 4 - Discontinued Operations

 

The Company reached a decision in 2005 to sell the operations of Institut Francais de Gestion Langues (“IFG Langues”), a non-strategic part of IFG, and accordingly the business was classified as discontinued operations.  Also, during the first quarter of 2005, the Company completed the sale of its Wall Street Institute (“WSI”) business.  The operations and cash flows of the business components comprising the IFG Langues 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

 

During the first quarter of 2006, the Company recorded a net gain of $261, including a tax benefit of $576, related to the settlement of franchisee law suits related to the WSI business.  During the second quarter of 2006, the Company recorded a net gain of $700 due to the re-assessment of income tax accruals related to the disposal.

 

 

11



 

During the third quarter of 2005, WSI Education S.a.r.l. received a preliminary field audit report assessing Italian value added taxes (“VAT”) owed related to services provided by the WSI business unit in 2003 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 being available to Italian owned companies.  Subsequent to June 30, 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 proceed with court proceedings.  As a result, the Company deposited approximately $3,000 with the Italian tax authority, representing approximately 50% of the total tax and interest assessed to-date, in exchange for an expedited hearing on the merits of the case.  The Company continues to believe that it is not possible to estimate the ultimate outcome of this issue.  As a result, no accrual for any potential adverse outcome of this matter has been made in the consolidated financial statements.  The Company intends to vigorously pursue these cases.

 

Other

 

During the second quarter of 2006, the Company entered into a binding agreement with an unrelated third party (the “Buyer”) to sell IFG Langues, a non-strategic business in the European segment.  Under the agreement, the Buyer will purchase all assets and assume substantially all third party liabilities of the business.  It is anticipated that the transaction will close in the third quarter of 2006.  As a result of comparing the carrying value of the net assets held for sale of the IFG Langues business to the estimated net realizable value of the business upon completion of the sale, the Company has estimated an additional pre-tax loss of $2,310 during the second quarter and, accordingly, has included this amount as a component of loss from discontinued operations for the three- and six-months ended June 30, 2006.

 

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 June 30:

 

 

 

WSI

 

Other

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenues

 

$

 

$

 

$

1,988

 

$

1,820

 

Pretax (loss) income from discontinued operations

 

$

(14

)

$

 

$

(1,176

)

$

3

 

 

 

12



 

Six-months ended June 30:

 

 

 

WSI

 

Other

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenues

 

$

 

$

12,310

 

$

3,787

 

$

3,501

 

Pretax (loss) income from discontinued operations

 

$

(25

)

$

480

 

$

(1,334

)

$

(150

)

 

Net assets of the other discontinued operations were as follows:

 

 

 

December 31,
2005

 

Current assets

 

$

2,192

 

Property and equipment, net

 

386

 

Tradename/accreditation

 

165

 

Other assets

 

163

 

Total net assets of discontinued operations

 

$

2,906

 

 

Note 5 — Notes Receivable (Long-term)

 

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

 

 

June 30,
2006

 

December 31, 2005

 

Trade notes receivable (long-term), net of allowance of $9,106 and $9,328 at June 30, 2006 and December 31, 2005, respectively

 

$

33,992

 

$

34,762

 

Notes receivable (long-term):

 

 

 

 

 

Kendall College

 

29,185

 

25,395

 

WSI Education S.a.r.l.

 

14,530

 

13,448

 

Other

 

8,608

 

10,208

 

 

 

$

86,315

 

$

83,813

 

 

Of the balance of long-term other trade notes receivable, $8,530 was unearned as of June 30, 2006 and is included in deferred revenue on the Company’s balance sheet.  Tuition revenues are generally billable, and the full amount of notes receivable and related deferred revenue are recorded, when a note agreement is signed by the student.

 

Note 6— Other Intangible Assets

 

The following table summarizes other intangible assets as of June 30, 2006:

 

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Subject to amortization:

 

 

 

 

 

 

 

Student rosters

 

$

19,365

 

$

(15,010

)

$

4,355

 

Non-compete agreements

 

1,320

 

(900

)

420

 

Other

 

1,198

 

(744

)

454

 

Total

 

$

21,883

 

$

(16,654

)

$

5,229

 

 

Amortization expense for intangible assets was $1,128 and $2,276 for the three and six months ended June 30, 2006, respectively, and $2,110 and $3,472 for the three and six months ended June 30, 2005 respectively. The estimated future amortization expense for intangible assets for the remaining six-month period of 2006 is $1,924. The estimated future amortization expense for intangible assets for each of the five years subsequent to December 31, 2006 is as follows: 2007 - $2,424; 2008 - $556; 2009 - $325; 2010 and beyond - $0.

 

 

13



 

Note 7 - Long-Term Debt

 

Long-term debt consists of the following:

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

Mortgage notes payable bearing interest at variable rates ranging from 3.30% to 8.50%

 

$

54,096

 

$

52,429

 

Various unsecured lines of credit bearing interest at variable rates ranging from 3.45% to 8.80%

 

51,571

 

51,332

 

Notes payable secured by fixed assets, bearing interest at rates ranging from 3.81% to 10.00%

 

27,592

 

24,239

 

Capital lease obligations bearing interest at rates ranging from 3.85% to 9.00%

 

23,644

 

12,374

 

Various notes payable bearing interest at fixed rates ranging from 3.00% to 13.72%

 

15,580

 

19,742

 

Various notes payable bearing interest at variable rates ranging from 3.15% to 9.27%

 

1,687

 

2,925

 

 

 

174,170

 

163,041

 

Less: current portion of long-term debt

 

59,460

 

63,044

 

Total long-term debt, net of current portion

 

$

114,710

 

$

99,997

 

 

Note 8 - Due to Shareholders of Acquired Companies

 

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

               

 

 

June 30,

 

December 31,

 

 

 

2006

 

2005

 

Amounts payable to former shareholders of:

 

 

 

 

 

 

 

 

 

 

 

Universidade Anhembi Morumbi (“UAM”)

 

$

15,362

 

$

13,658

 

Universidad Andres Bello (“UNAB”)

 

13,501

 

24,929

 

Universidad Tecnologica Centroamericana (“UNITEC”)

 

14,601

 

14,814

 

Universidad Interamericana (“UI”)

 

4,200

 

4,200

 

Universidad Peruana de Ciencias Aplicadas (“UPC”)

 

2,996

 

2,859

 

Universidad del Noroeste (“UNO”)

 

1,755

 

1,890

 

Universidad Latinoamericana de Ciencia y Tecnologia (“ULACIT”)

 

100

 

100

 

Cyprus College

 

 

2,973

 

 

 

52,515

 

65,423

 

Less: current portion of due to shareholders

 

23,428

 

18,737

 

Total due to shareholders, net of current portion

 

$

29,087

 

$

46,686

 

 

During 2006, the amount payable to the former shareholders of Cyprus College was re-evaluated under the terms of the purchase agreement.  As a result, the liability and corresponding goodwill recorded in the transaction were decreased.

 

Note 9 - 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 six-month periods ended June 30, 2006 and 2005 were based on the estimated effective tax rates applicable for the 2006 and 2005 full years, after giving effect to significant items related specifically to the interim periods. The Company’s effective tax rate from continuing operations was 18.0% and 18.4% for the three- and six-months ended June 30, 2006 respectively and 11.2% and 11.2% for the three- and six-months ended June 30, 2005, respectively. For the six months ended June 30, 2006, the effective rate includes the impact of FIN No. 18.  FIN No. 18 only applies to interim periods and has no effect on the Company’s annual effective rate.  The effective rate for both the three- and six- months ended June 30, 2006, excluding the impact of FIN No. 18 and the discrete events described below, was 8.7%.  For the three- and six-month periods ended June 30, 2005, the Company’s effective tax rate was 11.2% and 11.2%, and the impact of FIN No. 18 was immaterial. Recent acquisitions in lower-taxed jurisdictions and foreign tax

 

 

14



 

planning initiatives have decreased the 2006 forecasted effective tax rate below the 2005 effective tax 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.

 

During the second quarter of 2006, Laureate Education, LLC (“Ventures”), a subsidiary of the Company, recorded a receivable of $9,322 from the sale of Chancery Software, Ltd (see Note 15).  Because this event monetized the last significant remaining uncertain asset of Ventures, the Company has accelerated its plans for the liquidation of Ventures.  The Company recorded income tax expense of $6,991 as a result of the Chancery transaction and accelerated liquidation plans.

 

As previously reported, 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. The Company filed a protest with the IRS during the second quarter and will contest vigorously the IRS’s determination and believes that it has properly reported the transaction.  Consequently, the Company does not believe at this point that a loss from this matter is probable, nor is it possible to estimate the ultimate outcome if the Company does not prevail.  As a result, no accrual for any potential adverse outcome of this matter has been made in the consolidated financial statements; however, the Company can provide no assurance that the eventual outcome will not result in a material adverse amount.

 

As previously reported, on February 23, 2006, the Company received a Notice of Deficiency from the IRS for the Company’s 1997 tax year disagreeing with the Company’s exclusion from income of a break-up fee it received in its attempted acquisition of NEC. The Company is appealing the Notice of Deficiency and paid the current amount of the assessment, $8,100, and the associated interest due of $6,700, in May 2006.   These amounts had been previously accrued based upon the Company’s assessment of the probability of loss and its ability to reasonably estimate that loss.  The Company is preparing its appeal which is expected to be filed in a court of law having jurisdiction over such matters in the third quarter of 2006.  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, it is the opinion of management that the ultimate disposition of this issue will not have a material 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 tax year.  In addition, there are several other income tax audits in progress, which includes an IRS examination of Walden for the 2003 tax year; an examination of two of the Company’s Dutch subsidiaries, Sylvan I BV and Sylvan International BV for the 2000 to 2003 tax years; and an examination of the net operating loss carryforwards that were included in Laureate Online Education BV when it was purchased from third parties in 2004.  No assurance can be given as to the eventual outcome of these audits.

 

 

15



 

Note 10 — 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, 2005 (as restated - Note 2)

 

$

499

 

$

503,791

 

$

435,735

 

$

38,453

 

$

978,478

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised for purchase of 1,411 shares of common stock, net of 22 replenishment shares

 

14

 

17,848

 

 

 

17,862

 

Non cash stock compensation modification for former employee

 

 

365

 

 

 

365

 

Non-cash stock compensation

 

 

6,346

 

 

 

6,346

 

Other

 

1

 

7

 

 

 

8

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income for the six months ended June 30, 2006

 

 

 

37,298

 

 

37,298

 

Foreign currency translation adjustment

 

 

 

 

1,236

 

1,236

 

Unrealized gain on available-for-sale securities

 

 

 

 

9

 

9

 

Total comprehensive income

 

 

 

 

 

38,543

 

Balance at June 30, 2006

 

$

514

 

$

528,357

 

$

473,033

 

$

39,698

 

$

1,041,602

 

 

 

Note 11 — Comprehensive Income

 

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

 

 

 

Three-months ended
June 30,

 

Six-months ended
June 30,

 

 

 

 

 

2005

 

 

 

2005

 

 

 

2006

 

(as restated —
Note 2)

 

2006

 

(as restated — Note 2)

 

Net income

 

$

37,973

 

$

21,562

 

$

37,298

 

$

23,502

 

Foreign currency translation adjustment

 

412

 

(6,812

)

1,236

 

(23,044

)

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

 

(6

)

39

 

9

 

53

 

Minimum pension liability adjustment

 

 

 

 

(22

)

Comprehensive income

 

$

38,379

 

$

14,789

 

$

38,543

 

$

489

 

 

Note 12 - Earnings Per Share

 

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

 

 

 

Three-months ended
June 30,

 

Six-months ended
June 30,

 

 

 

 

 

2005

 

 

 

2005

 

 

 

2006

 

(as restated — Note 2)

 

2006

 

(as restated — Note 2)

 

Numerator used in basic and diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

40,659

 

$

31,310

 

$

39,892

 

$

32,638

 

(Loss) Income from discontinued operations, net of tax

 

(1,504

)

3

 

(1,673

)

615

 

Loss on disposal of discontinued operations, net of tax

 

(1,182

)

(9,751

)

(921

)

(9,751

)

Net income

 

$

37,973

 

$

21,562

 

$

37,298

 

$

23,502

 

 

 

 

 

 

 

 

 

 

 

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

 

51,429

 

49,566

 

50,940

 

49,402

 

Net effect of dilutive securities based on treasurystock method

 

1,669

 

2,378

 

1,943

 

2,478

 

 

 

16



 

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

 

53,098

 

51,944

 

52,883

 

51,880

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share, basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.79

 

$

0.63

 

$

0.78

 

$

0.66

 

(Loss) Income from discontinued operations, net of tax

 

(0.03

)

0.00

 

(0.03

)

0.01

 

Loss on disposal of discontinued operations, net of tax

 

(0.02

)

(0.20

)

(0.02

)

(0.20

)

Earnings per common share

 

$

0.74

 

$

0.44

 

$

0.73

 

$

0.48

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share, diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.77

 

$

0.60

 

$

0.75

 

$

0.63

 

(Loss) Income from discontinued operations, net of tax

 

(0.03

)

0.00

 

(0.03

)

0.01

 

Loss on disposal of discontinued operations, net of tax

 

(0.02

)

(0.19

)

(0.02

)

(0.19

)

Earnings per common share

 

$

0.72

 

$

0.42

 

$

0.71

 

$

0.45

 

 

Per share amounts may not sum due to rounding differences.

 

Note 13 — Commitments and Contingencies

 

This chart is intended to be a high-level summary of purchase obligations and contingent arrangements.  Please refer to additional disclosure in the footnotes to the chart. 

Higher Education Institution

 

Date of Contingency

 

Additional
Ownership Share

 

Terms of Commitment or Contingent Transaction

Purchase Obligations:

 

 

 

 

 

 

Ecole Centrale d’Electronique (“ECE”) 1

 

December 31, 2008

 

30%

 

$8,954

 

 

 

 

 

 

 

IFG 2

 

on or before
July 31, 2007

July 31, 2007

 


16%

23%

 


$1,604

$2,389

 

 

 

 

 

 

 

Put Right Arrangements:

 

 

 

 

 

 

IFG 2

 

October through November 2008

 

10%

 

$1,023

 

 

 

 

 

 

 

Universidad de Las Americas (“UDLA”) 3

 

April 1, 2008

 

20%

 

Approximately 4.5 times average recurring earnings before interest and taxes (“EBIT”) for specified periods

 

 

 

 

 

 

 

UNAB and Academia de Idiomas y Estudios Profesionales (“AIEP”) 4

 

April 1, 2009

 

20%

 

Variable purchase price based on average recurring EBIT for specified periods

 

 

 

 

 

 

 

 UAM5

 

March 1, 2009


 

29%


 

Approximately 4 times recurring earnings before interest, taxes, depreciation and amortization (“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

 

 

 

 

 

 

 

Cyprus College 6

 

July 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

 

 

17



 

Call Right Arrangements:

 

 

 

 

 

 

UDLA 3

 

April 1, 2009

 

20%

 

Approximately 5 times average recurring EBIT for specified periods

 

 

 

 

 

 

 

UNAB and AIEP 4

 

April 1, 2009

 

20%

 

Variable purchase price based on average recurring EBIT for specified periods

 

 

 

 

 

 

 

UAM 5

 

March 1, 2009


 

29%


 

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


 

 

Beginning March 1, 2013 through March 1, 2023

 

20%

 

Variable purchase price based on recurring EBITDA for certain specified periods.

 

 

 

 

 

 

 

Cyprus College 6

 

July 1, 2006


 

35%


 

6% - Payable April 2007 based on 6.25 times 2006 audited recurring EBITDA


 

 

 

 

 

 

29% - Payable April 2012 based on a variable scale for new enrollments and 2011 EBITDA


 

 

July 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

 

 

 

 

 

 

 

Contingent Earnouts (cash payments):

 

 

 

 

 

 

UDLA 7

 

March 31, 2006 or 45 days after receipt of financial statements

March 31, 2007 or 45 days after receipt of financial statements

 




 

$81,700
(estimated based on 2004 and 2005 reported EBIT) (currently in negotiation)

$18,500
(estimated based on 2005 reported EBIT)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Laureate Online Education BV 8

 

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 less the April 1, 2007 payment, not to exceed $10,000

 

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.

 

 

18



 

Purchase Obligations

 

1 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 $8,954.  The purchase obligation is denominated in Euros, and is subject to foreign currency exchange rate risk on the date of payment.

 

2 As part of the acquisition of 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 shall contribute approximately $1,604 and $2,389 resulting in an increase in ownership share of 16% and 23%, respectively. In addition, during the period October through November 2008, the sellers may exercise a put option requiring the Company to purchase the remaining 10% ownership for approximately $1,023.  During the second quarter of 2006, the Company negotiated an amendment to the agreement that provides that the first additional capital contribution of $1,604 can be extended through July 31, 2007, instead of July 31, 2006.  There were no other material amendments made to the agreement.  The purchase obligation is denominated in Euros, and is subject to foreign currency exchange rate risk on the dates of payment.

 

Contingent Payments

 

In connection with certain acquisitions, variable amounts of contingent consideration are payable to the sellers 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.

 

3 Effective April 1, 2008 the minority owners of UDLA have a put right to require the Company to purchase their remaining 20% interest in Decon, the holding company that controls and operates UDLA, 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.

 

4 Effective April 1, 2009 the minority owners of UNAB and AIEP have a put 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.

 

5 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. Also effective March 1, 2009, the Company has a call right to acquire the same 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 or 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 minority owners and the Company have similar put and call rights, respectively, on the remaining 20% interest of the minority owners, with the purchase price determined based on a similar formula.

 

6 Effective January 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.  Effective January 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.

 

Contingent Earnouts (cash payments)

 

7 Additional amounts of contingent consideration are due the sellers of UDLA based on operating results for the three years ending December 31, 2006.  The agreement stipulates that on the later of March 31, 2006 or 45 days after the Company receives the audited financial statements of Decon, 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

 

 

19



 

specified debt.  The Company has reviewed the Decon audited financials and the parties are presently engaged in negotiations regarding the amount due in respect of the contingent payment obligation.  Excluding adjustments of non-recurring EBIT items and any other negotiated amounts, the computed formula yields an estimated earnout of $81,700, although the actual amount to be mutually agreed upon with the sellers or otherwise determined under the applicable agreements may differ from this amount.  This amount is net of approximately $8,800 of amounts owed to the Company from the sellers related to consideration from a prior acquisition of another university.  On the later of March 31, 2007 or 45 days after the Company receives the audited financial statements of Decon, 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.  Excluding adjustments of non-recurring EBIT items and any other negotiated amounts as well as including 2006 estimates and projections, the Company would be obligated to the sellers for approximately $18,500.  The Company has pledged its shares of Decon as security for its payment obligations to the sellers. The Company cannot dispose of, place any lien on or encumber the shares without the prior approval of the sellers.

 

8 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.

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.

 

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 $4,981 through December 2010 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 (“Kendall”) to Key Equipment Finance. Equipment leases with remaining payments of $3,986 through December 2011 are guaranteed by the Company. The fair value of the guarantees has been recorded as other long-term liabilities in the consolidated balance sheets.

 

Standby Letters of Credit

 

The Company has $14,600 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 $1,500 assuring the collectibility of a line of credit at AIEP, which is being used for working capital purposes.  The outstanding balance on the line of credit was $1,900 at June 30, 2006 and is also covered by other guarantees by other affiliated entities.

 

Commitments

 

Under terms of note agreements with Kendall, the Company has committed to providing total additional funding to Kendall of up to $1,200.  In the event the Company does not exercise its agreement to acquire Kendall, Kendall is obligated to enter into a lease agreement with the Company beginning September 1, 2007 to lease office space.  The lease commitment specifies a term of 36 months and annual rent of $1,000.

 

As a part of the acquisition of Cyprus College, the Company committed to making a contribution of approximately $3,165 between the closing date and three years thereafter.  The contributions will fund certain capital projects, if approved, and will not alter the relative equity interests.  The contribution commitment is denominated in Cypriot Pounds and is subject to foreign currency exchange rate risk on the dates of payment.

 

 

20



 

Note 14 - Business and Geographic Segment Information

 

The Company is focused exclusively on providing a superior higher education experience to approximately 228,500 students through a leading global network of accredited campus-based and online higher education institutions. The Company’s educational services are offered through three reportable segments:  Latin America, Europe and Laureate Online Education.

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, and campus-based overhead expenses.

 

The Latin America segment consists of ten separately accredited universities and one professional institute, and has operations in Mexico, Chile, Brazil, Peru, Ecuador, Honduras, Panama and Costa Rica.  Latin America higher education institutions currently enroll approximately 180,000 students and offer more than 100 degree programs through 44 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, law, health sciences, information technology and engineering.

 

The Europe segment consists of two accredited universities and eight other accredited post-secondary institutions, and has operations in Spain, Switzerland, France and Cyprus.  Europe higher education institutions currently enroll approximately 19,300 students and offer more than 75 degree programs through 9 campuses.  The schools primarily serve 18- to 24-year-old students and offer an education that emphasizes career-oriented fields of study with undergraduate and graduate degrees in a wide range of disciplines, including international business, hotel management, health sciences, architecture and engineering.

 

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

 

The Laureate Online Education segment offers undergraduate and graduate degree programs to working professionals through distance learning.  Laureate Online Education consists of Walden, Canter, and Laureate Online Education BV, which collectively offer degree programs including education, psychology, health and human services, management, engineering, and information technology.  Laureate Online Education institutions currently enroll approximately 29,200 students.

 

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

 

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

Three-months ended June 30, 2006

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

190,805

 

$

57,297

 

$

55,017

 

$

303,119

 

Segment profit

 

59,063

 

7,100

 

8,146

 

74,309

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-months ended June 30, 2005

(as restated — Note 2)

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

131,151

 

$

50,241

 

$

45,577

 

$

226,969

 

Segment profit

 

41,573

 

6,650

 

5,341

 

53,564

 

 

 

 

 

 

 

 

 

 

 

Six-months ended June 30, 2006

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

313,306

 

$

117,200

 

$

107,723

 

$

538,229

 

Segment profit

 

56,753

 

19,635

 

12,466

 

88,854

 

 

 

21



 

Six-months ended June 30, 2005

(as restated — Note 2)

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

214,123

 

$

106,484

 

$

85,039

 

$

405,646

 

Segment profit

 

41,275

 

17,054

 

6,509

 

64,838

 

 

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
June 30,

 

Six-months ended
June 30,

 

 

 

2006