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 September 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 51,435,244 shares of Common Stock, par value [$.01] per share, outstanding as of October 30, 2006.

 




 

INDEX

 

 

 

 

Page No.

 

PART I. - FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations — Nine-months ended September 30, 2006 and September 30, 2005

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows — Nine-months ended September 30, 2006 and September 30, 2005

 

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements — September 30, 2006

 

 

 

 

 

 

 

 

 

 

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

N/A

 

 

 

 

 

 

 

 

 

 

 

Item 1A.

Risk Factors

N/A

 

 

 

 

 

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

N/A

 

 

 

 

 

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

N/A

 

 

 

 

 

 

 

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

N/A

 

 

 

 

 

 

 

 

 

 

 

Item 5.

Other Information

N/A

 

 

 

 

 

 

 

 

 

 

 

Item 6.

Exhibits

 

 

 

 

 

 

 

 

 

 

 

SIGNATURES

 

 

 

 

 

i




 

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

 

 

September 30,
2006

 

December 31,
2005

 

 

 

 

 

(as restated - 
Note 2)

 

 

 

(unaudited)

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

168,260

 

$

105,106

 

Available-for-sale securities

 

5,308

 

4,768

 

 

 

 

 

 

 

Receivables:

 

 

 

 

 

Accounts receivable

 

144,418

 

181,211

 

Notes receivable

 

76,830

 

104,880

 

Other receivables

 

13,159

 

14,208

 

 

 

234,407

 

300,299

 

Allowance for doubtful accounts

 

(45,605

)

(39,006

)

 

 

188,802

 

261,293

 

 

 

 

 

 

 

Inventory

 

5,808

 

5,282

 

Deferred income taxes

 

18,578

 

16,978

 

Income tax receivable

 

2,517

 

2,373

 

Prepaid expenses and other current assets

 

24,243

 

17,836

 

Total current assets

 

413,516

 

413,636

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes receivable, less current portion, net of allowance of $10,472 and $9,328 at September 30, 2006 and December 31, 2005, respectively

 

85,751

 

83,813

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land

 

121,387

 

101,993

 

Buildings

 

320,783

 

256,941

 

Construction in-progress

 

53,644

 

40,856

 

Furniture, computer equipment and software

 

274,196

 

223,143

 

Leasehold improvements

 

95,862

 

81,336

 

 

 

865,872

 

704,269

 

Accumulated depreciation and amortization

 

(167,347

)

(130,332

)

 

 

698,525

 

573,937

 

 

 

 

 

 

 

Goodwill

 

511,339

 

412,215

 

Other intangible assets:

 

 

 

 

 

Tradenames and accreditations

 

263,876

 

215,112

 

Other intangible assets, net of accumulated amortization of $17,935, and $14,397 at September 30, 2006 and December 31, 2005, respectively

 

7,599

 

7,163

 

 

 

782,814

 

634,490

 

 

 

 

 

 

 

Deferred income taxes

 

31,702

 

25,760

 

Deferred costs, net of accumulated amortization of $17,974 and $14,041 at September 30, 2006 and December 31, 2005, respectively

 

22,396

 

21,935

 

Other assets

 

23,709

 

19,651

 

Assets of discontinued operations

 

 

2,906

 

Total assets

 

$

2,058,413

 

$

1,776,128

 

 

1




 

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

 

 

 

September 30,
2006

 

December 31,
2005

 

 

 

 

 

(as restated - Note 2)

 

 

 

(unaudited)

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

38,758

 

$

30,078

 

Accrued expenses

 

63,585

 

50,739

 

Accrued compensation and benefits

 

61,250

 

55,724

 

Deferred revenue

 

223,497

 

273,030

 

Current portion of long-term debt

 

89,927

 

63,044

 

Current portion of due to shareholders of acquired companies

 

23,675

 

18,737

 

Income tax payable

 

21,772

 

31,615

 

Deferred income taxes

 

28,937

 

28,644

 

Other current liabilities

 

2,227

 

3,543

 

Total current liabilities

 

553,628

 

555,154

 

 

 

 

 

 

 

Long-term debt, less current portion

 

320,946

 

99,997

 

Due to shareholders of acquired companies, less current portion

 

29,349

 

46,686

 

Deferred income taxes

 

4,791

 

583

 

Other long-term liabilities

 

25,627

 

22,876

 

Total liabilities

 

934,341

 

725,296

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Minority interest

 

61,706

 

72,354

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

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

 

 

 

Common stock, par value $.01 per share — authorized 90,000 shares, issued and outstanding shares of 51,404 and 49,861 as of September 30, 2006 and December 31, 2005, respectively

 

514

 

499

 

Additional paid-in capital

 

532,865

 

503,791

 

Retained earnings

 

485,021

 

435,735

 

Accumulated other comprehensive income

 

43,966

 

38,453

 

Total stockholders’ equity

 

1,062,366

 

978,478

 

Total liabilities and stockholders’ equity

 

$

2,058,413

 

$

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 September 30,

 

 

 

2006

 

2005

 

 

 

 

 

(as restated - Note 2)

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Revenues

 

$

260,906

 

$

193,800

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Direct costs

 

236,250

 

170,214

 

General and administrative expenses

 

11,154

 

8,145

 

Total costs and expenses

 

247,404

 

178,359

 

 

 

 

 

 

 

Operating income

 

13,502

 

15,441

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest and other income

 

4,527

 

2,876

 

Interest expense

 

(4,886

)

(2,611

)

Foreign currency exchange gain (loss)

 

854

 

(90

)

 

 

495

 

175

 

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

 

13,997

 

15,616

 

Income tax expense

 

(591

)

(1,749

)

Minority interest in income of consolidated subsidiaries, net of tax

 

(3,359

)

(4,634

)

Equity in net loss of affiliates, net of tax

 

(163

)

(166

)

 

 

 

 

 

 

Income from continuing operations

 

9,884

 

9,067

 

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

 

(113

)

(229

)

Gain from disposal of discontinued operations, net of income tax benefit of $2,341 in 2006 and $0 in 2005

 

2,217

 

 

 

 

 

 

 

 

Net income

 

$

11,988

 

$

8,838

 

 

 

 

 

 

 

Earnings per common share, basic:

 

 

 

 

 

Income from continuing operations

 

$

0.19

 

$

0.18

 

Net income

 

$

0.23

 

$

0.18

 

 

 

 

 

 

 

Earnings per common share, diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.19

 

$

0.17

 

Net income

 

$

0.23

 

$

0.17

 

 

See accompanying notes to financial statements.

 

3




 

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

 

 

Nine months ended September 30,

 

 

 

2006

 

2005

 

 

 

 

 

(as restated - Note 2)

 

 

 

(Unaudited)

 

Revenues

 

$

799,135

 

$

599,446

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Direct costs

 

696,200

 

517,020

 

General and administrative expenses

 

32,425

 

20,641

 

Total costs and expenses

 

728,625

 

537,661

 

 

 

 

 

 

 

Operating income

 

70,510

 

61,785

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Gain on sale of Chancery Software, Ltd.

 

9,322

 

 

Interest and other income

 

12,531

 

8,565

 

Interest expense

 

(11,634

)

(7,687

)

Foreign currency exchange gain (loss)

 

540

 

(777

)

 

 

10,759

 

101

 

 

 

 

 

 

 

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

 

81,269

 

61,886

 

Income tax expense

 

(12,958

)

(6,931

)

Minority interest in income of consolidated subsidiaries, net of tax

 

(18,161

)

(12,880

)

Equity in net loss of affiliates, net of tax

 

(374

)

(370

)

 

 

 

 

 

 

Income from continuing operations

 

49,776

 

41,705

 

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

 

(1,786

)

386

 

Gain (Loss) from disposal of discontinued operations, net of income tax (expense) benefit of $3,332 in 2006 and $(10,531) in 2005

 

1,296

 

(9,751

)

 

 

 

 

 

 

Net income

 

$

49,286

 

$

32,340

 

 

 

 

 

 

 

Earnings per common share, basic:

 

 

 

 

 

Income from continuing operations

 

$

0.97

 

$

0.84

 

Net income

 

$

0.96

 

$

0.65

 

 

 

 

 

 

 

Earnings per common share, diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.94

 

$

0.80

 

Net income

 

$

0.93

 

$

0.62

 

 

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,

 

 

 

2006

 

2005

 

 

 

 

 

(as restated - Note 2)

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

Net income

 

$

49,286

 

$

32,340

 

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

 

 

 

 

 

Depreciation and amortization of fixed assets

 

35,563

 

26,861

 

Amortization

 

10,434

 

10,439

 

(Gain) loss on disposal of discontinued operations

 

(1,296

)

9,751

 

Gain on sale of Chancery Software, Ltd.

 

(9,322

)

 

Non-cash stock compensation expense

 

10,674

 

2,529

 

Minority interest in consolidated subsidiaries

 

18,161

 

12,760

 

Equity in net loss of affiliates

 

374

 

370

 

Deferred income taxes

 

(2,620

)

(8,066

)

Other non-cash items

 

(2,304

)

(2,065

)

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

64,021

 

52,481

 

Income tax receivable

 

369

 

15,676

 

Inventory, prepaid expenses and other current assets

 

(6,965

)

(6,406

)

Accounts payable and accrued expenses

 

23,022

 

(14,835

)

Income tax payable

 

(9,333

)

(7,614

)

Deferred revenue and other current liabilities

 

(45,599

)

(28,292

)

Net cash provided by operating activities

 

134,465

 

95,929

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchase of available-for-sale securities

 

(4,786

)

(4,393

)

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

 

4,420

 

2,950

 

Change in investment in and advances to affiliates and other investments

 

(230

)

 

Purchase of property and equipment, net

 

(143,380

)

(82,861

)

Proceeds from sales of discontinued operations, net of cash sold

 

 

12,654

 

Cash loaned in exchange for notes receivable

 

(5,476

)

(5,414

)

Proceeds from repayment of notes receivable

 

3,596

 

 

Proceeds from the sale of Chancery Software, Ltd.

 

7,050

 

 

Cash paid for acquisitions, including deferred consideration, net of cash acquired

 

(174,478

)

(34,717

)

Expenditures for deferred costs

 

(2,702

)

(9,089

)

Change in other long-term assets

 

(4,501

)

1,578

 

Net cash used in investing activities

 

(320,487

)

(119,292

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from exercise of options

 

18,416

 

11,207

 

Proceeds from issuance of long-term debt

 

475,428

 

72,045

 

Payments on long-term debt

 

(243,055

)

(80,067

)

Change in other long-term liabilities

 

3,053

 

(1,238

)

Net cash provided by financing activities

 

253,842

 

1,947

 

Effects of exchange rate changes on cash

 

(4,666

)

3,351

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

63,154

 

(18,065

)

Cash and cash equivalents at beginning of period

 

105,106

 

117,518

 

Cash and cash equivalents at end of period

 

$

168,260

 

$

99,453

 

 

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 nine-month periods ended September 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. 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 provides higher education programs and services to over 240,000 students through a leading global network of licensed campus-based and online universities and higher education institutions (“higher education institutions”). The Company’s educational offerings are delivered through three separate reportable segments: Campus Based - Latin America (“Latin America”), Campus Based - Europe (“Europe”) and Laureate Online Education. Latin America and Europe own or maintain controlling interests in eleven and ten separately licensed 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.

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 retrospective 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.

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 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 nine-month periods ended September 30, 2005:

6




 

 

 

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
September 30, 2005

 

Nine-months ended
September 30, 2005

 

Statement of Operations

 

 

 

 

 

Increase/(Decrease) to:

 

 

 

 

 

Revenues

 

$

(5,403

)

$

1,844

 

 

 

 

 

 

 

Operating income

 

(5,403

)

1,844

 

 

 

 

 

 

 

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

 

(5,403

)

1,844

 

 

 

 

 

 

 

Minority interest in income of consolidated subsidiaries, net of tax

 

1,195

 

201

 

Income tax expense

 

1,228

 

1,475

 

 

 

 

 

 

 

Income from continuing operations

 

(2,980

)

3,520

 

Net income

 

$

(2,980

)

$

3,520

 

 

 

 

 

 

 

Increase/(Decrease) to:

 

 

 

 

 

Earnings per share, basic:

 

 

 

 

 

Income from continuing operations

 

$

(0.06

)

$

0.07

 

Net income

 

$

(0.06

)

$

0.07

 

 

 

 

 

 

 

Earnings per share, diluted:

 

 

 

 

 

Income from continuing operations

 

$

(0.06

)

$

0.07

 

Net income

 

$

(0.06

)

$

0.07

 

 

Income Taxes

The Company accounts for income taxes using the liability method pursuant to SFAS No. 109, “Accounting for Income Taxes” (“SFAS 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 (“FASB”) Interpretation No. 18, “Accounting for Income Taxes in Interim Periods” (an interpretation of APB Opinion No. 28) (“FIN 18”). FIN 18 measures the seasonality of any subsidiary, or controlled entity, that operates at an annual loss for which no income tax benefit is recognized. This seasonality can cause volatility in the interim effective rates. However, FIN 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 SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 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 nine-months ended September 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 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 123R. The Company recognizes these compensation costs on a straight-line basis over the requisite service period, which is generally the vesting period of the award. SFAS 123R clarifies and expands the guidance in SFAS 123 in several areas, including measuring fair value and attributing compensation cost to reporting periods. Changes to SFAS 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 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 107”) regarding the SEC’s interpretation of SFAS 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 107 in its adoption of SFAS 123R. Under SAB 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 123R, the Company recognized equity-based compensation expense in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Under APB 25, 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 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 FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109. 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 impact of FIN 48.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective in fiscal years beginning after November 15, 2007. The

8




Company will adopt SFAS 157 on January 1, 2008. The Company does not expect the adoption of this standard will have a material effect on the Company’s financial position or results of operations.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit and Other Postretirement Plans, an amendment of FASB Statements No. 87, 106, and 132 (R),” (“SFAS 158”). SFAS 158 requires companies to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other postretirement benefit plans. SFAS 158 requires prospective application, and the recognition and disclosure requirements are effective for the Company’s fiscal year ending December 31, 2006. In addition, SFAS 158 requires companies to measure plan assets and obligations at their year-end balance sheet date. This requirement is effective for the Company’s fiscal year ending December 31, 2008. The Company is currently evaluating the impact of the adoption of SFAS 158 on the Company’s financial statements.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” (“SAB 108”). SAB 108 addresses how the effects of prior year uncorrected financial misstatements should be considered in current year financial statements. SAB 108 requires registrants to quantify misstatements using both balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relative quantitative and qualitative factors. SAB 108 does not change the SEC staff’s previous guidance in SAB 99, “Materiality,” on evaluating the materiality of misstatements. Additionally, SAB 108 addresses the mechanics of correcting misstatements that include the effects from prior years. SAB 108 requires registrants to apply the new guidance the first time it identifies material errors in existence at the beginning of the first fiscal year ending after November 15, 2006 by correcting these errors through a one time cumulative effect adjustment to beginning retained earnings. The Company does not expect the adoption of this standard will have a material effect on the Company’s financial position or results of operations.

Note 3 — Equity-Based Compensation

Equity-Based Compensation Plans

The Company’s 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 Laureate Education, Inc. 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 to an amendment to the 2005 Plan was obtained to increase the number of shares reserved under the 2005 Plan by 4,000 shares, with no more than 1,000 shares 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 shares 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 approved prior to the 2005 Plan are subject to time-based vesting generally over five years with a contractual term of ten years. Stock option awards under the 2005 Plan are subject to time-based vesting generally over four years with a contractual term of seven years. Stock options under the 2005 Plan vest ratably generally over a four year period; the first year vests generally on the first anniversary date and the remaining three years generally vest quarterly. Stock options granted to non-employee directors generally vested immediately prior to January 1, 2006. Subsequent to January 1, 2006, options granted to non-employee directors generally 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 RSU awards granted subsequent to December 2005 are generally performance-based and are commonly eligible for vesting over four years.

Stock Options

The following table summarizes the stock option activity of the Company for the nine-month period ended September 30, 2006:

9




 

 

 

Options

 

Weighted- 
Average 
Exercise 
Price

 


Aggregate 
Intrinsic 
Value

 

Outstanding at December 31, 2005

 

6,188

 

$

19.45

 

 

 

 

 

 

 

 

 

 

 

Granted

 

125

 

$

47.39

 

 

 

Exercised

 

(1,487

)

$

13.50

 

 

 

Forfeited

 

(2

)

$

14.18

 

 

 

Outstanding at September 30, 2006

 

4,824

 

$

22.09

 

$

115,780

 

Exercisable at September 30, 2006

 

3,801

 

$

16.93

 

$

110,521

 

Vested and expected to vest at September 30, 2006

 

4,711

 

$

22.09

 

$

112,913

 

 

The weighted average remaining contractual term of options outstanding is 3.9 years. The weighted average contractual term of exercisable options outstanding is 3.3 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 period was $57,110.

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 value of stock options granted for the nine-months ended September 30, 2006 was $14.53. The total compensation expense related to stock options was $1,730 and $4,416, net of the impact of estimated forfeitures, for the three- and nine-month periods ended September 30, 2006, respectively.

As of September 30, 2006, $13,243 of total unrecognized equity-based compensation cost related to stock options is expected to be recognized over a weighted average period of 2.3 years.

Nonvested Restricted Stock and Restricted Stock Units

Nonvested restricted stock and RSU awards as of September 30, 2006 and changes during the nine-month period ended September 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

 

(65

)

$

22.08

 

Forfeited

 

 

—-

 

Nonvested at September 30, 2006

 

573

 

$

40.67

 

 

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 restrictions on 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 one-year 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 September 30, 2006, there was $14,248 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 2.9 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 $2,040 and $5,701 for the three- and nine-month periods ended September 30, 2006, respectively.

10




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

 

 

2006

 

2005

 

Direct costs

 

$

1,816

 

$

367

 

General and administrative expenses

 

2,146

 

968

 

Equity-based compensation expense before income taxes

 

3,962

 

1,335

 

Income tax benefit

 

(1,280

)

(489

)

Total equity-based compensation expense after income taxes

 

$

2,682

 

$

846

 

 

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

 

 

2006

 

2005

 

Direct costs

 

$

5,401

 

$

961

 

General and administrative expenses

 

5,272

 

1,568

 

Equity-based compensation expense before income taxes

 

10,673

 

2,529

 

Income tax benefit

 

(3,744

)

(923

)

Total equity-based compensation expense after income taxes

 

$

6,929

 

$

1,606

 

 

Prior to January 1, 2006, the Company provided pro forma disclosure amounts in accordance with SFAS 123, as if the fair value method defined by SFAS 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 nine-months ended September 30, 2005 and recorded equity-based compensation for the nine-months ended September 30, 2006:

 

 

2006

 

2005

 

Average risk-free interest rate

 

4.8

%

3.9

%

Expected dividend yield

 

0.0

%

0.0

%

Expected lives

 

1-4.75 years

 

0-7.5 years

 

Average expected volatility

 

27.8

%

30.2

%

 

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

 

 

Three-months 
ended
September 30,
2005

 

Nine-months 
ended
September 30,
2005

 

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

 

$

8,838

 

$

32,340

 

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

 

846

 

1,606

 

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

 

(1,092

)

(3,449

)

Pro forma net income

 

$

8,592

 

$

30,497

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

Basic - as reported

 

$

0.18

 

$

0.65

 

Basic - pro forma

 

$

0.17

 

$

0.62

 

Diluted — as reported

 

$

0.17

 

$

0.62

 

Diluted — pro forma

 

$

0.17

 

$

0.59

 

 

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.

11




As a result of adopting SFAS 123R, for the three-month period ended September 30, 2006, income before income taxes and net income was $1,730 and $1,657 lower, respectively, than if the Company had continued to account for equity-based compensation under APB 25. For the nine-month period ended September 30, 2006, income before income taxes and net income was $4,416 and $3,712 lower, respectively, than if the Company had continued to account for equity-based compensation under APB 25. The impact on both basic and diluted earnings per share from continuing operations using the Company’s effective tax rate for the three- and nine-month periods ended September 30, 2006 was $0.03 and $0.07 per share, respectively. In addition, prior to the adoption of SFAS 123R, the Company presented the tax benefit of stock option exercises as operating cash flows. Upon the adoption of SFAS 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 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 nine-months ended September 30, 2006.

 Note 4 - Discontinued Operations

During the third quarter of 2006, the Company sold the operations of Institut Francais de Gestion Langues (“IFG Langues”), a non-strategic part of IFG. 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, WSI, India, and K-12 educational services were eliminated from ongoing operations as a result of the sale or abandonment and the Company does 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 lawsuits related to the WSI business. During the second quarter of 2006, the Company recorded an income tax gain of $700 due to the re-assessment of income tax accruals related to the disposal. During the third quarter of 2006, the Company recorded a $2,230 beneficial tax return adjustment related to the discontinued operations of the WSI business.

During the third quarter of 2006 and 2005, WSI Education S.a.r.l. received preliminary field audit reports assessing Italian value added taxes (“VAT”) owed related to services provided by the WSI business unit in 2004 and 2003 and prior to its disposition, respectively. 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. In the third quarter of 2006, the Company received notification that the Italian Court denied the stay of payment request, which sought to defer payment of the tax and interest portion of the obligation that is normally required to commence court proceedings. As a result, the Company deposited approximately $3,000 with the Italian tax authority, representing approximately 50% of the 2003 and prior total tax and interest assessed to date. The next hearing will be on January 25, 2007. The Company continues to believe that a loss from this matter is not probable, nor is it possible to estimate the ultimate outcome of this issue. As a result, no expense for any potential adverse outcome of this matter has been recorded in the consolidated financial statements. The Company intends to vigorously pursue these cases.

Other

In July 2006, the Company sold IFG Langues, a non-strategic part of IFG, to an unrelated third party. Under the agreement, the buyer purchased all assets and assumed substantially all third party liabilities of the business. 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 had estimated an additional after-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 nine-months ended September 30, 2006. During the third quarter of 2006, the Company recorded an adjustment to decrease the estimated after-tax loss on the sale of IFG Langues recorded in the second quarter of 2006 by $153.

12




 

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

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenues

 

$

 

$

 

$

420

 

$

1,329

 

Pretax loss from discontinued operations

 

$

(14

)

$

(69

)

$

(99

)

$

(160

)

 

 

 

 

 

 

 

 

 

 

 

Nine-months ended September 30:

 

 

WSI

 

Other

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenues

 

$

 

$

12,310

 

$

4,207

 

$

4,830

 

Pretax (loss) income from discontinued operations

 

$

(39

)

$

411

 

$

(1,433

)

$

(310

)

 

 

 

 

 

 

 

 

 

 

 

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 — Acquisitions

On August 16, 2006, the Company entered into a binding agreement to purchase the remaining 20% of the share capital of Desarrollo del Conocimiento S.A. (“Decon”) and Desarrollo de la Educacion Superior S.A. (“Desup”) that was not previously owned by the Company, in order to increase the Company’s ownership to 100%. Decon and Desup control the Company’s Chilean businesses, including a subsidiary in Ecuador.  The purchase price of $174,174, including transaction costs of $5,904 and other non-cash consideration of $7,470, was paid on September 12, 2006. In addition to the final 20% share capital in Decon and Desup, this amount includes the remaining balances payable by the Company as contingent earnouts with respect to the Company’s previous purchases of the initial 80% of the share capital of Decon. Following the closing, the Company will have no further monetary obligations with respect to the purchase of the capital stock of Decon and Desup.  The Company began 100% consolidation of the Chilean businesses effective September 12, 2006.

The Company accounted for this step acquisition using the purchase method of accounting, allocating the purchase price to its incremental share of acquired identifiable intangible assets and liabilities assumed based on estimated fair values at the date of the step acquisition, with the excess of $92,563 recorded as additional goodwill, as follows:

Goodwill

 

$

92,563

 

Other intangible assets (amortizing and non amortizing)

 

50,207

 

Total assets acquired

 

142,770

 

Other long-term liabilities

 

342

 

Minority interest

 

(31,746

)

Total liabilities assumed

 

(31,404

)

Net assets acquired

 

$

174,174

 

 

The preliminary allocation of the purchase price is subject to revision based on the final determination of fair values.

13




Note 6 — Notes Receivable (Long-term)

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

 

 

September 30,
2006

 

December 31,
2005

 

Trade notes receivable (long-term), net of allowance of $10,472 and $9,328 at September 30, 2006 and December 31, 2005, respectively

 

$

32,929

 

$

34,762

 

Notes receivable (long-term):

 

 

 

 

 

Kendall College

 

32,090

 

25,395

 

WSI Education S.a.r.l.

 

14,472

 

13,448

 

Other

 

6,260

 

10,208

 

 

 

$

85,751

 

$

83,813

 

 

Of the balance of long-term trade notes receivable, $8,359 was unearned as of September 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 7— Other Intangible Assets

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

 

 

Gross Carrying
Amount

 

Accumulated 
Amortization

 

Net Carrying 
Amount

 

Subject to amortization:

 

 

 

 

 

 

 

Student rosters

 

$

23,028

 

$

(16,244

)

$

6,784

 

Non-compete agreements

 

1,323

 

(917

)

406

 

Other

 

1,183

 

(774

)

409

 

Total

 

$

25,534

 

$

(17,935

)

$

7,599

 

 

Amortization expense for intangible assets was $1,279 and $3,555 for the three- and nine-months ended September 30, 2006, respectively, and $1,751 and $5,223 for the three- and nine-months ended September 30, 2005 respectively. The estimated future amortization expense for intangible assets for the remaining three-month period of 2006 is $970. The estimated future amortization expense for intangible assets for each of the five years subsequent to December 31, 2006 is as follows: 2007 - $3,241; 2008 - $1,369; 2009 - $974; 2010 - $851; 2011 and beyond - $194.

Note 8 - Long-Term Debt

Long-term debt consists of the following:

 

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

Long-term credit lines under the Bank Facility bearing interest at rates ranging from 6.83% to 6.90%

 

$

207,473

 

$

 

Various unsecured lines of credit bearing interest at variable rates ranging from 3.45% to 8.60%

 

86,797

 

51,332

 

Mortgage notes payable bearing interest at variable rates ranging from 3.35% to 8.50%

 

52,404

 

52,429

 

Notes payable secured by fixed assets, bearing interest at rates ranging from 3.95% to 10.00%

 

27,481

 

24,239

 

Capital lease obligations bearing interest at rates ranging from 2.60% to 6.98%

 

22,610

 

12,374

 

Various notes payable bearing interest at fixed rates ranging from 3.00% to 8.09%

 

12,298

 

19,742

 

Various notes payable bearing interest at variable rates ranging from 3.15% to 9.05%

 

1,810

 

2,925

 

 

 

410,873

 

163,041

 

Less: current portion of long-term debt

 

89,927

 

63,044

 

Total long-term debt, net of current portion

 

$

320,946

 

$

99,997

 

 

14




 

On August 16, 2006, the Company entered into a $250,000 Credit Agreement (the “Bank Facility”) with JPMorgan Chase Bank, National Association (“JPMorgan Chase”) and certain other parties thereto.

The Bank Facility expires on August 16, 2011 and is comprised of two sub-facilities:  a U.S. sub-facility for $150,000 and a Spanish sub-facility for $100,000. The Bank Facility has a swingline loan feature of up to $10,000 and an expansion feature for an aggregate principal amount of up to $100,000. The new borrowings were used in part to repay the Company’s prior credit agreement dated as of October 26, 2005 with Bank of America, National Association, which was terminated at the time of repayment, except for a $5,000 swingline that was kept in place. The proceeds of subsequent borrowings under the Bank Facility will be used for general corporate purposes, including acquisitions and the transaction described in Footnote 5.

The Bank Facility provides that all borrowings under the U.S. sub-facility are denominated in U.S. Dollars. Borrowings under the Spanish sub-facility may be denominated in U.S. Dollars or foreign currency. Borrowings bear interest (a) in the case of U.S. Dollar-denominated loans, at the Borrower’s option, at either (i) the applicable LIBOR rate or (ii) the higher of JPMorgan Chase’s prime rate or the Federal Funds effective rate (the “Alternate Base Rate”), plus, in the case of both (i) and (ii), a margin that varies according to the Company’s net leverage ratio; (b) in the case of loans denominated in foreign currency, at the applicable LIBOR rate plus a margin that varies according to the Company’s net leverage ratio; and (c) in the case of swingline loans, at the Alternate Base Rate, as defined in the Bank Facility.

The Bank Facility contains affirmative and negative covenants, including covenants related to maintenance of the Company’s net leverage ratio and interest expense coverage ratio and covenants restricting indebtedness, liens, investments, asset transfers and distributions. The obligations of the Company under the Bank Facility are guaranteed by certain subsidiaries, and, in the case of the Spanish sub-facility, by the Company. The obligations of the Company under the Bank Facility are secured by a pledge of certain equity interests and other assets of the Company.

During the third quarter of 2006, Universidad Del Valle De Mexico (“UVM”) entered into a new credit line for $27,285.  The term of the credit line is 30 months with decreases in the available line of $2,700 per quarter.  The interest rate of the credit line is the Mexican interbank rate (TIEE).  In addition, UVM also renewed two existing credit lines during the third quarter for a total amount of $36,380.  The proceeds of the borrowings are used to support the growth of UVM.  The proceeds of the borrowings will be used to fund working capital needs including acquisitions.

Note 9 - Due to Shareholders of Acquired Companies

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

 

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

Amounts payable to former shareholders of:

 

 

 

 

 

Universidade Anhembi Morumbi (“UAM”)

 

$

15,611

 

$

13,658

 

Universidad Tecnologica Centroamericana (“UNITEC”)

 

14,498

 

14,814

 

Universidad Andres Bello (“UNAB”)

 

13,802

 

24,929

 

Universidad Interamericana (“UI”)

 

4,200

 

4,200

 

Universidad Peruana de Ciencias Aplicadas (“UPC”)

 

3,007

 

2,859

 

Universidad del Noroeste (“UNO”)

 

1,806

 

1,890

 

Universidad Latinoamericana de Ciencia y Tecnologia (“ULACIT”)

 

100

 

100

 

Cyprus College

 

 

2,973

 

 

 

53,024

 

65,423

 

Less: current portion of due to shareholders

 

23,675

 

18,737

 

Total due to shareholders, net of current portion

 

$

29,349

 

$

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.

15




Note 10 - 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, 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 4.2% and 15.9% for the three- and nine-months ended September 30, 2006, respectively, and 11.2% for both the three- and nine-months ended September 30, 2005.  For the nine months ended September 30, 2006, the effective tax rate includes the impact of FIN 18.  FIN 18 only applies to interim periods and has no effect on the Company’s annual effective tax rate.  The effective tax rate for the three- and nine- months ended September 30, 2006, excluding the impact of FIN 18 and the discrete events described below, was (1.6%) and 6.7%, respectively. For both the three- and nine-month periods ended September 30, 2005, the Company’s effective tax rate was 11.2% and the impact of FIN 18 was immaterial. Recent acquisitions in lower-taxed jurisdictions and foreign tax planning initiatives have decreased the 2006 forecasted effective tax rate to 11.4% including discrete events, below the 2005 effective tax rate of 15.0%.  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 tax 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 16).  Because this event monetized the last significant remaining uncertain asset of Ventures, the Company has reassessed its plans for the liquidation of Ventures.  As a result of the Chancery transaction and current liquidation plans, the Company re-evaluated its deferred tax assets related to Ventures, and recorded income tax expense of $6,991 to reduce the asset to its current net realizable value.

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

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

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

16




Note 11 — Stockholders’ Equity

The components of stockholders’ equity are as follows:

 

 

 

 

 

Additional

 

 

 

Accumulated
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 1,487 shares of common stock, net of 35 replenishment shares

 

14

 

18,401

 

 

 

18,415

 

Non-cash stock compensation modification for former employee

 

 

557

 

 

 

557

 

Non-cash stock compensation

 

 

10,116

 

 

 

10,116

 

Other

 

1

 

 

 

 

1

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income for the nine months ended September 30, 2006

 

 

 

49,286

 

 

49,286

 

Foreign currency translation adjustment

 

 

 

 

5,428

 

5,428

 

Unrealized gain on available-for-sale securities

 

 

 

 

85

 

85

 

Total comprehensive income

 

 

 

 

 

54,799

 

Balance at September 30, 2006

 

$

514

 

$

532,865

 

$

485,021

 

$

43,966

 

$

1,062,366

 

 

Note 12 — 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

 

 

 

2005

 

 

 

2006

 

(as restated — 
Note 2)

 

2006

 

(as restated — 
Note 2)

 

Net income

 

$

11,988

 

$

8,838

 

$

49,286

 

$

32,340

 

Foreign currency translation adjustment

 

4,192

 

12,860

 

5,428

 

(10,184

)

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

 

76

 

(5

)

85

 

48

 

Minimum pension liability adjustment

 

 

 

 

(22

)

Comprehensive income

 

$

16,256

 

$

21,693

 

$

54,799

 

$

22,182

 

 

Note 13 - Earnings Per Share

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

 

 

Three-months ended
September 30,

 

Nine-months ended
September 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

 

$

9,884

 

$

9,067

 

$

49,776

 

$

41,705

 

(Loss) Income from discontinued operations, net of tax

 

(113

)

(229

)

(1,786

)

386

 

Gain (Loss) on disposal of discontinued operations, net of tax

 

2,217

 

-

 

1,296

 

(9,751

)

Net income

 

$

11,988

 

$

8,838

 

$

49,286

 

$

32,340

 

 

 

 

 

 

 

 

 

 

 

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

 

51,522

 

49,801

 

51,134

 

49,539

 

Net effect of dilutive securities based on treasury stock method

 

1,602

 

2,272

 

1,829

 

2,409

 

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

 

53,124

 

52,073

 

52,963

 

51,948

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share, basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.19

 

$

0.18

 

$

0.97

 

$

0.84

 

(Loss) Income from discontinued operations, net of tax

 

0.00

 

0.00

 

(0.03

)

0.01

 

Gain (Loss) on disposal of discontinued operations, net of tax

 

0.04

 

0.00

 

0.03

 

(0.20

)

Earnings per common share, basic

 

$

0.23

 

$

0.18

 

$

0.96

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share, diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.19

 

$

0.17

 

$

0.94

 

$

0.80

 

(Loss) Income from discontinued operations, net of tax

 

0.00

 

0.00

 

(0.03

)

0.01

 

Gain (Loss) on disposal of discontinued operations, net of tax

 

0.04

 

0.00

 

0.02

 

(0.19

)

Earnings per common share, diluted

 

$

0.23

 

$

0.17

 

$

0.93

 

$

0.62

 

 

17




 

Per share amounts may not sum due to rounding differences.

Note 14 — Commitments and Contingencies

This chart is intended to provide 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 Contingent Transaction

Purchase Obligations:

 

 

 

 

 

 

Ecole Centrale d’Electronique (“ECE”)(1)

 

December 31, 2008

 

30%

 

$8,877

 

 

 

 

 

 

 

IFG(2)

 

On or before July 31, 2007

 

16%

 

$1,590

 

 

 

 

 

 

 

 

 

July 31, 2007

 

23%

 

$2,368

 

 

 

 

 

 

 

Put Right Arrangements:

 

 

 

 

 

 

 IFG(2)

 

October through November 2008

 

10%

 

$1,014

 

 

 

 

 

 

 

 UAM(3)

 

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(4)

 

April 1, 2012 or up to five years thereafter

 

20%

 

Payable based on a variable scale for new enrollments and EBITDA related to the year prior to exercise

18




 

 

 

 

 

 

 

 

Call Right Arrangements:

 

 

 

 

 

 

UAM(3)

 

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%

 

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

 

 

 

 

 

 

 

Cyprus College(4)

 

Beginning 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

 

 

January 1, 2012 or up to five years thereafter

 

20%

 

Payable April in the year following exercise based on a variable scale for new enrollments and EBITDA related to the year prior to exercise

 

 

 

 

 

 

 

Contingent Earnouts (cash payments):

 

 

 

 

 

 

Laureate Online Education BV(5)

 

April 1, 2007

 

 

 

Approximately 75% of 4 times 2006 EBITDA, not to exceed $10,000

 

 

 

 

 

 

 

 

 

April 1, 2008

 

 

 

Approximately 4 times the average of 2006 and 2007 EBITDA, not to exceed $10,000, less the April 1, 2007 payment

 

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

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 $8,877.  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 $1,590 and $2,368 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 $1,014.  During the second quarter of 2006, the Company negotiated an amendment to the agreement that provides that the first additional capital contribution of $1,590 can be extended up to 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

19




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 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.

(4) Effective April 1, 2012 and exercisable up to five years thereafter, the minority owners of Cyprus College have a put right to require the Company to purchase an equity interest of 20% from the minority owners at a variable purchase price based on a variable scale for new enrollments and EBITDA for the calendar year preceding the exercise date.  Beginning July 1, 2006, the Company has a call right to acquire up to a 35% interest from the minority owners for a variable purchase price based on a variable scale for new enrollment and 2006 EBITDA.  Effective January 1, 2012 and exercisable up to five years thereafter, the Company has the call right to acquire the remaining 20% interest from the minority owners for a variable purchase price based on a variable scale for new enrollment and EBITDA for the calendar year preceding the exercise date.

Contingent Earnouts (cash payments)

(5) 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.  See additional discussion in Note 4 and Note 10 to the consolidated financial statements.

Material Guarantees

Subsequent to the June 2003 divestiture of the Company’s K-12 business segments, all leases related to Sylvan Learning Centers were renegotiated or assigned in the name of Educate, Inc. (“Educate”) during the third quarter of 2003.  Leases with remaining payments of $4,111 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 $3,805 through December 2011 are guaranteed by the Company. The Company has an agreement to guarantee rent lease payments owed by a co-tenant of a building in which the Company leases space.  Upon the event of default, eviction and other conditions, on behalf of the co-tenant, the Company assumes all rights of the co-tenant.  The Company is not liable for any loss or damages caused by the co-tenant.  The lease contains remaining payments of $3,162 through April 30, 2009.  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 $14,200 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 $700.  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 Academia de Idiomas y Estudios Profesionales (“AIEP”), which is being used for working capital purposes.  The outstanding balance on the line of credit was $2,188 at September 30, 2006 and is also covered by other guarantees by other affiliated entities.  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.

 

20




 

Commitments

Under terms of note agreements with Kendall, the Company has committed to providing total additional funding to Kendall of up to $1,459.  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 $3,175 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.

Note 15 - Business and Geographic Segment Information

The Company provides higher education programs and services to over 240,000 students through a leading global network of licensed 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 licensed 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 190,000 students and offer more than 100 degree programs through 49 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 licensed universities and eight other licensed post-secondary institutions, and has operations in Spain, Switzerland, France and Cyprus.  Europe higher education institutions currently enroll over 19,000 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 over 31,000 students.

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

21




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

Three-months ended
September 30, 2006

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

169,228

 

$

31,835

 

$

59,843

 

$

260,906

 

Segment profit

 

30,348

 

(12,013

)

12,319

 

30,654

 

 

Three-months ended
September 30, 2005
(as restated — Note 2)

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

125,419

 

$

22,572

 

$

45,809

 

$

193,800

 

Segment profit

 

29,416

 

(6,981

)

7,012

 

29,447

 

 

Nine-months ended
September 30, 2006

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

482,534

 

$

149,035

 

$

167,566

 

$

799,135

 

Segment profit

 

87,101

 

7,622

 

24,785

 

119,508

 

 

Nine-months ended
September 30, 2005
(as restated — Note 2)

 

Latin America

 

Europe

 

Laureate Online
Education

 

Total

 

Revenues

 

$

339,542

 

$

129,056

 

$

130,848

 

$

599,446

 

Segment profit

 

70,691

 

10,073

 

13,521

 

94,285

 

 

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,

 

 

 

2006

 

2005
(as restated
— Note 2)

 

2006

 

2005
(as restated
— Note 2)

 

Total profit for reportable segments

 

$

30,654

 

$

29,447

 

$

119,508

 

$

94,285

 

Campus-based segments’ overhead

 

(5,998

)

(5,861

)

(16,573

)

(11,859

)

General and administrative expense

 

(11,154

)

(8,145

)

(32,425

)

(20,641

)

Net non-operating income (loss)

 

495

 

175