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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number 0-27248

 

 

LEARNING TREE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   95-3133814

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1805 Library Street

Reston, VA

  20190
(Address of principal executive offices)   (Zip Code)

(703) 709-9119

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.0001 par value   The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (do not check if a smaller reporting company)    Smaller reporting company   ¨

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

The aggregate market value of the common stock, $.0001 par value, held by non-affiliates of the registrant, as of April 1, 2011 was $52,582,003. (Excludes 7,564,673 shares held by directors and officers of the registrant since such persons may be deemed to be affiliates.)

The number of shares of common stock, $.0001 par value, outstanding as of December 7, 2011, was 13,479,409.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement of the registrant to be delivered to stockholders in connection with the 2012 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

 

          Page  
     Part I       

Item 1.

  

Business

     4   

Item 1A.

  

Risk Factors

     12   

Item 1B.

  

Unresolved Staff Comments

     20   

Item 2.

  

Properties

     20   

Item 3.

  

Legal Proceedings

     21   

Item 4.

  

Removed and reserved

     21   
   Part II   

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     22   

Item 6.

  

Selected Financial Data

     25   

Item 7.

  

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

     27   

Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

     41   

Item 8.

  

Financial Statements and Supplementary Data

     43   

Item 9.

  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     69   

Item 9A.

  

Controls and Procedures

     69   

Item 9B.

  

Other Information

     71   
   Part III   

Item 10.

  

Directors, Executive Officers and Corporate Governance

     72   

Item 11.

  

Executive Compensation

     72   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     72   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     72   

Item 14.

  

Principal Accountant Fees and Services

     72   
   Part IV   

Item 15.

  

Exhibits and Financial Statement Schedules

     73   

Signatures

     74   

Exhibit Index

     75   

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can find many (but not all) of these statements by looking for words such as “approximates,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “would,” “may” or other similar expressions in this Report. Our forward-looking statements relate to future events or our future performance and include, but are not limited to, statements concerning our business strategy, future commercial revenues, market growth, capital requirements, new product introductions, expansion plans and the adequacy of our funding. Other statements contained in this report that are not historical facts are also forward-looking statements.

We claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995. We caution investors that any forward-looking statements presented in this Report, or that we may make orally or in writing from time to time, are based on our beliefs, assumptions made by us and information currently available to us. Such statements are based on assumptions, and the actual outcome will be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control or ability to predict. Although we believe that our assumptions are reasonable, they are not guarantees of future performance, and some will inevitably prove to be incorrect. As a result, our actual future results can be expected to differ from our expectations, and those differences may be material. Accordingly, investors should use caution in relying on forward-looking statements, which are based on known results and trends at the time they are made, to anticipate future results or trends.

Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed or implied by forward-looking statements include those related to the following:

 

   

the timely development, introduction, and customer acceptance of our courses;

 

   

efficient delivery and scheduling of our courses;

 

   

technology development and new technology introduction;

 

   

competition;

 

   

international operations, including currency fluctuations;

 

   

attracting and retaining qualified personnel;

 

   

intellectual property, including having to defend potential infringement claims;

 

   

changing economic and market conditions; and

 

   

adverse weather conditions, strikes, acts of war or terrorism and other external events.

For further discussion of these and other factors see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”

This Report and all subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to release publicly any revisions to our forward-looking statements to reflect events or circumstances after the date of this Report.

 

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PART I

 

Item 1. BUSINESS.

As used in this Report (unless the context otherwise requires) “we”, “our”, and “us” refer to Learning Tree International, Inc. and its subsidiaries.

Overview

Learning Tree International, Inc. is a leading worldwide vendor-independent provider to business and government organizations for the training and education of their managers and information technology (“IT”) professionals. Since our founding in 1974, we have provided high-quality training to over 2.1 million managers and IT professionals. In fiscal year 2011, we trained 76,419 course participants from more than 8,400 organizations worldwide, including large national and multinational companies, government organizations, and small and medium-size companies.

As of September 30, 2011, we offer a broad proprietary library of intensive instructor-led courses from one to five days in length, which at September 30, 2011 comprised 220 different course titles representing 4,824 hours of training, including 137 IT course titles and 83 management course titles. Learning Tree courses provide education and training across a wide range of technical and management disciplines, including operating systems, databases, computer networks, computer and network security, web development, programming languages, software engineering, open source applications, project management, business skills, leadership and professional development.

We market and present our courses through locally staffed operations in the United States, the United Kingdom, France, Canada, Sweden and Japan and generate approximately half of our revenues internationally. We coordinate, plan and deliver our courses at our own education centers, external hotel and conference facilities and customer sites worldwide. During fiscal year 2011, we presented courses in 54 countries. We also offer courses through our proprietary live on-line learning platform, Learning Tree AnyWare™, which allows individuals located anywhere in the world to use their Internet browser to participate online in instructor-led classes being conducted live in Learning Tree Education Centers or at customer locations. During fiscal year 2011, the market success of Learning Tree AnyWare continued to grow, with more than 6,300 remote participants attending AnyWare course sessions—an increase of 48% from the prior year.

We use a well-defined systematic approach to develop and update the Learning Tree course library so as to provide training that is immediately relevant to course participants working in a broad range of applications and industries. After assessing market need, courses may be translated into French, Swedish and Japanese. Our proprietary course development process also allows us to efficiently and effectively customize our courses for delivery at our customers’ sites.

Business Strategy

Our long-term objective is to sustain and grow our position as a leading worldwide vendor-independent provider of training and education to managers and IT professionals and become the provider of choice for large national and multinational companies, small and medium-size companies and government organizations. To that end, we focus on providing our customers’ employees with the knowledge and skills they need to contribute to their employers’ key business objectives and developing and maintaining long-term relationships with our customers and course participants.

Commitment to Quality Training. For the past 37 years, we have set the highest standards of excellence in educating and training managers and IT professionals throughout the world. We believe these standards have driven our long-term success. Our course participants have consistently rated Learning Tree instructors and courses at the top end of the scale. These ratings reflect our ongoing commitment to quality and innovations in

 

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instructional delivery, including our patented MagnaLearn™ instructional enhancement system and Reality-Plus™ management training methodology, as well as, the latest up-to-date hands-on course equipment, ongoing revision and updating of our course materials, and the ongoing training and coaching of our already superb instructors. Our AnyWare e-Learning platform extends the full range of Learning Tree features and standards to our online participants, so that they enjoy the same results as our in-class participants.

High Quality Instructor Team. At September 30, 2011, we had 619 course instructors located around the world. Learning Tree instructors are practicing professionals with expert subject knowledge. Our average instructor has nearly 26 years of “hands-on, real world” experience. Learning Tree instructors teach an average of approximately 10 course events per year on an “as-needed” basis. During the rest of the year they work for other organizations either as full-time employees or as independent technical or management consultants. This “on-demand” structure enables us to quickly schedule additional courses anywhere in the world and to respond efficiently to our customers’ needs for management and IT skills training. Our course participants particularly benefit because Learning Tree instructors generally spend the majority of their time working in industry settings, and therefore provide our course participants with up-to-date, practical knowledge and skills in the latest technological and management developments. Our instructors also provide us with unique access to a large pool of industry experts on management and IT trends throughout the world that is especially valuable in our decisions and development process for new course titles.

Our success depends on our ability to attract and retain highly skilled instructors. We use a highly systemized process in each of our local operating subsidiaries to identify, engage, train, coach, and evaluate our instructor team. Our instructors are highly loyal as evidenced by our annual instructor retention rate, which is approximately 90%.

Broad Proprietary Course Library. We offer a broad, proprietary course library, which at September 30, 2011 totaled 220 instructor-led one- to five-day course titles comprising a total of 4,824 hours of classroom instruction covering a wide range of management and IT topics. Based on their sophistication and quality, all Learning Tree courses are recommended for one to two semester hours of college credit by the American Council on Education. We are a trusted continuing professional education (CPE) provider of the International Information Systems Security Certification Consortium (ISC)2. In addition, we are on the National Association of State Boards of Accountancy National Registry of CPE sponsors and are a Registered Education Provider of the Project Management Institute (PMI).

 

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The following table itemizes the number of Learning Tree course titles by curriculum at September 30, 2011:

 

Curriculum

   Number of
Course Titles
     Total Hours of
Training
 

Project Management

     18         378   

Business Analysis

     17         321   

SQL Server

     15         348   

Visual Studio and .NET Development

     15         348   

Communication and Time Management

     15         252   

Windows Systems and Exchange

     14         342   

Web Development and XML

     14         300   

Networking, Cisco Networks and PC Support

     13         330   

ITIL Certification

     12         276   

Software Engineering

     12         270   

SharePoint

     11         228   

Management and Leadership

     11         216   

Java, C++ and Perl Programming

     10         240   

RDBMS, and Oracle Databases

     9         240   

Security

     9         228   

UNIX and Linux

     7         162   

Microsoft Office

     4         90   

Cloud Computing

     4         63   

Disney Institute Courses

     4         60   

FAC/PPM

     3         72   

Apple Macintosh Systems and Support

     2         36   

Mobile App Development

     1         24   
  

 

 

    

 

 

 

Total

     220         4,824   
  

 

 

    

 

 

 

As a leading vendor-independent provider of IT training, our objective is to provide our customers with job-focused, hands-on learning experiences that best meet their needs for the development of their managers and professional IT staff. We design our courses to provide participants an unbiased perspective of both the strengths and limitations of software and hardware products and an understanding of how to compare and integrate multiple platforms and technologies from various vendors. Drawing from the expertise of our international team of instructors, each course incorporates multiple points of view concerning IT applications used throughout the world. Our IT courses are designed to be highly interactive; most involve “hands-on” training on networked state-of-the-art workstations so that participants can practice and assimilate the skills being taught. Participants spend a significant portion of each hands-on course working on computer-based exercises and participating in group workshops and class interactions. As a result, they return to their jobs with the confidence to immediately apply the new skills and knowledge they have gained. Participants receive extensive printed course materials that facilitate learning and serve as a post-course reference tool.

Our management courses, while including core concepts and theory, focus heavily on providing practical skills, tools, and techniques that participants can apply immediately upon returning to their jobs. Participants work extensively in group exercises that provide the opportunity for them to practice applying the key concepts in real-world situations. These real-world scenarios are primarily delivered through RealityPlus™, our proprietary performance-based management training platform. RealityPlus™ courses bring the real world to life in the classroom through the use of computer-based and rich-media simulations, supplemented with substantial amounts of hands-on exercises and group activities, facilitated by experts in their respective fields. RealityPlus™ prepares participants to apply the skills and knowledge they learn in our simulated projects to the real-life management tasks they will perform in the workplace.

 

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As of September 30, 2011, we offered 137 titles in our IT curriculum, representing 62% of our entire course library. This compares to the same number of titles, which represented 64% of our entire course library, at the end of fiscal year 2010. As of September 30, 2011, we offered 83 titles in our management curriculum, representing 38% of our course library, compared to 77 titles, or 36% of our entire course library, at the end of fiscal year 2010. Our spending on course development was $7.5 million in fiscal year 2011, $7.3 million in fiscal year 2010 and $7.4 million in fiscal year 2009.

To assist participants in their long-term professional development, we offer 24 Learning Tree Professional Certification programs, in which participants earn their certification by successfully completing four Learning Tree courses in a particular field, and demonstrating mastery by passing the examination for each course. Each Professional Certification Program is designed to teach all of the skills necessary to master a specific job function.

Over our 37-year history, we have developed and implemented a well-defined, systematic approach for rapidly developing, customizing and updating courses in the Learning Tree library and for translating our course content into multiple languages. We organize courses into curricula that reflect general topics or disciplines. We continuously update and expand our course curriculum structure and course content and add new course titles to keep pace with the introduction of new technologies and to reflect the evolving training needs of our customers. To identify potential new courses for development, we incorporate feedback from the worldwide Learning Tree instructor team, course participants and customers, and from the development groups of leading IT vendors. In fiscal year 2011, we introduced 24 new course titles and retired 18 titles. We may or may not introduce more titles than we retire in any period, and there can be no assurance that we will develop courses that keep pace with the introduction of new hardware, software and networking technologies or the need for key business skills training. We expect course development costs to vary in the future, primarily depending on the number of new titles we introduce in any period, as well as the overall size of the total course library we must maintain.

International Infrastructure and Logistics Capability. We meet customer demand for scheduling flexibility by delivering course events frequently and at multiple locations throughout the world, and by making approximately three-quarters of our course titles available online through Learning Tree AnyWare™. Our sophisticated infrastructure and logistics capability allow us to coordinate, plan and deliver Learning Tree courses at our education centers and external hotel and conference facilities worldwide. We also present standard or customized courses on demand at customer facilities whenever and wherever desired, with quality standards that are identical to those for courses presented in Learning Tree Education Centers. By using our team of 619 instructors, our course development and customization processes, our team of customer support specialists, our logistics team and our thousands of classroom computer workstations, we can rapidly and effectively deliver any Learning Tree course to any location in the world.

In fiscal year 2011, we presented 6,178 course events at Learning Tree Education Centers and at third-party and customer sites in a total of 54 countries. We currently operate wholly-owned subsidiaries in the United States (since 1974), France (since 1977), the United Kingdom (since 1978), Canada (since 1985), Sweden (since 1986) and Japan (since 1989). Each subsidiary is staffed by local personnel responsible for the sale and delivery of courses in its local country as well as in other designated countries. As in most years, in fiscal year 2011 our international operations produced approximately half of our revenues. See Note 9 of “Notes to Consolidated Financial Statements” for certain financial data regarding operating segments and geographic regions. See Item 1A, “Risk Factors” for a description of the risks associated with our international operations.

On an on-going basis, we evaluate the advisability of expansion or contraction of our operations both within cities and countries with existing Learning Tree Education Centers and in new cities or countries.

Long-Term Relationships with Global Customer Base. We have built long-standing relationships with our customer base of large national and multinational companies, small and medium-sized companies and government organizations throughout the world, and seek to build continuing relationships both with these

 

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employers and with the individual employees who participate in our courses. Our customers operate in a wide range of sectors, including finance, computer, communications, electronics, systems integration, aerospace, government and military, manufacturing, and energy. Every one of our 100 largest clients five years ago in fiscal year 2006 was still one of our clients five years later in fiscal year 2011. In fiscal year 2011, we provided training to 76,419 course participants, and over 180 of our corporate and government customers purchased more than $100,000 of Learning Tree training. No customer accounted for 10% or more of our revenues in fiscal years 2011, 2010 or 2009.

In fiscal year 2011, we continued our efforts to develop enterprise-wide relationships with many of our large customers. These relationships take various forms, but generally involve a modest discount to our list price in exchange for becoming a preferred supplier, which enables us to provide training services to a greater number of individual employees with lower sales and administrative costs.

Backlog. Our sales backlog at November 30, 2011 was $26.1 million. This compares to a sales backlog of $26.4 million at November 30, 2010. We reasonably expect the entire backlog to be executed within fiscal year 2012.

Multi-Tiered Sales and Marketing Organization. We have a multi-tiered sales and marketing organization that integrates direct mail, electronic marketing, telemarketing and field sales to market and sell our course offerings to existing customers and to attract new customers.

As we have since our inception, we maintain a strong brand image for providing high-quality training for managers and IT professionals through the prominent use of our trademarks in our marketing and course materials. We market our courses primarily through direct mail and electronic mail to our proprietary database of approximately 3 million technology professionals and managers who have attended, inquired about, or sent a staff member to Learning Tree courses, and we also use direct mail to reach other managers and IT professionals on rented mailing lists. We send targeted, personalized e-mails through our automated e-mail marketing system to advise prospective course participants of upcoming events. In addition, we use rented e-mail address lists to augment our own database. We also market our products and services over the Internet on our website (www.learningtree.com). (Information contained on our website is not part of this Annual Report on Form 10-K.)

We have a telemarketing sales team that consisted of approximately 111 telemarketers and related support staff at September 30, 2011. Our telemarketers call customer leads generated from direct mailings, e-mail marketing, website inquiries and other sales and marketing programs. In addition, our sales team follows up on customer inquiries, and works to identify key personnel at customers with the potential to become major customers. We use our proprietary automated POST techniques to identify regions of our database that are profitable to mail, email and/or call, and those that are not.

At September 30, 2011, we employed a field sales team of 63 direct field sales representatives and related support staff. Our direct sales force primarily focuses on selling training that is delivered on-site for our customers at their locations.

To remain successful, we must continue to expand our business with both existing and new customers. To encourage repeat purchases from existing customers, we offer multiple-course discount programs—Learning Tree “Training Passports” and Learning Tree “Training Vouchers”—and also provide the Professional Certification Programs described earlier. We believe that in addition to generating revenues directly, these programs foster long-term relationships with participants and encourage participants to recommend Learning Tree courses to their colleagues.

Learning Tree Training Passports permit an individual Passport holder to attend up to a specified number of courses, generally three or four, during a one- to two-year period. List prices for Passports are significantly discounted from the list price of the equivalent number of individual courses. The Learning Tree Training

 

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Voucher program allows corporate customers to buy blocks of three or more Vouchers at a fixed discounted price, for future courses to be taken by any person in the customer organization over a six- to twelve-month period.

Markets and Competition

Instructor-Led Training. The management and IT training markets include outside third-party providers, as well as in-house training conducted by organizations for their own employees. Third-party providers of IT training include “vendor-dependent providers”, who deliver courses developed by the vendors of software and hardware technologies and who depend heavily on those vendors to market their courses. The IT training market also includes “vendor-independent providers”, such as Learning Tree, who independently develop, market and deliver proprietary courses. In addition, third-party providers of management training include non-profit associations, as well as “for-profit providers”, who provide training largely as a professional development service, and both for-profit and not-for-profit “academic providers”, who offer courses that lead to accredited undergraduate or graduate degrees.

We are a for-profit vendor-independent provider of management education and IT training. Some competitors offer course titles and programs similar to ours at lower prices. In addition, some competitors have greater financial or other resources than we do.

Our main IT training competitors are vendor-dependent and include the IT hardware and software vendors themselves. Many hardware and software vendors supply training, sometimes bundled in the prices of their products. Other vendor-dependent providers are authorized or certified companies that deliver these vendors’ proprietary courses. Vendor-dependent providers may have, or claim, greater knowledge of upcoming developments in their products, and their certifications are widely recognized. We differentiate ourselves from vendor-dependent providers by maintaining a vendor-independent posture and providing cross-platform training solutions. Our courses focus on improving job skills, rather than the vendor-dependent focus on vendor product features. By being vendor-independent, we can address both the strengths and the weaknesses of a product and teach IT professionals how to integrate one product with those of other vendors in a multi-vendor configuration. We leverage the expertise of Learning Tree instructors and authors, to ensure that we offer levels of expertise that match or exceed those of vendor-dependent providers.

Our principal management education competitors include for-profit and not-for-profit post-secondary educational providers, as well as not-for-profit management associations and training companies who focus—as do we—on providing continuing professional development programs to government and commercial organizations and the employees of those organizations. We believe we differentiate ourselves from these competitors by adopting and implementing a more practical, results-oriented approach to management education than is typical in this market, as well as through our focus on performance-based learning, our patented MagnaLearn Instructional Enhancement Technology, and our RealityPlus simulation-centric educational methodology.

We believe that many competitive third-party training providers—whether in management or IT—are smaller organizations that often provide training as one of several services or product lines. We differentiate ourselves from these providers based on our experience over more than three decades, the breadth and quality of our proprietary course library, our worldwide delivery capability, and the size, quality and experience of our instructor force.

Internal training departments generally provide companies with the most control over the method and content of training, enabling them to tailor programs to their specific needs. However, we believe that internal trainers find it difficult to keep pace with new technologies, lack the hands-on experience needed to teach the latest technological developments and lack the capacity to meet demand for training, and therefore most organizations must supplement their internal training resources with externally supplied training. This is

 

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particularly critical when dealing with new or emerging technologies. Additionally, internal training departments may not operate consistently on a worldwide basis, where we offer consistent management and IT courses, processes and quality around the globe.

Our customers are widely diversified across industries and geographies, with varying fiscal years including many whose fiscal years coincide with the United States government September 30 budget year, many who are on the calendar year, and many whose fiscal years coincide with the UK and Canadian governments’ March 31 budget year. We also see seasonal variations in our business as a result of other factors, including summer vacations, especially in Europe. For a discussion of the seasonal effects on our business, see Item 1A “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

E-Learning and Blended Learning. Management and IT training are primarily delivered by classroom instructors, video, and technology-based training, including Internet-based e-learning and printed means. Independent industry reports state that instructor-led training continues to account for the largest portion of the IT training market, representing approximately 70% of the total market in each of the last ten years. We believe this is because instructor-led training provides the greatest focus and ability for participants to learn, practice and receive feedback on their mastery of new knowledge and skills. Course participants value the personalized interaction and problem-solving with their instructor and fellow participants, and the opportunity to get expert advice on the application of the course material to their own projects. Furthermore, instructor-led classroom training insulates course participants from workplace interruptions and accelerates their learning of new technologies. However, the use of technology-based IT training formats, such as Internet-based e-learning, has gained some acceptance in the IT and management training and education market, largely gaining market share at the expense of other self-study formats including video and printed materials.

We have continued to investigate alternate, technology-based training formats and how they might effectively be integrated into our training programs. In fiscal year 2009, we developed Learning Tree AnyWare, our proprietary live online learning platform that integrates participants in remote locations into live class events in another location. Remote participants use an ordinary Internet connection to connect to our patent-pending classroom interface. Once logged in, remote AnyWare class participants see and hear their classroom-based instructor and classmates in real time, and view the instructor’s annotations on the two in-class MagnaLearn projection screens in real-time. They are able to participate in discussions, ask questions, work in breakout sessions, and complete the same hands-on exercises as their in-class counterparts. They gain the full benefit of our proprietary courseware, and achieve the same level of knowledge and skill transfer as in-class participants. Through AnyWare, we effectively apply technology to leverage the strengths of our classroom offerings. In fiscal year 2011, more than 6,300 remote participants have attended our courses using Learning Tree AnyWare, a 48% increase from fiscal year 2010.

Employees

Our executive officers have extensive experience in the training and education industry with an average of over 17 years of experience with us and over 20 years of relevant industry experience.

On September 30, 2011, we had a total of 465 full-time equivalent employees, of whom 186 were employed outside the United States. We also utilized the services of 619 expert instructors to teach our courses on an “as-needed” basis. We consider our relations with our employees and our instructors to be good.

Intellectual Property Rights

Our course development process and course titles are proprietary, and we rely on a combination of copyright, trademark and trade secret laws, customer licensing agreements, employee and third-party nondisclosure agreements and other methods to protect those proprietary rights.

 

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“LEARNING TREE”, “LEARNING TREE INTERNATIONAL”, the Learning Tree “Tree Design” logo, “LEARNING TREE INTERNATIONAL” and Design, “LEARNING TREE PROFESSIONAL CERTIFICATION” and Design, “LEARNING TREE ANYWARE BE THERE WITH ANYWARE” and Design, “LEARNING TREE ANYWARE”, “LEARNING TREE ANYWARE ENTERPRISE”, “LEARNING TREE ANYWARE ENTERPRISE” and Design, and “LEARNING TREE ANYWARE YOUR EXPERTISE DELIVERED ANYWHERE!” and Design, “EDUCATION IS OUR BUSINESS”, “EDUCATION YOU CAN TRUST”, “WE BRING EDUCATION TO LIFE”, “PRODUCTIVITY THROUGH EDUCATION”, “REALITYPLUS” Design, “REALITYPLUS MANAGEMENT EDUCATION FOR THE REAL WORLD”, “TRAINING PASSPORT”, “TRAINING ADVANTAGE”, “ALUMNI GOLD”, “TRAINING YOU CAN TRUST”, “WE BRING LEARNING TO LIFE”, “WWW.LEARNINGTREE.COM”, “MAGNALEARN”, “VENDOR INDEPENDENT TRAINING YOU CAN TRUST”, “LEARNING TREE UNIVERSITY CONSORTIUM” and Design, “ON-SITE COURSES” and Design, “800-LRN-TREE”, “800-THE-TREE” and LEARNING TREE LEAP SYSTEM are among our trademarks and service marks. In addition to our trademarks and service marks, this Annual Report on Form 10-K also contains trademarks and trade names of other companies.

We own the copyright to all course materials we develop. Our copyrighted course materials are a significant differentiator of our services from those of our competitors.

Our MagnaLearn Instructional Enhancement System is covered by patents in the United States and a number of foreign countries. The MagnaLearn system gives Learning Tree instructors greater flexibility to customize and pace course presentations by allowing them to annotate, highlight and manipulate course materials on two independent projection screens, in real time. The system also provides automated feedback to our course development resources, allowing constant improvement of courses and the ability to consistently update courses immediately on a world-wide basis.

We have applied for patent protection related to our recently introduced Learning Tree AnyWare live online learning platform.

Our patents, trademarks, trade secrets, copyrights, and other intellectual property rights are important assets for us. Various events outside of our control could pose a threat to our intellectual property rights, as well as to our products and services. For example, effective intellectual property protection may not be available in every country in which our courses are delivered. We cannot be certain that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar course titles or delivery methods unencumbered by our proprietary rights. If substantial unauthorized use of our products were to occur, our business and results of operations could be materially adversely impacted. We may also have to defend against claims that our current or future courses infringe on the proprietary rights of others, or have to pursue claims to protect our proprietary rights. Defending against and prosecuting these claims is costly and time consuming and could have a material adverse effect on our operating results.

Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of these innovations. Changes in patent law, foreign or domestic, may have an impact on our ability to obtain patent protections. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable.

We also seek to maintain certain intellectual property as trade secrets. The secrecy could be compromised by outside parties, or by our employees or former employees, which would cause us to lose the competitive advantage resulting from these trade secrets.

 

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Regulatory Environment

We are paid directly by the employers of Learning Tree course participants and do not receive funding from any government student-aid or loan programs. As a result, we do not depend on government appropriations for programs and are generally exempt from the governmental regulation of public education providers. In contrast, providers of education to the public must comply with many laws and regulations of Federal, state and international governments. However, our results of operations could be affected by current or future licensing or regulatory requirements.

After certain corporate reorganizations, we became a Delaware corporation incorporated in 1991.

Available Information

We make available on our website (www.learningtree.com), free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed or furnished to the Securities and Exchange Commission. (Information contained on our website is not part of this Annual Report on Form 10-K.) Our Annual Report on Form 10-K may also be obtained free of charge by written request to the Chief Financial Officer, Learning Tree International, Inc., 1805 Library Street, Reston, VA 20190.

 

Item 1A. RISK FACTORS.

You should carefully consider the following discussion of various risks and uncertainties, keeping in mind that they are not the only ones that affect us. Additional risks that we do not presently consider material, or of which we are not currently aware, may also have an adverse impact on us.

Common Stock Price Fluctuations

Historically, our common stock price has fluctuated, and we expect fluctuations to continue in the future.

General Factors. We believe some of the reasons for past fluctuations in the price of our stock related to factors such as:

 

   

variations in our revenues, gross margins, earnings or other financial results;

 

   

fluctuations in general conditions in the economy, our market, and the markets served by our customers;

 

   

announcements of developments related to our business;

 

   

announcements concerning new products or enhancements by us or our competitors;

 

   

developments in our relationships with our customers;

 

   

market perceptions of new means of delivering training, such as the Internet; and

 

   

introductions of new technologies both by our customers and technology vendors.

In addition, prices in the stock market, particularly for technology-related stocks, have been volatile in recent years. In some cases, the fluctuations have been unrelated to the operating performance of the affected companies. As a result, the price of our common stock could fluctuate in the future without regard to our operating performance.

Future Sales of Our Common Stock. Sales of our common stock by our founders, officers, directors and employees could adversely and unpredictably affect the price of shares of our common stock. Additionally, the

 

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price could be affected even by the potential for sales by these persons. In addition to the 13,479,409 shares outstanding as of December 7, 2011, as of that date we are authorized to issue up to 257,947 shares of common stock upon the exercise of outstanding options and vesting of restricted stock units, and an additional 660,842 shares of common stock remained available for issuance of equity awards under our 2007 Equity Incentive Plan. We cannot predict the effect that any future sales of our common stock, or the potential for those sales, will have on our share price.

Fluctuations in Operating Results

Historically, our operating results have fluctuated, and we expect fluctuations to continue in the future.

Fluctuations in our historical operating results have resulted from many factors, some of which are beyond our control. In the future, these or other factors could have a material adverse impact on our operating results and cause our stock price to decrease. For example:

Timing of Course Development, and Sales and Marketing Expenditures. We try to adjust our expenditures for course development and sales and marketing to maintain our long-term profitability, including our assessment of the potential to influence future customer demand, market conditions, and other factors. This may mean accepting reduced margins in poor economic periods, as we must commit to much of our spending before our attendees enroll in our courses. If revenues fall short of our expectations, we may not be able to adjust our expenditures quickly enough to compensate for lower than anticipated revenues. This could compound the impact of any revenue shortfall and further affect our operating results and the price of our common stock.

Course Scheduling and Marketing Activities. The timing and content of our courses and our marketing activities can affect the number of participants who attend our courses. Some of the activities that can contribute to fluctuations in our operating results include:

 

   

the frequency of our course events;

 

   

the number of weeks during which our courses can be conducted in a quarter;

 

   

the timing, timely delivery, frequency and size of, and the response to, our direct mail marketing and advertising campaigns;

 

   

the timing of introduction of new course titles;

 

   

the average length of courses, based on the current mix of course titles, which affects the average revenue per attendee; and

 

   

the mix between course events held at customer locations and course events held in our education centers and hotels due to differing gross profit margins.

Seasonal Factors. Our quarterly revenues and income fluctuate due to the seasonal spending patterns of our customers, which are affected by factors such as:

 

   

cyclic or one-time budgetary considerations;

 

   

factors specific to their business or industry; and

 

   

weather, holiday and vacation considerations.

Use of Accounting Estimates. The preparation of our financial statements in conformity with Generally Accepted Accounting Principles requires us to make estimates and assumptions in calculating our financial results. As one example, we currently offer our customers a multiple-course sales discount referred to as a Training Passport, which allows an individual passport holder to attend up to a specified number of Learning Tree courses over a one to two-year period for a fixed price. For a Training Passport, the amount of revenue we recognize for each attendance in one of our courses is based upon the selling price of the Training Passport, the

 

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list price of the course taken, the average list price of all courses taken, and our estimate of the average number of courses a Passport holder will actually attend. After expiration of a Training Passport, we record the difference, if any, between the revenue previously recognized and the Training Passport selling price. For example, if a Passport holder attends more courses than we had estimated, we would make a negative adjustment to revenues at the expiration of that Passport. We base our estimate of the average number of course events that a Training Passport holder will attend on historical trends. However, these historical trends may not accurately predict the actual number of course events that a Training Passport holder will attend in the future. If average Training Passport attendance rates were to increase, for example, we would have to make negative adjustments to our revenue, which could be significant. For a summary of some of our key accounting estimates, please see our “Critical Accounting Estimates and Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Changing Regulation of Corporate Governance and Public Disclosure. Changing laws, regulations and standards relating to corporate governance and public disclosure can result in uncertainty regarding compliance matters and higher costs incurred with ongoing revisions to disclosure and governance practices. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

Introductions and Adoption of New Technology. Our customers tend to increase their training at times when new technology is being introduced. During periods when fewer new technologies are being introduced, demand for our training courses may decrease, which could have a material adverse effect on our operating results and stock price.

Other Factors. Other factors that may affect our operating results include:

 

   

competitive forces within our current and anticipated future markets;

 

   

our ability to attract customers and meet their expectations;

 

   

currency fluctuations and other risks inherent in international operations;

 

   

general economic conditions;

 

   

differences in the timing of our spending on the marketing of our courses, as well as the timing of our spending on the development of our courses and other areas; and

 

   

excess capacity and/or unused space in our education centers and/or administrative office facilities, and our ability to sublease or find other uses for it.

All or any of these and similar factors could cause our operating results to differ substantially from the expectations of public market analysts and investors, which would likely have a material adverse impact on our stock price.

Risks Associated with Technology Changes

If we do not adequately anticipate or respond to changes in technology, it could have a material adverse effect on our operating results and stock price.

Changes in technology can affect our business in at least two principal ways. First, we must anticipate and keep pace with the introduction of new hardware, software and other information technologies and develop courses that effectively train customers in the technologies they use now and will use in the future. Second, we must adapt to changes in the technologies by which we can deliver training to our customers’ employees. As a result of technology developments, we may have to make substantial and unanticipated expenditures to develop

 

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new course titles, buy new equipment, or invest in further course development software and processes to deliver our courses. Further, we may not adequately anticipate or respond successfully to technology changes for many reasons, including misjudging the impact of technology changes, as well as financial, technological or other constraints. A lack of adequate response on our part to changes in information technology platforms, customer preferences or software technology could have a material adverse impact on our operating results and stock price.

Competition

If our customers decide that they prefer training offered by new or existing competitors, it could have a material adverse effect on our operating results and stock price.

The IT and management training markets are highly fragmented, with low barriers to entry. No single competitor holds a dominant market share. We face intense competition from both established entities and new entries in the market. Our primary competitors include:

 

   

internal training departments within our current and potential customers;

 

   

computer hardware and software vendors and their Authorized Training and Education Center partners;

 

   

independent education and training companies;

 

   

academic providers; and

 

   

software systems integrators.

Some of our competitors offer course titles and programs similar to ours at lower prices. In addition, some competitors have greater financial and other resources than us. Additionally, hardware and software vendors, as well as software systems integrators, may combine IT education and training with sales of their products or other services, which could allow them to offer training at lower prices than we do. Furthermore, future consolidation of IT vendors or training companies could have a material impact on our future operations.

The risk of outsourcing of corporate IT administration and software development overseas to countries or firms not currently served by us could have a material adverse impact on our future operations.

Although instructor-led classroom training continues to dominate the worldwide IT and management training markets, technology-based education and training formats, such as Internet-based distance learning, have gained some acceptance. Accordingly, our future results may also depend on the extent to which the market will continue to accept instructor-led IT and management training and on our ability to develop and market instructor-led courses that compete effectively against technology-based courses offered by our competitors.

Risks Associated with International Operations

Approximately half of our annual revenue is generated by courses conducted outside the United States. Therefore, if we do not adequately anticipate and respond to the risks inherent in international operations, it could have a material adverse effect on our operating results and stock price.

Foreign Currency Fluctuations. Our consolidated financial statements are prepared in U.S. dollars, while the operations of our foreign subsidiaries are conducted in their respective local currencies. Consequently, changes in exchange rates can unpredictably and adversely affect our consolidated operating results and could result in exchange losses. We do not hedge against the risks associated with fluctuations in exchange rates. Even if we were to use hedging techniques in the future, we might not be able to eliminate or reduce the effects of currency fluctuations. Thus, exchange rate fluctuations could have a material adverse impact on our operating results and stock price.

 

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Other Risks Associated with International Operations. Additionally, our results of operations may be adversely affected by other international risks, such as:

 

   

difficulties in translating our courses into foreign languages;

 

   

international political and economic conditions;

 

   

changes in government regulation in various countries;

 

   

trade barriers;

 

   

difficulty in staffing our foreign offices, and in training and retaining foreign instructors;

 

   

adverse income tax and transfer pricing consequences; and

 

   

potential costs associated with expansion into new territories.

We expect that international revenues will continue to be a significant portion of our total revenues. A lack of anticipation and response to the risks associated with international operations could have a material adverse effect on our operating results and stock price.

Dependence on Key Personnel

If we are unable to recruit and retain qualified personnel, it could have a material adverse effect on our operating results and stock price.

Our success depends in large part on the continued services of our executive officers, our senior managers and other key personnel. The loss of these people, especially without advance notice, could have a material adverse impact on our results of operations. It is also very important that we attract and retain highly skilled personnel, including course instructors, to accommodate growth, new course titles and to replace personnel who leave. Competition for qualified personnel can be intense, especially in information technology industries and/or in certain geographic areas, and there are a limited number of people with the requisite knowledge and experience. Under these conditions, we could be unable to recruit, train and retain instructors and employees. If we cannot attract and retain qualified personnel, it could have a material adverse impact on our operating results and stock price.

Risks Associated with Intellectual Property

If substantial unauthorized use of our courses occurs or if we must defend against infringement claims, it could have a material adverse effect on our operating results and stock price.

Our success depends in part on our ability to protect our intellectual property and confidential information. Our course development process and course titles are proprietary and we rely primarily on a combination of statutory and common law copyright, trademark and trade secret laws, customer licensing agreements, employee and third-party nondisclosure agreements and other methods to protect those proprietary rights. Our course materials generally do not include any mechanisms to prohibit or prevent unauthorized use. As a result, someone could copy or otherwise obtain and use our course materials without authorization, either for educational use or to develop competing courses. In addition, we operate in countries that do not provide protection of proprietary rights to the same extent as the United States. Finally, our intellectual property rights will not prevent competitors from independently developing similar course titles or delivery methods. If substantial unauthorized use of our products were to occur, our results of operations and price of our common stock could be materially adversely impacted.

We may also have to defend against claims that our current or future courses infringe on the proprietary rights of others. If such a claim succeeded, we might have to change or eliminate courses and could be required

 

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to pay damages or royalties. In addition, litigation over intellectual property rights, whether brought by us or by someone else, could be time-consuming and expensive, even if we were ultimately to succeed. Accordingly, defending and prosecuting these claims could have a material adverse effect on our operating results and stock price.

Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of these innovations. Changes in patent law, foreign or domestic, may have an impact on our ability to obtain patent protections. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable. We also seek to maintain certain intellectual property as trade secrets. The secrecy could be compromised by outside parties, or by our employees or former employees, which would cause us to lose the competitive advantage resulting from these trade secrets.

Risks Associated with Laws and Regulations

Laws and regulations can affect our operations and may limit our ability to operate in certain states.

Providers of educational programs to the public must comply with many laws and regulations of Federal, state and international governments. Generally, we are exempt from this type of regulation because we contract with the employer of the participants in our courses, and we do not participate in any Federal or state student aid or loan programs. However, state laws and regulations targeting educational providers could affect our operations in the future and could limit our ability to obtain authorization to operate in certain states. If we were found in violation of a state’s current or future licensing or regulatory requirements, we could be subject to civil or criminal sanctions, including monetary penalties, and we could also be barred from providing educational services in that state. In addition, laws and regulatory decisions in many areas other than education could also adversely affect our operations. Complying with current or future legal requirements could have a material adverse effect on our operating results and stock price.

We are subject to tax audits by state, federal and foreign jurisdictions. Such audits are to be expected and may result in adjustments as a result of the accretion of tax jurisdiction interpretations and changes in operational practices. Any such audits may result in additional taxes being assessed or in the refund of taxes previously paid. Such changes could have a material adverse effect on our operating results and stock price.

Control by Management

Senior personnel, especially our founders, own a majority of our outstanding shares and may therefore have significant influence over our policies and affairs and may be in a position to determine the outcome of corporate actions.

As of December 7, 2011, our executive officers and directors collectively beneficially own approximately 56% of our outstanding shares of common stock. As of that date, Mr. Garen, our Chairman of the Board of Directors, beneficially owned approximately 24% of our outstanding shares of common stock. Dr. Collins, our Vice Chairman of the Board of Directors, beneficially owned approximately 31.0% of our outstanding shares of common stock as of December 7, 2011. Consequently, senior personnel, and Mr. Garen and Dr. Collins in particular, have significant influence over, and may control, our policies and affairs and may be in a position to determine the outcome of corporate actions requiring stockholder approval. These may include, for example, the election of directors, the adoption of amendments to our corporate documents and the approval of mergers and sales of our assets.

 

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Risks Associated with Possible Acquisitions and Other Strategic Transactions

If we cannot successfully implement any future acquisitions or other strategic transactions, it could have a material adverse effect on our operating results and stock price.

On occasion, we evaluate business opportunities and other strategic transactions that appear to fit within our overall business strategy. We could decide to pursue one or more of these opportunities by acquisition or internal development. Acquisitions and other strategic transactions involve many risks, including:

 

   

the difficulty of integrating acquired technologies, operations and personnel with our existing operations;

 

   

the difficulty of developing and marketing new products and services;

 

   

the diversion of our management’s attention as a result of evaluating, negotiating and integrating acquisitions or new business ventures;

 

   

our exposure to unforeseen liabilities of acquired companies; and

 

   

the loss of key employees of an acquired operation.

In addition, an acquisition or other strategic transactions could adversely impact cash flows and/or operating results, and dilute shareholder interests, for many reasons, including:

 

   

charges to our income to reflect the amortization of acquired intangible assets;

 

   

write-offs for the impairment of the carrying value of goodwill or other intangible assets;

 

   

interest costs and debt service requirements for any debt incurred in connection with an acquisition or new business venture; and

 

   

any issuance of securities in connection with an acquisition or other strategic transactions that dilutes or lessens the rights of our current common stockholders.

We have had no significant experience in executing and implementing acquisitions. Although we have implemented other strategic transactions, those ventures have not always been successful, and we may not succeed in the future. The risks associated with acquisitions and other strategic transactions could have a material adverse impact on our operating results and stock price.

Risks Associated with Changing Economic Conditions

General domestic and international economic conditions could have a material adverse effect on our operating results and common stock price. As a result of the current economic uncertainty and macro-economic challenges currently affecting the economy of the United States and other parts of the world, some of our customers may choose to delay or postpone purchases of courses from us until the economy and their businesses strengthen.

Domestic and/or International Economic Downturns. A significant part of our revenues comes from Fortune 1000-level companies, their international equivalents, and government organizations. During weak economic conditions, our sales grow more slowly or can even diminish. If the domestic and/or international economy were to continue to weaken, the demand for our services could decline, which could have a material adverse effect on our operating results and stock price.

Industry-Specific Slowdowns. Our customers generally operate in the finance, computer, communications, electronics, systems integration, aerospace, government and military, manufacturing, and energy sectors. When one or more of these industries experiences a slowdown, it can have a material adverse effect on our operating results and stock price.

 

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Globalization Issues. Our operations are concentrated in Europe and North America, which have traditionally been the centers of IT development and implementation. In recent years, there has been increasing IT activity in other parts of the world, such as China and India. If this trend adversely affects IT jobs in regions in which we have our principal operations, it could have a material adverse effect on our operating results and stock price.

Anti-Takeover Provisions

Certain provisions of our Restated Certificate of Incorporation, our Bylaws and Delaware law could adversely impact the interests of our stockholders.

Certain provisions of our Restated Certificate of Incorporation, our Bylaws and Delaware law could, together or separately, discourage, delay or prevent a third party from acquiring us, even if doing so might benefit our stockholders. These provisions may also affect the price investors would receive for their shares of our common stock. Some examples of these provisions in our Restated Certificate of Incorporation and Bylaws are:

 

   

the division of our board of directors into three classes;

 

   

the right of our board of directors to issue preferred stock with rights and privileges that are senior to the common stock, without prior stockholder approval;

 

   

certain limitations of the rights of stockholders to call a special meeting of stockholders; and

 

   

the prohibition of stockholder actions by written consent.

Natural Disasters, External Strikes, Acts of War or Terrorism and Other External Events

Since our founding in 1974, various natural disasters, external labor disruptions, acts of war or terrorism and other adverse external factors have from time to time impaired our ability to conduct our business, resulted in the loss of revenue or otherwise affected our operating results. When these or other external events occur in the future, they could have a material adverse effect on our operating results and stock price.

Natural Disasters. Natural disasters can affect our business. For example, severe weather has at times prevented our course participants from traveling to our courses. In these situations, we try to transfer the course participants to later courses, but we may still lose some revenue. Similarly, both weather and floods have also disrupted the printing and transportation of the catalogs we use in our direct mail campaigns. The resulting delays in our mailings may reduce or delay the revenue we realize from courses listed in those catalogs.

External Strikes. We have had to react to postal, transportation, and other strikes in the countries where we operate. Postal strikes delay or reduce the delivery of our direct mail marketing materials, which may result in reduced enrollments in upcoming course events. Transportation strikes can make it difficult for our course participants or our instructors to reach course facilities. Although we try to employ strategies to mitigate the impact of external strikes, these alternative means are rarely completely effective and generally increase our costs, which could adversely affect our operating results.

Acts of War or Terrorism. Threats or acts of war or terrorism can adversely affect our business. The terrorist attacks in the United States on September 11, 2001, the declaration of war by the United States against terrorism, and continuing hostilities in the Middle East and elsewhere have created significant instability and uncertainty in the world. These and future events may have a material adverse effect on world financial markets, including financial markets in the United States. In addition, threats or acts of war or terrorism can cause course participants to be reluctant regarding or prevented from traveling to our course facilities, thereby resulting in lower attendance rates. Additionally, our direct mail marketing materials may be delayed or disrupted from reaching our customers; and suppliers and service providers may be unable to provide required services or

 

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materials. These impacts could happen after we have committed to all the costs of our course, so that we would be unable to quickly adjust our cost structure to reflect the changes in revenues caused by these events, which could materially and adversely affect our operating results and stock price.

Other External Factors. Other factors outside our control can affect our operations, including those related to our suppliers and service providers. For example, disruptions of telephone networks can prevent customers from enrolling in our courses; disruptions in transportation services can prevent customers from reaching our facilities, and power outages can prevent us from delivering courses. Similarly, if commodities (for example, the paper used in the printing of our catalogs) that we or our customers need become scarce or more expensive, our operating results may be adversely affected.

 

Item 1B. UNRESOLVED STAFF COMMENTS.

None.

 

Item 2. PROPERTIES.

Our headquarters are located at 1805 Library Street, Reston, VA 20190.

We own a 38,500 square foot office facility in Reston, VA, which is occupied by the sales, administrative and operations groups of our United States subsidiary. We lease all of our other offices and education center classroom facilities. The leases expire at various dates over the next 10 years. We also present our courses at rented hotel and conference facilities and customer sites. We typically provide all of the software, hardware and networking systems required for use in our courses.

We believe that our facilities are adequate and suitable for our needs. In general, at current attendee levels, we have some excess capacity at most of our education centers. We have been seeking to deal with excess capacity by reducing the size of some of our facilities and by renting excess classrooms.

We present our classroom courses at Learning Tree Education Centers in Chicago, Los Angeles, New York City, the Washington, D.C. area (three locations), Ottawa, Toronto, London, Paris, Stockholm, and Tokyo as well as in other rented facilities in those and other cities worldwide as well as at our clients’ facilities.

The following table contains certain information regarding Learning Tree Education Centers and offices at September 30, 2011:

 

Location
(Metropolitan Area)

  

Function(s)

   Number of
Classrooms
     Total Area in
Square Feet
 

Chicago, IL

   Education Center      5         11,017   

Los Angeles, CA

   Education Center & Office      5         22,697   

New York, NY

   Education Center      19         41,724   

Washington, DC area

   Education Centers (3 sites)      37         87,958   

Reston, VA

   Offices (3 sites)      —           45,959  (a) 

Powell, OH

   Office      —           400   

Kennett Square, PA

   Office      —           440   

Paris, France

   Education Center & Office      25         36,813   

London, England

   Education Center      34         54,977  (b) 

Leatherhead, England

   Office      —           23,056  (c) 

Ottawa, Canada

   Education Center & Office      6         20,006   

Toronto, Canada

   Education Center      10         17,207   

Stockholm, Sweden

   Education Center & Office      9         21,151   

Tokyo, Japan

   Education Center & Office      2         3,195   
     

 

 

    

 

 

 
        152         386,600   
     

 

 

    

 

 

 

 

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(a) Includes a 38,500 square foot office facility which we own; all other facilities are leased.
(b) Excludes 57,023 square feet that we sublease to various subtenants. Subleases end at various dates prior to the end of our prime lease. See Note 4 of “Notes to Consolidated Financial Statements” for details on subleases.
(c) Excludes 3,000 square feet that we sublease to a single subtenant. The Sublease ends in February 2016 and the subtenant may opt for early termination in March 2013.

 

Item 3. LEGAL PROCEEDINGS

We are not involved in any pending or threatened legal proceedings, other than routine legal proceedings and claims incidental to our business, that we believe could reasonably be expected to have a material adverse effect on our financial condition or results of operations.

 

Item 4.

REMOVED AND RESERVED.

 

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PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Price Range of Common Stock

Our Common Stock trades on the NASDAQ Stock Market under the symbol “LTRE.” The following table sets forth, for the periods indicated, the range of high and low sales prices for our Common Stock on the NASDAQ Stock Market:

 

Fiscal Year 2010

     

First Quarter

   $ 12.69       $ 10.20   

Second Quarter

     15.31         10.82   

Third Quarter

     16.50         10.32   

Fourth Quarter

     13.40         8.00   

Fiscal Year 2011

     

First Quarter

   $ 11.20       $ 9.38   

Second Quarter

     10.07         8.14   

Third Quarter

     10.19         7.69   

Fourth Quarter

     10.57         7.10   

On December 6, 2011, the number of holders of our Common Stock was 990, consisting of 60 record holders and 930 stockholders whose stock is held by a bank, broker or other nominee.

Dividends

On August 9, 2010, our Board of Directors declared a special dividend of $2.20 per share (approximately $29.9 million) which was paid on September 10, 2010, to stockholders of record as of August 20, 2010. No other dividends have been declared or paid by us during fiscal years 2011, 2010 or 2009. We have no plans to pay any other cash dividends in the foreseeable future. The declaration and payment of dividends are subject to the discretion of our Board of Directors and to compliance with applicable laws. Any determination as to the payment of dividends in the future will depend upon, among other things, general business conditions, the effect such payment would have on our financial condition and other factors that our Board of Directors may in the future consider to be relevant.

Sales of Unregistered Securities.

During fiscal years 2011 and 2010, we did not make any unregistered sales of our securities.

Purchases of Equity Securities

We made no repurchases of Common Stock during the three months ended September 30, 2011. We may choose to make purchases of our Common Stock in the future, but have no commitment to do so.

 

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Securities Authorized for Issuance under Equity Compensation Plans

 

Plan Category

   Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
     Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
     Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plan
(Excluding Securities
Reflected in the first
Column)
 

Equity compensation plan approved by security holders

     155,475       $ 13.62         660,842   

Equity compensation plan not approved by security holders

     0         0.00         0   
  

 

 

    

 

 

    

 

 

 

Total

     155,475       $ 13.62         660,842   
  

 

 

    

 

 

    

 

 

 

For a description of the other material features of our equity compensation plan, see Note 6 of “Notes to Consolidated Financial Statements.”

 

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COMPANY STOCK PERFORMANCE

The information contained below shall not be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), whether made before or after the date hereof and irrespective of any general incorporation language in any such filing (except to the extent that we specifically incorporate this information by reference) and shall not otherwise be deemed “soliciting material” or “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act (except to the extent that we specifically request that this information be treated as soliciting material or specifically incorporate this information by reference).

The following graph compares the cumulative total stockholder return on our Common Stock from September 29, 2006 to September 30, 2011 with the cumulative total return on the NASDAQ Stock Market Composite Index and an appropriate “peer group” index (assuming the investment of $100 in our Common Stock and in each of the indexes on September 29, 2006.)

LOGO

 

     Fiscal Year Ended  
     September 29,
2006
     September 28,
2007
     October 3,
2008
     October 2,
2009
     October 1,
2010
     September 30,
2011
 

Learning Tree International, Inc.

                 

Common Stock

   $ 100       $ 219       $ 129       $ 140       $ 152       $ 111   

NASDAQ Stock Exchange

                 

Composite Index

   $ 100       $ 121       $ 88       $ 93       $ 109       $ 112   

Peer Group Index (1)

   $ 100       $ 142       $ 129       $ 162       $ 118       $ 88   

Peer Group + Learning Tree International, Inc

   $ 100       $ 143       $ 129       $ 161       $ 118       $ 88   

 

Data and graph provided by Zacks Investment Research, Inc. Copyright© 2011, NASDAQ, Inc. All rights reserved. Used with permission.

(1) Peer Group index includes: Apollo Group, Inc.; Corinthian Colleges Inc.; DeVry, Inc.; and, ITT Education Services, Inc. The returns of each issuer within the Peer Group Index have been weighted according to such issuer’s respective stock market capitalization at the beginning of the period presented.

 

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Item 6. SELECTED FINANCIAL DATA.

The following selected consolidated financial data is qualified in its entirety by reference to, and should be read in conjunction with, the audited consolidated financial statements and notes thereto and other financial data included elsewhere in this Annual Report on Form 10-K. The statement of operations data set forth below for the fiscal years ended October 2, 2009, October 1, 2010 and September 30, 2011, and the balance sheet data as of October 1, 2010 and September 30, 2011, are derived from our consolidated financial statements, which are included elsewhere herein. The statement of operations data set forth below for the fiscal years ended September 28, 2007 and October 3, 2008, and the balance sheet data as of September 28, 2007, October 3, 2008 and October 2, 2009, are derived from our audited financial statements that are not included in this annual report on Form 10-K. These historical results are not necessarily indicative of the results to be expected in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We follow a 52- or 53-week fiscal year. Our year-end and quarter-end dates are on the Friday nearest the end of the calendar quarter. Accordingly, our fiscal year 2009 ended on October 2, 2009, fiscal year 2010 ended on October 1, 2010 and fiscal year 2011 ended on September 30, 2011. Fiscal year 2007 consisted of 52 weeks, fiscal year 2008 consisted of 53 weeks and fiscal years 2009, 2010 and 2011 each consisted of 52 weeks.

 

      Fiscal Year Ended
(dollars in thousands, except per share data)
 
      September 28,
2007
     October 3,
2008
     October 2,
2009
     October 1,
2010
     September 30,
2011
 

SELECTED STATEMENT OF OPERATIONS DATA:

              

Revenues

   $ 167,193       $ 181,278       $ 132,559       $ 127,470       $ 133,782   

Cost of revenues

     72,936         76,807         59,243         59,198         61,641   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     94,257         104,471         73,316         68,272         72,141   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses:

              

Course development

     8,613         9,656         7,442         7,304         7,493   

Sales and marketing

     41,094         43,596         31,962         30,461         30,836   

General and administrative

     30,041         33,532         31,929         25,310         28,565   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     79,748         86,784         71,333         63,075         66,894   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     14,509         17,687         1,983         5,197         5,247   

Other income, net

     4,236         4,001         1,048         557         105   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before provision for income taxes

     18,745         21,688         3,031         5,754         5,352   

Provision for income taxes

     1,755         7,888         1,828         1,366         2,110   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 16,990       $ 13,800       $ 1,203       $ 4,388       $ 3,242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income per common share—basic

   $ 1.03       $ 0.84       $ 0.08       $ 0.32       $ 0.24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income per common share—diluted

   $ 1.03       $ 0.83       $ 0.08       $ 0.32       $ 0.24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash dividends declared per common share

   $ 0       $ 0       $ 0       $ 2.20       $ 0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding—basic

     16,498         16,516         15,181         13,722         13,496   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding—diluted

     16,498         16,580         15,181         13,739         13,514   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

In fiscal year 2008, we incurred expense of $1.0 million on a since discontinued effort to sell our business as well as $0.9 million for certain tax and financial services consulting. In fiscal year 2009, we incurred expense of $4.2 million for the settlement of a claim, $1.3 million for the restructuring of our business and $0.7 million for the since discontinued effort to sell our business. In fiscal year 2010, we incurred $1.3 million for an expected vacancy due to the exercise of an option to terminate by one of our London education center subtenants.

 

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     As of
(dollars in thousands)
 
     September 28,
2007
     October 3,
2008
     October 2,
2009
     October 1,
2010
     September 30,
2011
 

SELECTED BALANCE SHEET DATA:

              

Cash and cash equivalents

   $ 49,732       $ 51,853       $ 44,313       $ 34,449       $ 40,293   

Available for sale securities

   $ 38,775       $ 18,909       $ 29,497       $ 4,997       $ 2,352   

Income tax receivable

   $ 4,224       $ 2,475       $ 265       $ 230       $ 219   

Total current assets

   $ 120,861       $ 101,294       $ 96,743       $ 64,765       $ 67,238   

Available for sale securities, long-term

   $ 0       $ 23,440       $ 0       $ 0       $ 0   

Total assets

   $ 163,976       $ 172,424       $ 136,820       $ 100,173       $ 102,152   

Deferred revenues

   $ 50,216       $ 47,712       $ 38,103       $ 35,745       $ 34,572   

Total current liabilities

   $ 76,924       $ 70,065       $ 60,430       $ 52,229       $ 51,465   

Total long-term liabilities

   $ 9,844       $ 15,961       $ 13,528       $ 13,172       $ 12,936   

Total stockholders’ equity

   $ 77,208       $ 86,398       $ 62,862       $ 34,772       $ 37,751   

In fiscal years 2009, 2010 and 2011 we repurchased shares of our stock for approximately $25.2 million, $4.8 million and $0.4 million, respectively. In fiscal year 2010 we declared a special dividend of $2.20 per share which we paid (approximately $29.9 million) on September 10, 2010, to stockholders of record as of August 20, 2010.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes many forward-looking statements. For cautions about relying on such forward-looking statements, please refer to the section entitled “Special Note Regarding Forward-Looking Statements” at the beginning of this Report immediately prior to “Part I-Item 1”.

OVERVIEW

Nature of the Business. Learning Tree International is a leading worldwide vendor-independent provider of training and education to business and government organizations for their managers and IT professionals. Since our founding in 1974, we have provided high-quality training to over 2.1 million managers and IT professionals. In fiscal year 2011 we trained 76,419 course participants from more than 8,400 organizations worldwide, including large national and multinational companies, government organizations, and small and medium-size companies.

As of September 30, 2011, we offered a broad proprietary library of intensive instructor-led courses from one to five days in length, consisting of 220 different course titles representing 4,824 hours of training, including 137 IT course titles and 83 management course titles. Learning Tree courses provide both breadth and depth of education and training across a wide range of technical and management disciplines, including operating systems, databases, computer networks, computer and network security, web development, programming languages, software engineering, open source applications, project management, business skills, leadership and professional development.

We market and present our courses through locally staffed operations in the United States, the United Kingdom, France, Canada, Sweden and Japan and generate approximately half of our revenues internationally. We coordinate, plan and deliver our courses at our own education centers, external hotel and conference facilities and customer sites worldwide. During fiscal year 2011, we presented courses in 54 countries. Our proprietary live online learning platform, Learning Tree AnyWare™, allows individuals located anywhere in the world to use their Internet browser to participate online in instructor-led classes being conducted live in Learning Tree Education Centers or at customer locations. During fiscal year 2011, more than 6,300 remote participants attended AnyWare course sessions, an increase of 48% compared with our prior fiscal year.

We use a well-defined systematic approach to develop and update the Learning Tree course library so as to provide training that is immediately relevant to course participants working in a broad range of applications and industries. After assessing market need, courses are translated into French, Swedish and Japanese. Our proprietary course development process also allows us to customize our courses for delivery at our customers’ sites.

We design our own vendor-independent IT courses to provide participants an unbiased perspective regarding software and hardware products and the ability to compare and integrate multiple platforms and technologies from various vendors. All Learning Tree courses are highly interactive, and incorporate extensive hands-on exercises or case study workshops. While addressing core concepts and theory, all of our technical and management courses focus primarily on providing skills, tools, and technologies that participants can apply immediately upon returning to their jobs. To accomplish this objective, many of our RealityPlus™ management courses utilize extensive multi-media simulations to teach practical management techniques. This innovative methodology provides an environment in which RealityPlus™ course participants learn entirely by doing. Throughout these courses, they gain extensive experience applying new management skills in life-like, challenging situations, within the confines of the classroom and under the guidance of an expert instructor. As a result, RealityPlus™ course participants can achieve greater mastery of effective management techniques as well as the confidence needed to apply them, and thus return to their jobs both ready and willing to immediately apply their expanded skills in their workplaces.

 

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We had 619 instructors as of September 30, 2011, who are practicing professionals with expert subject knowledge, and who average nearly 26 years of “hands-on, real world” experience. Learning Tree instructors teach an average of approximately 10 course events per year on an “as-needed” basis. During the rest of the year they apply the skills that they teach, either as full-time employees for other companies or as independent consultants. When they are not teaching, Learning Tree instructors are using and honing their management and IT skills as either full-time employees for other companies or as independent consultants.

We have structured our business so that the majority of our course delivery costs are variable and depend primarily upon the number of course events conducted. We schedule our course events throughout the year based on our assessment of demand. Since Learning Tree instructors typically work full-time or as consultants for other business and industry employers, or in the case of management instructors as industry consultants and facilitators, they teach our course events as needed and thus, our instructor-related costs are largely variable. However, expenses associated with our own education centers and course equipment are largely fixed.

We adjust our expenditures for sales and marketing depending on our strategic objectives, which generally include an assessment of our expectations for influencing future customer demand, market conditions and other factors. However, if our expectations regarding the results of our marketing efforts prove to be wrong, any significant revenue shortfall would have a material adverse effect on our results of operations.

As we have for the past 37 years, we continue to emphasize excellence in educating and training managers and IT professionals from government and commercial organizations around the world. We believe that quality is a significant differentiator in the eyes of our customers, and that our proven long-term record of exceptional performance is a reason for our clients’ tremendous loyalty. Every one of our 100 largest clients five years ago in fiscal year 2006 was still one of our clients five years later in fiscal year 2011. We continue our emphasis on excellence by focusing on our core strengths: our expert instructors, proprietary content library, state-of-the-art classrooms, application of technology to education, and worldwide course delivery systems.

We follow a 52- or 53-week fiscal year. Our year-end and quarter-end dates are on the Friday nearest the end of the calendar quarter. Accordingly, our fiscal year 2009 ended on October 2, 2009, fiscal year 2010 ended on October 1, 2010 and fiscal year 2011 ended on September 30, 2011. Our fiscal years 2009, 2010 and 2011 each consisted of 52 weeks.

RESULTS OF OPERATIONS

The following table summarizes our consolidated statements of operations for the periods indicated expressed as percentages of revenues:

 

     Fiscal Year Ended  
     October 2,
2009
    October 1,
2010
    September 30,
2011
 

Revenues

     100.0     100.0     100.0

Cost of revenues

     44.7        46.4        46.1   
  

 

 

   

 

 

   

 

 

 

Gross profit

     55.3        53.6        53.9   

Operating expenses:

      

Course development

     5.6        5.7        5.6   

Sales and marketing

     24.1        23.9        23.1   

General and administrative

     24.1        19.9        21.3   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     53.8        49.5        50.0   
  

 

 

   

 

 

   

 

 

 

Income from operations

     1.5        4.1        3.9   

Other income, net

     0.8        0.4        0.1   
  

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     2.3        4.5        4.0   

Provision for income taxes

     1.4        1.1        1.6   
  

 

 

   

 

 

   

 

 

 

Net income

     0.9     3.4     2.4
  

 

 

   

 

 

   

 

 

 

 

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FISCAL YEAR 2011 COMPARED WITH FISCAL YEAR 2010

In fiscal year 2011, our revenues increased to $133.8 million compared to $127.5 million in fiscal year 2010. Income from operations was level at $5.2 million in fiscal years 2011 and 2010. Net income for fiscal year 2011 decreased to $3.2 million compared to $4.4 million in fiscal year 2010.

Revenues. Our fiscal year 2011 revenues increased by 5.0% compared to fiscal year 2010. The increase in revenues was primarily due to a 0.3% increase in the number of participants in our courses and a 4.3% increase in average revenue per participant. The increase in revenue per participant was primarily the result of an overall price increase of 1.3% and a favorable effect of changes in foreign exchange rates of 2.4%. Additionally, in fiscal year 2011 compared with fiscal year 2010 we had a higher percentage of participants at courses held at our own education centers, where the average revenue per participant is higher than for courses held at customer locations, which increased revenue per participant by 0.8%.

During fiscal year 2011, we provided 267,770 attendee-days of training, an increase of 1.2% from 264,514 attendee-days in fiscal year 2010. In our management courses in fiscal year 2011, we provided 111,413 attendee-days of training, a 2.7% decrease from 114,481 attendee-days in fiscal year 2010. In our IT courses during fiscal year 2011, we provided 156,357 attendee-days of IT training, a 4.2% increase from 150,033 attendee-days in fiscal year 2010.

Revenues in the United States decreased 1.4% from $65.6 million in fiscal year 2010 to $64.7 million in fiscal year 2011, primarily due to a 5.2% reduction in the number of course events presented at customer locations. Revenues from our international operations increased 11.7% from $61.9 million in fiscal year 2010 to $69.1 million in fiscal year 2011, primarily due to a 9.5% increase in the number of course participants in our international locations and a 2.2% increase in average revenue per participant in those locations.

Cost of Revenues. Our cost of revenues primarily includes the costs of course instructors and their travel expenses, course materials and equipment, freight, classroom facilities and refreshments. During fiscal year 2011, we presented 6,178 events compared to 5,907 events during fiscal year 2010. Our cost of revenues for fiscal year 2011 increased to $61.6 million from $59.2 million in fiscal year 2010. Our cost of revenues as a percentage of our revenues decreased to 46.1% for fiscal year 2011 from 46.4% in fiscal year 2010.

Changes in exchange rates do not materially affect our gross profit percentages since exchange rates have essentially the same impact on both revenues and cost of revenues in any time period.

The decrease in cost of revenues as a percentage of revenues in fiscal year 2011 was due to a 0.4% decrease in average cost per event, that resulted from small reductions across a broad variety of expense categories. Gross profit in the United States stayed the same at $34.2 million in fiscal year 2010 and 2011. Gross profit from our international operations increased 11.3% from $34.1 million in fiscal year 2010 to $37.9 million in fiscal year 2011, primarily due to the increase in our revenues from our international locations this year compared to fiscal year 2010, as discussed earlier.

Course Development Expenses. We maintain a disciplined process to develop new courses and update our existing courses. All costs incurred in that process, principally for internal product development staff and for subject matter experts, are expensed when incurred and are included in course development expenses.

During fiscal year 2011, course development expenses were 5.6% of revenues compared to 5.7% during fiscal year 2010. In fiscal year 2011, we increased our overall spending on course development by 2.6% to $7.5 million compared with $7.3 million in fiscal year 2010. This net increase reflected an increase in personnel and benefits expense of $0.3 million and an increase in royalty expense (due to an increase in attendee days) of $0.1 million offset by decreases in other course development expenses.

 

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We introduced 10 new management course titles in fiscal year 2011 compared with 11 in fiscal year 2010. During fiscal year 2011 we introduced 14 new IT courses compared with 12 in fiscal year 2010.

At the end of fiscal year 2011, the Learning Tree library of instructor-led courses numbered 220 titles, comprising 4,824 hours of training, compared with 214 titles at the end of fiscal year 2010. The increase in the number of titles in fiscal year 2011 reflected the net effect of introducing 24 new titles and retiring 18 titles. In general, titles are retired when the profits they generate no longer justify the ongoing cost of marketing them and maintaining their content. Thus, we may or may not develop more titles than we retire in any period.

At September 30, 2011, we had 83 management titles in our course library, compared with 77 management titles at the end of fiscal year 2010. Our library of IT titles numbered 137 as of September 30, 2011, the same as at the end of fiscal year 2010.

Sales and Marketing Expenses. Sales and marketing expenses primarily include the cost of designing, producing and distributing direct mail and media advertisements, marketing e-mails and our website; compensation and travel-related costs for sales and marketing personnel; and the cost of information systems to support these activities. Our sales and marketing expense, and in particular our expenditure on course catalogs, is one of our largest expenditures.

Our sales and marketing expenses were 23.1% and 23.9% of revenues in fiscal years 2011 and 2010, respectively. Sales and marketing expenses increased to $30.8 million in fiscal year 2011 from $30.4 million in fiscal year 2010. The overall increase of $0.4 million was due to increases of: $1.6 million for personnel and benefits, $0.4 million for trade shows and advertising and $0.3 million for severance. These increases were offset by decreases of: catalog production costs of $0.5 million, sales commissions of $0.4 million, professional service fees of $0.2 million, recruiting fees of $0.2 million and various other expenses of $0.6 million. Changes in foreign exchange rates caused our overall sales and marketing expenses to increase by about 2.0%.

General and Administrative Expenses. Our general and administrative expenses in fiscal year 2011 increased by $3.3 million, from $25.3 million in fiscal year 2010 to $28.6 million in fiscal year 2011. This change from our prior year expenses resulted mainly from increases of $2.3 million in personnel and benefits expense, $0.7 million for legal fees, $0.4 million due to changes in foreign exchange rates, $0.2 million for the fiscal year 2010 reversal of an asset retirement obligation from the renegotiation of a lease, and $0.6 million in other general and administrative expenses. These increases were offset by $0.9 million in cost reductions, principally due to a $1.0 million reduction in onerous lease provisions compared to the prior year.

The increase in personnel and benefits expense primarily resulted from increases of: $0.5 million of incentive compensation (as very little incentive compensation was paid in our prior year), $0.5 million for annual compensation increases, $0.4 million as a result of additional personnel, $0.3 million in benefits primarily related to the aforementioned salary increases, $0.3 million in severance expense, and $0.3 million for stock-related compensation and other expenses.

Fiscal year 2010 included a charge of $1.3 million for an expected period of vacancy due to the exercise of an option to terminate by one of our London education center subtenants on October 7, 2010. An additional charge of $0.3 million for vacant space was taken in fiscal year 2011.

Other Income (Expense), Net. Other income (expense), net in fiscal year 2011 decreased by $0.5 million over the prior fiscal year, from $0.6 million to $0.1 million. This change was primarily due to a decrease in interest income of $0.4 million due to lower interest rates.

 

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Income Taxes. In fiscal year 2011, our income tax provision was $2.1 million compared to $1.4 million in fiscal year 2010. Our effective rate for fiscal year 2011 was 39.4% compared to 23.7% in fiscal year 2010. The lower effective rate for fiscal year 2010 was primarily attributable to the expiration of uncertain tax positions which resulted in a $1.1 million reduction in our tax expense.

We did not provide for United States federal income and foreign withholding taxes of international subsidiaries’ undistributed earnings as of September 30, 2011, because we currently intend to reinvest such earnings indefinitely. The undistributed earnings were approximately $22.2 million as of September 30, 2011. Because of the availability of United States foreign tax credits, it is not practicable to determine the United States federal income tax liability that would be payable if such earnings were not reinvested.

FISCAL YEAR 2010 COMPARED WITH FISCAL YEAR 2009

Our fiscal year 2010 began October 3, 2009, and from the outset was significantly impacted by the global financial crisis and subsequent economic downturn. In fiscal year 2010, our revenues decreased by 3.8% to $127.5 million compared to $132.6 million in fiscal year 2009. Income from operations increased by 162.1% to $5.2 million in fiscal year 2010 compared to $2.0 million in fiscal year 2009. Net income for fiscal year 2010 increased by 264.8% to $4.4 million compared to $1.2 million in fiscal year 2009.

Revenues. Our fiscal year 2010 revenues decreased by 3.8% compared to fiscal year 2009. The decrease in revenues was primarily due to a 0.5% decrease in the number of participants in our courses and a 3.6% decrease in average revenue per participant. The decrease in revenue per participant was primarily the result of the fact that in fiscal year 2010 compared to fiscal year 2009, we had a higher percentage of participants at courses held at customer locations, where the average revenue per participant is lower than for courses held in our own education centers, as well as a higher percentage of participants at our management courses, which have a shorter average length than our IT courses and accordingly a lower average revenue per participant. These decreases were partially offset by a 1.8% increase due to the effect of changes in foreign exchange rates.

Revenues in the first half of fiscal year 2010 declined by 11.2% from the comparable period in fiscal year 2009; in contrast, revenues grew by 1.6% in the third quarter of fiscal year 2010 compared to the same quarter of fiscal year 2009 and, even after a 1.5% adverse effect from foreign exchange rate changes, by 6.6% in the fourth quarter of fiscal year 2010 compared to the same quarter of fiscal year 2009.

During fiscal year 2010, we provided 264,514 attendee-days of training, a decrease of 2% from the 269,854 attendee-days in fiscal year 2009. In our management courses in fiscal year 2010, we provided 114,481 attendee-days of training, a 19.2% increase over the 96,020 attendee-days in fiscal year 2009. In our IT courses during fiscal year 2010, we provided 150,033 attendee-days of IT training, a 13.7% decrease from the 173,834 attendee-days in fiscal year 2009.

Revenues in the United States increased 1.1% from $64.9 million in fiscal year 2009 to $65.6 million in fiscal year 2010, primarily due to an increase in the number of course participants. Revenues from our international operations decreased 8.5% from $67.7 million in fiscal year 2009 to $61.9 million fiscal year 2010, primarily due to a decrease in the number of course participants, which was partially offset by a 1.8% positive effect of changes in foreign exchange rates.

Cost of Revenues. During fiscal year 2010, we presented 5,907 events compared to 6,082 events during fiscal year 2009. Our cost of revenues for fiscal years 2009 and 2010 was $59.2 million. Our cost of revenues as a percentage of our revenues increased to 46.4% for fiscal year 2010 from 44.7% in fiscal year 2009.

Changes in exchange rates do not materially affect our gross profit percentages since exchange rates have essentially the same impact on both revenues and cost of revenues in any time period.

 

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The increase in cost of revenues as a percentage of revenues in fiscal year 2010 reflected a 1.2% decrease in average revenue per event as well as a 2.9% increase in average cost per event. The decrease in our average revenue per event was the result of the higher percentage of participants at courses held at customer locations and the higher percentage of participants at our management courses discussed above. The increase in average cost per event in fiscal year 2010 principally resulted from the effect of changes in foreign exchange rates and the decrease in our average number of days per event held compared to fiscal year 2009, somewhat offset by proportionately higher fixed costs per event due to having fewer events during fiscal year 2009 over which to allocate the expenses associated with our education centers.

Gross profit in the United States decreased 3.2% from $35.3 million in fiscal year 2009 to $34.2 million in fiscal year 2010, primarily due to the higher percentage of participants at courses held at customer locations and at our management courses, both of which have lower average revenue per participant, and due to the proportionately higher fixed costs per event due to having fewer events during fiscal year 2010 over which to allocate the expenses associated with our education centers. Gross profit from our international operations decreased 10.3% from $38.0 million in fiscal year 2009 to $34.1 million in fiscal year 2010, primarily due to a decrease in the number of course participants.

Course Development Expenses. During fiscal year 2010, largely due to the decline in our revenues, course development expenses were 5.7% of revenues compared to 5.6% during fiscal year 2009. In fiscal year 2010, we decreased our overall spending on course development by 1.9% to $7.3 million compared with $7.4 million in fiscal year 2009. This net decrease reflected a reduction of $0.3 million in course author expense offset by increases of $0.1 million in consulting expense related to AnyWare and $0.1 million in various other costs.

We introduced 11 new management course titles in fiscal year 2010 compared with 25 in fiscal year 2009. During fiscal year 2010 we introduced 12 new IT courses compared with 25 in fiscal year 2009. Based on our research and development efforts on various approaches to delivering “hybrid” learning, which combines instructor-led classroom training with web-based e-learning, in fiscal year 2009 we introduced Learning Tree AnyWare™, our e-learning platform that allows individuals located anywhere to attend a live instructor-led class being conducted in a Learning Tree Education Center or at a customer location.

At the end of fiscal year 2010, the Learning Tree library of instructor-led courses numbered 214 titles, comprising 4,824 hours of training, compared with 219 titles at the end of fiscal year 2009. The decrease in the number of titles in fiscal year 2010 reflected the net effect of introducing 23 new titles and retiring 28 titles. In general, titles are retired when the profits they generate no longer justify the ongoing cost of marketing them and maintaining their content. Thus, we may or may not develop more titles than we retire in any period.

At October 1, 2010, we had 77 management titles in our course library, compared with 76 management titles at the end of fiscal year 2009. Our library of IT titles numbered 137 as of October 1, 2010 compared to 143 at the end of fiscal year 2009.

Sales and Marketing Expenses. Our sales and marketing expenses were 23.9% and 24.1% of revenues in fiscal years 2010 and 2009, respectively. Sales and marketing expenses decreased by $1.5 million from $32.0 million in fiscal year 2009 to $30.5 million in fiscal year 2010. During fiscal year 2010, we reduced the number of catalogs produced and mailed, lowering our expenses by $1.9 million. Reduction of personnel and benefits accounted for an additional reduction of $1.0 million. These decreases were offset by: increases in sales commissions of $0.5 million, recruiting expense of $0.3 million, professional service fees of $0.3 million for website redesign and AnyWare and for initial sales support for our Veteran’s Administration contract of $0.3 million. Changes in foreign exchange rates caused our overall sales and marketing expenses to increase by about 1.6%.

 

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General and Administrative Expenses. Our general and administrative expenses in fiscal year 2010 decreased by $6.6 million, from $31.9 million in fiscal year 2009 to $25.3 million in fiscal year 2010. Additionally, fiscal years 2010 and 2009 included the following significant items not associated with current operations.

 

   

Fiscal year 2010 included a charge of $1.3 million for an expected period of vacancy due to the exercise of an option to terminate by one of our London education center subtenants on October 7, 2010.

 

   

Fiscal year 2009 included a charge of $4.2 million to settle a contract dispute with the United States Government, which was paid at $4.5 million on April 7, 2010.

 

   

Fiscal year 2009 included $1.3 million of restructuring costs incurred as a result of staff reductions in November 2008 and April 2009.

 

   

Fiscal year 2009 included $0.7 million of costs associated with exploring a potential sale of the company, including non-contingent transaction contribution bonuses for certain employees principally in our finance and accounting department, as well as legal fees and special committee fees.

Other decreases included: $0.4 million in professional services fees, primarily for auditing services; $0.4 million in software amortization and depreciation, primarily for our accounting software; $0.3 million in rent expense; $0.3 million for the reversal of an asset retirement obligation from the renegotiation of a lease; and $0.3 million in personnel and benefits.

During fiscal year 2010, changes in foreign exchange rates caused total general and administrative expenses to increase by about 1.0% compared with fiscal year 2009.

Other Income (Expense), Net. Other income (expense), net in fiscal year 2010 decreased by $0.4 million over the prior fiscal year, from $1.0 million to $0.6 million. This change was primarily due to a decrease in interest income of $0.9 million due to lower interest rates and lower outstanding cash balances offset by a decrease in foreign exchange losses of $0.2 million.

Income Taxes. In fiscal year 2010, our income tax provision was $1.4 million compared to $1.8 million in fiscal year 2009. Our effective rate for fiscal year 2010 was 23.7% compared to 60.3% in fiscal year 2009. The lower effective rate for fiscal year 2010 was primarily attributable to the reduction in uncertain tax positions due to the expiration of the statute of limitations in fiscal year 2010 which resulted in a $1.1 million decrease. The higher effective rate for fiscal year 2009 was primarily attributable to United States income taxes on the repatriation of cash from our foreign subsidiaries, the write off of deferred tax assets related to equity compensation and other nondeductible items, which collectively increased tax expense by approximately $1.4 million. These increases were partially offset by the tax benefits from valuation allowance reversals of approximately $0.5 million.

We did not provide for United States federal income and foreign withholding taxes of international subsidiaries’ undistributed earnings as of October 1, 2010, because we currently intend to reinvest such earnings indefinitely. The undistributed earnings were approximately $20.8 million as of October 1, 2010. If these earnings were distributed, we would incur approximately $0.3 million of foreign withholding taxes. Because of the availability of United States foreign tax credits, it is not practicable to determine the United States federal income tax liability that would be payable if such earnings were not reinvested.

GEOGRAPHIC DATA

Learning Tree Education Centers are located in six countries and we have historically derived roughly half of our revenues from outside the United States. The United States operations recorded revenues of $64.7 million in fiscal year 2011 compared to revenues of $65.6 million in fiscal year 2010. Revenues from our European

 

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operations were $53.1 million in fiscal year 2011 compared to $46.8 million in fiscal year 2010. Canadian operations recorded revenues of $14.0 million in fiscal year 2011 compared to revenues of $13.0 million in fiscal year 2010 and our Asian operations recorded revenues of $2.0 million in fiscal year 2011 compared to $2.1 million in fiscal year 2010. See Note 9 of “Notes to Consolidated Financial Statements” for further information on segment reporting.

Although our consolidated financial statements are stated in U.S. dollars, all of our subsidiaries other than in the United States have functional currencies other than the U.S. dollar. Gains and losses arising from the translation of the balance sheets of our subsidiaries from the functional currencies to U.S. dollars are reported as adjustments to stockholders’ equity. Fluctuations in exchange rates may also have an effect on our results of operations. Since both revenues and expenses are generally denominated in the subsidiary’s local currency, changes in exchange rates that have an adverse effect on our foreign revenues are partially offset by a favorable effect on our foreign expenses, and vice versa. The impact of future exchange rates on our results of operations cannot be accurately predicted. To date, we have not sought to hedge the risks associated with fluctuations in exchange rates and therefore we continue to be subject to such risks. In the future, we may undertake such hedging transactions. There can be no assurance that any hedging techniques we might implement would be successful in eliminating or reducing the effects of currency fluctuations.

INFLATION

Inflation and changing prices do not have a significant impact on our net sales, revenues and income from continuing operations.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board, or FASB, issued guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.

In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.

Other recent accounting pronouncements issued by the FASB (including the Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, or management believes will not, have a material impact on our present or future consolidated financial statements.

QUARTERLY RESULTS OF OPERATIONS

Historically, our quarterly operating results have fluctuated, and that is expected to continue in the future. Typically, our first and third fiscal quarters have higher revenues and income from operations than do our second and fourth fiscal quarters. The fluctuations may be caused by many factors such as: (i) the frequency of course events; (ii) the number of weeks during which courses can be conducted in a quarter; (iii) the timing, timely delivery, frequency and size of and response to our direct mail marketing and advertising campaigns; (iv) the

 

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timing of our introduction of new course titles; (v) the mix between course events held at customer sites and course events held in our education centers and hotels due to differing gross profit margins; (vi) competitive forces within markets we serve; (vii) our ability to attract customers and meet their expectations; (viii) currency fluctuations and other risks inherent in international operations; (ix) natural disasters, external strikes, acts of war or terrorism and other external factors; and (x) general economic conditions and industry-specific slowdowns. Fluctuations in quarter-to-quarter results also occur as a result of differences in the timing of our spending on the marketing and development of our courses.

See Note 15 of “Notes to Consolidated Financial Statements” for our unaudited quarterly financial data for the eight fiscal quarters ended September 30, 2011. Our operating results for any quarter are not necessarily indicative of the results for any future period.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity at September 30, 2011 included cash and cash equivalents on hand of $40.3 million. During fiscal year 2011, the total of our cash and cash equivalents increased by $5.8 million primarily as a result of cash provided by operations of $9.9 million and net sales of available for sale securities of $2.5 million partially offset by $5.7 million used for capital expenditures and $0.4 million used for repurchases of our common stock.

Cash Flows. Our cash and cash equivalents increased by $5.8 million to $40.3 million at September 30, 2011 from $34.4 million at October 1, 2010.

 

     Fiscal Year Ended     Net Change  
     October 2,
2009
    October 1,
2010
    September 30,
2011
    2010 vs. 2009     2011 vs. 2010  

Cash provided by operating activities

   $ 7.5      $ 0.8      $ 9.9      $ (6.7   $ 9.1   

Cash provided by (used in) investing activities

     10.8        23.6        (3.1     12.8        (26.7

Cash used in financing activities

     (25.2     (34.3     (0.5     (9.1     33.8   

Effects of exchange rates on cash and cash equivalents

     (0.6     0.0        (0.5     0.6        (0.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

   $ (7.5   $ (9.9   $ 5.8      $ (2.4   $ 15.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by operating activities increased by $9.1 million to $9.9 million in fiscal year 2011 from $0.8 million in fiscal year 2010. Cash used in investing activities increased $26.7 million during fiscal year 2011 compared to fiscal year 2010 due to lower net proceeds from the disposition of available for sale securities and higher purchases of equipment and other capital assets. Cash used in financing activities was $0.5 million during fiscal year 2011 compared to $34.3 million in fiscal year 2010. This decrease was primarily due to larger repurchases of our common stock and payment of cash dividends during fiscal year 2010. The effect of exchange rates on cash and cash equivalents during fiscal year 2011 was a negative $0.5 million.

 

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In fiscal year 2011, “free cash flow,” which we define as net cash provided by operating activities minus purchases of equipment, property and leasehold improvements was $4.2 million. This compares to $(2.2) million of free cash flow in fiscal year 2010. The improvement in free cash flow for fiscal year 2011 is primarily due to an increase in cash provided by operating activities partially offset by an increase in purchases of capital expenditures. We believe that free cash flow is useful for investors to understand our liquidity. Free cash flow is a non-GAAP financial measure and accordingly should be considered only as a supplement to, and not a replacement of, cash provided by operating activities as a measure of our liquidity. The following is a reconciliation of free cash flow to cash provided by operating activities computed in accordance with GAAP:

 

      Fiscal Year  
      October 2,
2009
    October 1,
2010
    September 30,
2011
 

Cash provided by operating activities

   $ 7.5      $ 0.8      $ 9.9   

Less: Purchases of equipment, property and leasehold improvements

     (2.1     (3.0     (5.7
  

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 5.4      $ (2.2   $ 4.2   
  

 

 

   

 

 

   

 

 

 

Liquidity. At September 30, 2011 our working capital (current assets minus current liabilities) was $15.8 million, a $3.2 million increase from our working capital balance at October 1, 2010. The change in working capital was due to an increase in cash and cash equivalents of $5.8 million offset by net sales of available for sale securities of $3.2 million. This increase in working capital was primarily due to net income as operating assets and liabilities were comparable between fiscal years 2011 and 2010.

We have no outstanding debt or line-of-credit agreements. We anticipate we will continue to rely primarily on our balance of cash and cash equivalents on hand and cash flows from operations to finance our operating cash needs. We believe that such funds will be sufficient to satisfy our anticipated cash requirements for the foreseeable future.

Capital Requirements. During fiscal year 2011, we made capital expenditures of $4.9 million for the purchase of equipment worldwide, mostly computers and other equipment for use in our courses, as well as $0.8 million of leasehold improvements which subsequently were reimbursed by the landlord in October 2011. We will continue to invest in our infrastructure to accommodate any increased customer demand, to continue improving the quality and effectiveness of our course delivery, and to incorporate significant changes in technology. We have a number of operating leases for our administrative offices and education center classroom facilities located worldwide. These leases expire at various dates over the next 10 years. In addition to requiring monthly payments for rent, some of the leases contain asset retirement provisions whereby we are required to return the leased facility back to a specified condition at the expiration of the lease.

The following table summarizes our contractual commitments at September 30, 2011:

 

     Payments Due by Period (in thousands)  

Contractual Obligations

  Total     Less than 1 year
(Fiscal 2012)
    1 – 2 years (Fiscal
2013 and 2014)
    3 – 5 years (Fiscal
2015 – 2017)
    More than 5 years
(Fiscal 2018 –
2023)
 

Operating leases (i)

  $ 75,358      $ 12,404      $ 22,948      $ 28,475      $ 11,531   

Purchase commitments

    270        190        68        12        0   

Other lease contractual obligations (ii)

    7,958        254        0        341        7,363   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 83,586      $ 12,848      $ 23,016      $ 28,828      $ 18,894   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(i) Amounts exclude future minimum sublease rental proceeds of $8.3 million due in the future under non-cancelable subleases. See Note 4 of “Notes to Consolidated Financial Statements” for further details.
(ii) Represents estimated cash flows to satisfy contractual obligations to restore leased space to specified conditions at expiry of the leases. Amounts include $0.7 million expected to be recovered from subtenants.

 

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OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

Management’s discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The following list of critical accounting estimates and policies is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 1 of “Notes to Consolidated Financial Statements.” The following represents a summary of our critical accounting estimates and policies, defined as those policies that we believe are the most important to the portrayal of our financial condition and results of operations, and/or require management’s significant judgments and estimates.

Critical Accounting Estimates

Revenue Recognition. We offer our customers a multiple-course sales discount referred to as a Learning Tree Training Passport. A Learning Tree Training Passport allows an individual Passport holder to attend up to a specified number of courses over a one- to two-year period for a fixed price. For a Training Passport, the amount of revenue recognized for each course attendance is based upon the selling price of the Training Passport, the list price of the course taken, the weighted average list price of all courses taken and the estimated average number of courses all Passport holders will actually attend. Upon expiration of each individual Training Passport, we record the difference, if any, between the revenues previously recognized and that specific Training Passport’s total invoiced price. The estimated attendance rate is based upon the historical experience of the average number of course events that Training Passport holders have been attending. The actual Training Passport attendance rate is reviewed at least semi-annually, and if the Training Passport attendance rates change, the revenue recognition rate for active Training Passports and for Training Passports sold thereafter is adjusted prospectively.

We believe it is appropriate to recognize revenues on this basis in order to most closely match revenue and related costs, as the substantial majority of our Passport holders do not attend the maximum number of course events permitted under their Training Passports. We believe that the use of recent historical data is reasonable and appropriate because of the relative stability of the average actual number of course events attended by Passport holders.

The average actual attendance rate for all expired Training Passports has closely approximated the estimated rate we utilize. Although we have seen no material changes in the historical rates as the number of course titles has changed, we monitor such potential effects. In general, determining the estimated average number of course events that will be attended by a Training Passport holder is based on historical trends that may not continue in the future. These estimates could differ in the near term from amounts used in arriving at the reported revenue. If the estimates are wrong, we would record the difference between the revenues previously recognized for that Training Passport and the Training Passport selling price upon expiration of that Training Passport. Thus, the timing of revenue recognition may be affected by an inaccurate estimation, but the inaccuracy would have no effect on the aggregate revenue recognized over the one- to two-year life of each Training Passport.

For newer Passport products for which historical utilization data is not available, we assume that the estimated average number of courses to be attended is equal to the number of courses available on the Passport. This assumed utilization rate may be revised in future periods after sufficient time has passed to amass historical trends.

 

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Allowance for Doubtful Accounts Receivable. Trade accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. We use estimates in determining the allowance for doubtful accounts receivable, based on our analysis of various factors, including our historical collection experience, current trends, specific identification of invoices which are considered doubtful and a percentage of our past due accounts receivable. Although our estimates for this reserve have in the past been reasonably accurate, these estimates could differ from actual collection experience and are subject to adjustment. Our trade accounts receivable are written off when they are deemed uncollectible.

Lease Termination Costs. We lease education center and administrative office space under various operating lease agreements. Certain of these operating leases include space that is not used and that is currently subleased. We calculate and record a liability related to those leases based on the difference between the present value of the net aggregate sublease rental income and the present value of the prime lease costs for the subleased space throughout the remaining term of the leases. Periodically, we evaluate the nature and extent of each of the individual provisions and make adjustments as appropriate, as new information becomes available or subsequent developments occur.

In 1999, we entered into a 20-year lease on a building in London to house our United Kingdom Education Center. This building has space in addition to that required for our current needs, which we attempt to sublet. When space is vacant from time to time, we must estimate the fair value of the liability for the vacant space based upon the remaining lease costs as defined by our operating lease agreement reduced by estimated future sublease rental income that could be reasonably obtained for the property based upon prevailing real estate market conditions. The computed short and long-term portions of such liabilities are recorded as deferred facilities rent and other in the accompanying consolidated financial statements. Amounts are paid under the master lease to the landlord, netted against subtenant sublease receipts, and applied to our accrued lease liability, reducing the amount of liability recorded with an offset to General and Administrative expenses.

Asset Retirement Obligations. We record a liability equal to the fair value of the estimated future cost to retire an asset. For us, most asset retirement obligation (“ARO”) liabilities are primarily associated with education facilities leasehold improvements which, at the end of a lease, we are obligated to remove in order to restore the facility back to a condition specified in the lease agreement. At the inception of such a lease, we record the ARO as a liability and also record a leasehold improvement asset in an amount equal to the fair value of the liability. The capitalized leasehold improvement asset is then depreciated on a straight-line basis over 20 years or the term of the lease, whichever is shorter. Any difference between the actual costs incurred for the eventual retirement and the estimated liability previously recorded will be recognized as a gain or loss in our statement of operations at the termination of the lease.

The fair value of any such ARO liability is estimated in three steps: (1) the costs of leasehold restoration are estimated as if they were to be performed at the inception of the lease, (2) the cost is forecast into the future by applying an inflation rate in effect at the time of adoption together with a market-risk premium for a contractor’s risk for performing the work in the future, and (3) the present value of this future cost is computed by discounting it at our credit worthiness interest rate (determined at the inception of the lease).

The ARO liability is subsequently increased annually by interest accretion throughout the term of the lease. In future periods we may also make adjustments to the ARO liability as a result of the availability of new information, technology changes, changes in labor costs and other factors. The estimate of the ARO liability is based on a number of assumptions requiring professional judgment. We cannot predict what revisions to these assumptions will be required in future periods.

The ARO liability is based on a number of assumptions requiring professional judgment. These include estimates for: (1) expected future cash flows related to contractual obligations, primarily to restore leased space back to open floor layouts as required by the lease agreements; (2) our credit-adjusted risk free rate that considers our estimated credit rating as of the date of lease inception; (3) the market risk premium that we determine based

 

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on the length of the individual leases; and (4) the relevant inflation factor in each affected country. For the more significant AROs we obtain third-party restoration estimates specific to those leases. We cannot predict the type of revisions to these assumptions that will be required in future periods due to the availability of additional information, technology changes, the price of labor costs and other factors.

Critical Accounting Policies

Revenue Recognition. See “Critical Accounting Estimates” for significant policies on revenue recognition.

In addition to our Learning Tree Training Passports, we also offer a multiple-course sales discount referred to as Learning Tree Training Vouchers. With Learning Tree Training Vouchers, a customer buys the right to send a specified number of attendees to Learning Tree courses over a six to twelve-month period for a fixed price. Revenue is recognized on a pro rata basis for each attendance. For the majority of Training Vouchers with unused seats at the expiration of the Voucher, we record the pro rata selling price of the expired unused seats as revenue. At times we make a business decision to extend the life of a Training Voucher beyond the normal twelve month expiration date. Training Vouchers purchased under government rate schedules have no expiration date.

Stock-Based Compensation. We estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by assumptions regarding a number of variables including our expected stock price volatility, expected term and risk-free interest rates.

We analyzed our historical volatility to estimate the expected volatility. The risk-free interest rate assumption is based on the U.S. Treasury rate at the date of grant, which most closely resembles the expected life of our options. The estimated expected life represents the weighted-average period the stock options are expected to remain outstanding and has been determined based on the simplified method under ASC 718. We do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated pre-vesting forfeitures. Forfeitures were estimated based on historical experience. During fiscal year 2009, we reduced to zero the estimated forfeiture rate for executive personnel. The forfeiture rate for fiscal years 2010 and 2011 was zero.

Long-Lived Assets. We periodically review the carrying value of our long-lived assets, such as equipment, property and leasehold improvements, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In making such evaluations, we compare the expected future cash flows to the carrying amount of the assets. If the total of the expected future cash flows is less than the carrying amount of the assets, we are required to make estimates of the fair value of the long-lived assets in order to calculate the impairment loss equal to the difference between the fair value and the carrying value of the assets. We make significant assumptions and estimates in this process regarding matters that are inherently uncertain, such as estimating cash flows, remaining useful lives, discount rates and growth rates. The resulting cash flows are computed over an extended period of time, which subjects those assumptions and estimates to an even larger degree of uncertainty. While we believe that our estimates are reasonable, different assumptions regarding such cash flows could materially affect the valuation of long-lived assets.

Income Taxes. We provide for income taxes under the provisions of FASB ASC 740, Income Taxes. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in our consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between financial statement and tax basis of assets and liabilities using enacted rates expected to

 

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be in effect during the year in which the differences reverse. We must then also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that it is more likely than not that some portion or all of our deferred tax assets will not be realized, we must establish a valuation allowance. To the extent we establish a valuation allowance or change the allowance in a period, we must reflect the corresponding increase or decrease within the tax provision in the statement of operations.

OUTLOOK

Effect of Exchange Rates. Approximately half of our business annually is conducted in currencies other than U.S. dollars and fluctuations in exchange rates will affect future revenues and expenses when translated into dollars. If the exchange rates of December 1, 2011 remain constant for the remainder of our first quarter of fiscal year 2012, we would expect to report an unfavorable effect of approximately 0.5% on our revenues during our first quarter of fiscal year 2012 compared to the same quarter of fiscal year 2011. Of course, we would also see a favorable effect from exchange rates on our overall expenses, though this effect is less pronounced because more of our expenses are denominated in dollars, including our corporate management and centralized IT, marketing and course development activities which are located here in the United States.

First Quarter Revenues. We currently expect revenues for our first quarter of fiscal year 2012 of between $34.3 million and $35.8 million, compared to revenues of $35.6 million in our first quarter of fiscal year 2011.

First Quarter Gross Profit. We expect a gross profit percentage in our first quarter of fiscal year 2012 of between 53.4% and 55.0% compared to 55.7% in our first quarter of fiscal year 2011.

First Quarter Operating Expenses. We expect overall operating expenses for our first quarter of fiscal year 2012 to be between $17.0 million and $17.5 million, compared to $16.9 million in our first quarter last year.

First Quarter Income From Operations. As a result of the above factors, we expect to achieve first quarter operating income of between $1.2 million and $2.7 million compared with $3.0 million in our first quarter of fiscal year 2011.

First Quarter Interest Income. We expect first quarter interest income to be less than $0.1 million.

First Quarter Pre-Tax Income. Overall, we expect to report pre-tax income for our first quarter of fiscal year 2012 of between $1.2 million and $2.7 million, compared with $3.0 million in the first quarter of fiscal year 2010.

Effective Tax Rate. We estimate that our effective tax rate in our first quarter of fiscal year 2012 will be approximately 32.6%.

 

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from changes in interest rates and foreign currency exchange rates. For purposes of specific risk analysis, we use sensitivity analysis to determine the effects that market risk exposures may have.

Interest Rate Risk. Our cash equivalents and available for sale securities are diversified and consist primarily of investment grade securities of high-quality financial institutions and corporations. The fair value of our portfolio of marketable securities would not be significantly affected by either a 10% increase or decrease in the rates of interest due primarily to the short-term nature of the portfolio. We do not hold or issue derivative financial instruments.

Foreign Currency Risk. We are exposed to the impact of foreign currency fluctuations. The exposure to exchange rates relates primarily to our foreign subsidiaries. Subsidiaries with material foreign currency exposure are in Canada, the United Kingdom, Sweden and France. For our foreign subsidiaries, exchange rates can have an impact on the U.S. dollar value of their reported earnings as well as on the intercompany transactions with the United States and other subsidiaries.

Our consolidated financial statements are prepared in U.S. dollars, while the operations of our foreign subsidiaries are conducted in their respective local currencies. Fluctuations in the value of foreign currencies against the U.S. dollar may have a significant impact on our reported results. Revenues and expenses denominated in foreign currencies are translated monthly into U.S. dollars at the weighted average exchange rate. Consequently, as the value of the Dollar strengthens or weakens relative to other currencies in our major markets the resulting translated revenues, expenses and operating profits become lower or higher, respectively. A hypothetical appreciation of the Canadian Dollar, Euro, British Pound and Swedish Krona of 10% would result in a $0.1 million increase to our consolidated fiscal year 2011 results. This was estimated using a 10% appreciation factor to the average monthly exchange rates applied to the net income or loss for each of our subsidiaries in the respective period.

Fluctuations in currency exchange rates also can have an impact on the U.S. dollar amount of our stockholders’ equity. The assets and liabilities of our non United States subsidiaries are translated into U.S. dollars at the exchange rate of the balance sheet for the respective reporting period. The resulting translation adjustments are recorded in stockholders’ equity as accumulated other comprehensive income or loss. Due to unfavorable changes in the U.S. dollar relative to the Canadian Dollar, the Euro, the British Pound and the Swedish Krona, the foreign currency translation component of accumulated other comprehensive income declined $0.4 million during fiscal year 2011.

Additionally, we are exposed to the impact of foreign currency gains or losses due to short term intercompany transactions between the United States and its consolidated subsidiaries. While these intercompany balances are eliminated in consolidation, exchange rate changes do affect consolidated earnings. These balances generated a foreign exchange loss of $0.1 million in fiscal year 2011. To perform a sensitivity analysis, we assessed the risk of loss in fair values from the effect of a hypothetical 10% change in the value of foreign currencies, assuming no change in interest rates. As of September 30, 2011, the result of a uniform 10% change in the values of foreign currency exchange rates against the U.S. dollar for intercompany exposures with all other variables held constant would be immaterial to our statement of operations.

To date, we have not sought to hedge the risks associated with fluctuations in exchange rates. In the future, we may undertake such transactions; however, any hedging techniques we might implement might not be successful in eliminating or reducing the effects of currency fluctuations.

Credit Risk. Financial instruments that potentially subject us to concentrations of credit risk consist primarily of investments in available for sale securities, restricted interest bearing long-term investments and

 

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trade accounts receivable. We have policies that limit investments to investment grade securities and the amount of credit exposure to any one issuer. We do not require collateral or other security to support client receivables since most of our customers are large, well-established companies and government agencies. Our credit risk is also mitigated because our customer base is diversified both by geography and industry, and no single customer accounted for more than 10% of our consolidated revenues on an annual or quarterly basis during fiscal year 2011. We maintain an allowance for doubtful accounts for any potential credit losses related to our trade receivables. We do not use foreign exchange contracts to hedge the risk in receivables denominated in foreign currencies and we do not hold or issue derivative financial instruments for trading or speculative purposes.

 

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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     44   

Consolidated Balance Sheets at October 1, 2010 and September 30, 2011

     45   

Consolidated Statements of Operations for fiscal years ended October 2, 2009,  October 1, 2010 and September 30, 2011

     46   

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for fiscal years ended October 2, 2009, October 1, 2010 and September 30, 2011

     47   

Consolidated Statements of Cash Flows for fiscal years ended October 2, 2009,  October 1, 2010 and September 30, 2011

     48   

Notes to Consolidated Financial Statements

     49   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Learning Tree International, Inc.

Reston, Virginia

We have audited the accompanying consolidated balance sheets of Learning Tree International, Inc. and subsidiaries as of September 30, 2011 and October 1, 2010 and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended September 30, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Learning Tree International, Inc. and subsidiaries at September 30, 2011 and October 1, 2010, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2011, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Learning Tree International, Inc. and subsidiaries’ internal control over financial reporting as of September 30, 2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 13, 2011 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP

Bethesda, Maryland

December 13, 2011

 

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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

 

     October 1,
2010
    September 30,
2011
 

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 34,449      $ 40,293   

Available for sale securities

     4,997        2,352   

Trade accounts receivable, less allowances of $241 and $205, respectively

     18,311        18,220   

Income taxes receivable

     230        219   

Prepaid expenses

     4,649        3,769   

Deferred income taxes

     55        150   

Other current assets

     2,074        2,235   
  

 

 

   

 

 

 

Total current assets

     64,765        67,238   

Equipment, Property and Leasehold Improvements:

    

Education and office equipment

     40,384        38,006   

Transportation equipment

     204        240   

Property and leasehold improvements

     28,446        28,021   
  

 

 

   

 

 

 
     69,034        66,267   

Less: accumulated depreciation and amortization

     (52,191     (48,590
  

 

 

   

 

 

 
     16,843        17,677   

Restricted interest-bearing investments

     9,367        9,242   

Deferred income taxes

     8,141        7,098   

Other assets

     1,057        897   
  

 

 

   

 

 

 

Total assets

   $ 100,173      $ 102,152   
  

 

 

   

 

 

 

Liabilities

    

Current Liabilities:

    

Trade accounts payable

   $ 7,578      $ 7,468   

Deferred revenues

     35,745        34,572   

Accrued payroll, benefits and related taxes

     4,464        5,060   

Other accrued liabilities

     2,729        2,900   

Income taxes payable

     415        471   

Current portion of deferred facilities rent and other

     1,298        994   
  

 

 

   

 

 

 

Total current liabilities

     52,229        51,465   

Asset retirement obligations

     3,291        3,598   

Deferred income taxes

     293        296   

Deferred facilities rent and other

     6,435        6,926   

Noncurrent tax liabilities

     3,153        2,116   
  

 

 

   

 

 

 

Total liabilities

     65,401        64,401   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ Equity

    

Preferred stock, $.0001 par value; 1,000,000 shares authorized; 0 shares issued and outstanding

     0        0   

Common stock, $.0001 par value; 75,000,000 shares authorized; 13,512,750 and
13,479,409 shares issued and outstanding, respectively

     1        1   

Additional paid-in capital

     4,933        5,534   

Accumulated other comprehensive (loss) income

     180        (217

Retained earnings

     29,658        32,433   
  

 

 

   

 

 

 

Total stockholders’ equity

     34,772        37,751   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 100,173      $ 102,152   
  

 

 

   

 

 

 

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

 

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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except per share data)

 

     Fiscal Year Ended  
     October 2,
2009
    October 1,
2010
    September 30,
2011
 

Revenues

   $ 132,559      $ 127,470      $ 133,782   

Cost of revenues

     59,243        59,198        61,641   
  

 

 

   

 

 

   

 

 

 

Gross profit

     73,316        68,272        72,141   

Operating expenses:

      

Course development

     7,442        7,304        7,493   

Sales and marketing

     31,962        30,461        30,836   

General and administrative

     31,929        25,310        28,565   
  

 

 

   

 

 

   

 

 

 
     71,333        63,075        66,894   
  

 

 

   

 

 

   

 

 

 

Income from operations

     1,983        5,197        5,247   

Other income (expense), net:

      

Interest income, net

     1,502        649        233   

Foreign exchange losses

     (347     (109     (79

Other

     (107     17        (49
  

 

 

   

 

 

   

 

 

 
     1,048        557        105   
  

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     3,031        5,754        5,352   

Provision for income taxes

     1,828        1,366        2,110   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 1,203      $ 4,388      $ 3,242   
  

 

 

   

 

 

   

 

 

 

Income per common share—basic

   $ 0.08      $ 0.32      $ 0.24   
  

 

 

   

 

 

   

 

 

 

Income per common share—diluted

   $ 0.08      $ 0.32      $ 0.24   
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding—basic

     15,181        13,722        13,496   
  

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding—diluted

     15,181        13,739        13,514   
  

 

 

   

 

 

   

 

 

 

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

 

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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(amounts in thousands)

 

     Common Stock     Additional
Paid-In
Capital
     Accumulated
Other

Comprehensive
Income (Loss)
    Retained
Earnings
    Total
Stockholders’
Equity
 
     Shares
Outstanding
    Amount           

Balance, October 3, 2008

     16,557      $ 2      $ 3,220       $ (852   $ 84,028      $ 86,398   

Comprehensive income:

             

Net income

     0        0        0         0        1,203        1,203   

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

     0        0        0         187        0        187   

Foreign currency translation

     0        0        0         (420     0        (420
             

 

 

 

Comprehensive income

                970   

Share based compensation

     0        0        655         0        0        655   

Restricted stock grants

     28        0        0         0        0        0   

Stock repurchases

     (2,642     (1          (25,160     (25,161
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, October 2, 2009

     13,943        1        3,875         (1,085     60,071        62,862   

Comprehensive income:

             

Net income

     0        0        0         0        4,388        4,388   

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

     0        0        0         1,407        0        1,407   

Foreign currency translation

     0        0        0         (142     0        (142
             

 

 

 

Comprehensive income

                5,653   

Share based compensation

     0        0        459         0        0        459   

Restricted stock grants not earned

     (43     0        0         0        0        0   

Net shares issued for bonuses

     4        0        57         0        (21     36   

Stock options exercised

     49        0        542         0        0        542   

Shares surrendered in lieu of tax withholding

     (2     0        0         0        (23     (23

Dividend

     0        0        0         0        (29,918     (29,918

Stock repurchases

     (439     0        0         0        (4,839     (4,839
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, October 1, 2010

     13,512        1        4,933         180        29,658        34,772   

Comprehensive income:

             

Net income

     0        0        0         0        3,242        3,242   

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

     0        0        0         (6     0        (6

Foreign currency translation

     0        0        0         (391     0        (391
             

 

 

 

Comprehensive income

                2,845   

Share based compensation

     0        0        601         0        0        601   

Restricted stock units released

     18        0        0         0        0        0   

Shares surrendered in lieu of tax withholding

     (4     0        0         0        (39     (39

Stock repurchases

     (47     0        0         0        (428     (428
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, September 30, 2011

     13,479      $ 1      $ 5,534       $ (217   $ 32,433      $ 37,751   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

 

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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

 

     Fiscal Year Ended  
     October 2,
2009
    October 1,
2010
    September 30,
2011
 

Cash flows—operating activities:

      

Net income

   $ 1,203      $ 4,388      $ 3,242   

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

      

Depreciation and amortization

     6,061        5,736        4,616   

Share based compensation

     655        516        601   

Deferred income taxes

     (139     2,093        876   

Provision for doubtful accounts

     151        80        77   

Accretion of asset retirement obligations

     180        178        191   

Loss on disposals of equipment and leasehold improvements

     47        6        39   

Unrealized foreign exchange (gain) loss

     (6     4        (11

Deferred facilities rent and other charges

     (711     1,833        225   

Gain on settlement of asset retirement obligation

     0        (332     (103

Change in operating assets and liabilities:

      

Trade accounts receivable

     4,365        (3,277     (151

Prepaid expenses and other assets

     3,262        351        933   

Income taxes receivable / payable

     708        (2,883     (862

Trade accounts payable

     (1,345     (647     (22

Deferred revenues

     (8,662     (2,563     (874

Asset retirement obligations

     0        0        279   

Other accrued liabilities

     1,725        (4,635     861   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     7,494        848        9,917   
  

 

 

   

 

 

   

 

 

 

Cash flows—investing activities:

      

Purchases of equipment, property and leasehold improvements

     (2,134     (2,979     (5,657

Purchases of available for sale securities

     (8,587     (64,385     (28,148

Sales of available for sale securities

     21,466        90,897        30,654   

Sales of equipment and leasehold improvements

     2        18        14   
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     10,747        23,551        (3,137
  

 

 

   

 

 

   

 

 

 

Cash flows—financing activities:

      

Repurchases of common stock

     (25,161     (4,839     (428

Shares surrendered in lieu of tax withholding

     0        (23     (39

Payment of cash dividends

     0        (29,918     0   

Proceeds from exercise of stock options

     0        520        0   
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (25,161     (34,260     (467
  

 

 

   

 

 

   

 

 

 

Effects of exchange rates on cash and cash equivalents

     (620     (3     (469
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (7,540     (9,864     5,844   

Cash and cash equivalents at the beginning of the fiscal year

     51,853        44,313        34,449   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the fiscal year

   $ 44,313      $ 34,449      $ 40,293   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

      

Income taxes paid

   $ 4,616      $ 3,426      $ 2,479   
  

 

 

   

 

 

   

 

 

 

Interest paid

   $ 1      $ 4      $ 3   
  

 

 

   

 

 

   

 

 

 

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

 

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LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

 

1. NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

a. Nature of the Business

Learning Tree International, Inc. and subsidiaries (“we,” “us,” or “our”) develop, market and deliver a broad proprietary library of instructor-led classroom courses that are designed to meet the professional development needs of managers and information technology (“IT”) professionals worldwide. These courses are delivered primarily at our leased education centers located in the United States, the United Kingdom, Canada, France, Sweden and Japan. Such course events are also conducted in hotel and conference facilities and at customer sites throughout the world. We also offer approximately two-thirds of our course titles to individuals located worldwide through Learning Tree AnyWare™, our patent-pending live online learning interface that allows individuals at any location to attend a live instructor-led Learning Tree class via the Internet. Our courses provide both breadth and depth of education across a wide range of technical and management disciplines, including operating systems, databases, computer networks, computer and network security, web development, programming languages, software engineering, open source applications, project management, business skills, and leadership and professional development.

We follow a 52- or 53-week fiscal year, with our quarter-end dates on the Friday nearest the end of the calendar quarter and our year-end dates on the Friday nearest the end of September. Accordingly, our fiscal year 2009 ended on October 2, 2009, our fiscal year 2010 ended on October 1, 2010, and our fiscal year 2011 ended on September 30, 2011. Thus, these consolidated financial statements report our consolidated financial position as of October 1, 2010, and September 30, 2011 and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for the fiscal years ended October 2, 2009, October 1, 2010 and September 30, 2011. Fiscal years 2009, 2010 and 2011 were each 52-week years.

 

b. Principles of Consolidation

The accompanying consolidated financial statements include the accounts of Learning Tree International, Inc. and our subsidiaries. All significant intercompany accounts and transactions have been eliminated. The following is a list of our subsidiaries:

Learning Tree International USA, Inc. (U.S.)

Learning Tree International, K.K. (Japan)

Learning Tree International, Ltd. (United Kingdom)

Learning Tree Limited (United Kingdom)

Learning Tree International S.A. (France)

Learning Tree International AB (Sweden)

Learning Tree International Inc. (Canada)

Learning Tree International Ltd. (Hong Kong)

Advanced Technology Marketing, Inc. (U.S.)

 

c. Revenue Recognition and Accounts Receivable

Our revenues are received from business entities and government agencies for the professional training of their employees. Course events range in length from one to five days, and average approximately three and a half days. As stated above, we follow a 52- or 53-week fiscal year. This method is used in order to better align our

 

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external financial reporting with the way we operate our business. Since all courses have a duration of five days or less, and all courses begin and end within the same calendar week, under the 52- or 53-week fiscal year method all revenues and related direct costs for each course event are recognized in the week and the fiscal quarter in which the event takes place.

We offer our customers a multiple-course sales discount referred to as a “Learning Tree Training Passport.” A Learning Tree Training Passport allows an individual Passport holder to attend up to a specified number of Learning Tree courses over a one or two-year period for a fixed price. For a Training Passport, the amount of revenue recognized for each attendance in a course is based upon the selling price of the Training Passport, the list price of the course taken, the weighted average list price of all courses taken and the estimated average number of courses Passport holders will actually attend. Upon expiration of each individual Training Passport, we record the difference, if any, between the revenues previously recognized and that specific Training Passport’s total invoiced price. The estimated attendance rate is based upon the historical experience of the average number of course events that Training Passport holders have been attending. The actual Training Passport attendance rate is reviewed at least semi-annually, and if the Training Passport attendance rates change the revenue recognition rate for active Training Passports and for Training Passports sold thereafter is adjusted prospectively.

We believe it is appropriate to recognize revenues on this basis in order to most closely match revenue and related costs, as the substantial majority of our Passport holders do not attend the maximum number of course events permitted under their Training Passport. We believe that the use of recent historical data is reasonable and appropriate because of the relative stability of the average actual number of course events attended by Passport holders.

The average attendance rate for all expired Training Passports has closely approximated the estimated rate we utilize. Although we have seen no material changes in the historical rates as the number of course titles has changed, we monitor such potential effects. In general, determining the estimated average number of course events that will be attended by a Training Passport holder is based on historical trends that may not continue in the future. These estimates could differ in the near term from amounts used in arriving at the reported revenue. If the estimates are wrong, we would record the difference between the revenues previously recognized for that Training Passport and the Training Passport selling price upon expiration of that Training Passport. Thus, the timing of revenue recognition may be affected by an inaccurate estimation, but the inaccuracy would have no effect on the aggregate revenue recognized over the one- to two-year life of each Training Passport.

For newer Passport products for which historical utilization data is not available, we assume that the estimated average number of courses to be attended is equal to the number of courses available on the Passport. This assumed utilization rate may be revised in future periods after sufficient time has passed to amass historical trends.

In addition to our Learning Tree Training Passports, we also offer a multiple-course sales discount referred to as Learning Tree Training Vouchers. With Learning Tree Training Vouchers, a customer buys the right to send a specified number of attendees to Learning Tree courses over a six to twelve-month period for a fixed price. Revenue is recognized on a pro rata basis for each attendance. For the majority of Training Vouchers with unused seats at the expiration of the Voucher, we record the pro rata selling price of the expired unused seats as revenue. At times we make a business decision to extend a Training Voucher beyond the normal twelve month expiration date. Training Vouchers purchased under government rate schedules have no expiration date.

Trade accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. We use estimates in determining the allowance for doubtful accounts receivable, based on our analysis of various factors, including our historical collection experience, current trends, specific identification of invoices which are considered doubtful, and a percentage of our past due accounts receivable. These estimates could differ from actual collection experience and are subject to adjustment. Our trade accounts receivable are written off when they are deemed uncollectible.

 

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d. Stock-Based Compensation

We estimate the fair value of share-based option awards on the date of grant using an option-pricing model. We estimate the fair value of share-based restricted stock units and restricted stock grants using the closing price of our stock on the date of grant. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by assumptions regarding a number of variables, including our expected stock price volatility, expected term and risk-free interest rates.

We analyzed our historical volatility to estimate the expected volatility. The risk-free interest rate assumption is based on the U.S. Treasury rate at the date of grant, which most closely resembles the expected life of our options. The estimated expected life represents the weighted-average period the stock options are expected to remain outstanding and has been determined based on the simplified method under Accounting Standards Codification (“ASC”) 718. We do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

As stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated pre-vesting forfeitures. Forfeitures were estimated based on historical experience. During fiscal year 2009, we reduced to zero the estimated forfeiture rate for executive personnel. The forfeiture rates for fiscal years 2010 and 2011 were zero.

 

e. Course Development Costs

Course development costs are charged to operations in the period incurred.

 

f. Advertising

Advertising costs are charged to expense in the period incurred. Advertising costs totaled $759, $731 and $913 in fiscal years 2009, 2010 and 2011, respectively.

 

g. Cash and Cash Equivalents, Available for Sale Securities, and Interest-bearing Investments

We consider highly liquid investments with remaining maturities of ninety days or less when purchased to be cash equivalents.

We classify certain of our investments in marketable securities as “available for sale”. We do not have any investments classified as “trading” or “held-to-maturity.” Our policy is to invest cash with issuers that have high credit ratings and to limit the amount of credit exposure to any one issuer.

As of September 30, 2011, we had a total of available for sale securities of $2,352 stated at fair market value, net of unrealized gains and losses. Those available for sale securities were highly liquid investments. We may sell our investments prior to their stated maturities for strategic purposes, in anticipation of credit deterioration or for duration management. These investments consist primarily of short-term corporate bonds, United States government agencies securities, both state taxable and tax-exempt issues.

Restricted interest-bearing investments at September 30, 2011 consisted of cash deposits of $7,792 (5,000 British Pounds) and $1,450 which were pledged as collateral to secure our obligations under leases for education center facilities located in the United Kingdom and the United States, respectively. The deposits are in our name and are in interest-bearing accounts with interest accruing to us and paid on an annual basis in the United Kingdom and on a monthly basis in the United States.

 

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In the United Kingdom, our representatives and the landlords’ representatives control the deposit (all are solicitors). They act jointly in the operation of the deposit account. The deposit will be released to us at the earlier of the end of the lease period or when certain financial ratios have been met.

In the United States, the deposit will be returned at the end of the lease term.

 

h. Prepaid Marketing Expenses

Prepaid marketing expenses primarily include the external costs associated with the design, printing, postage, list rental and handling of direct mail advertising materials to be mailed in the future. These costs are charged to expense in the month in which the advertising materials are mailed since the benefit period for such costs is short and the amount of future benefit is not practically measurable. Marketing expenses for fiscal years 2009, 2010 and 2011 were $14,793, $12,446, and $12,724 respectively.

 

i. Equipment, Property and Leasehold Improvements

Equipment, property and leasehold improvements are recorded at cost and depreciated or amortized using the straight-line method over the following estimated useful lives:

 

Education and office equipment

   3 to 5 years

Transportation equipment

   4 years

Accounting software

   7 years

Leasehold improvements

   20 years or the life of the lease, if shorter

Building

   30 years

Land, stated at cost, amounted to $1,342 during all periods presented.

Software amortization amounted to $494, $4 and $3 in fiscal years 2009, 2010 and 2011, respectively. Total depreciation and amortization expense amounted to $6,061 and $5,736 in fiscal years 2009 and 2010, respectively. In fiscal year 2011, depreciation and amortization expense was $4,616. Costs of normal maintenance and repairs and minor replacements are normally charged to expense as incurred. In those instances where we have determined we are contractually obligated to incur recurring repairs and maintenance costs related to our leased facilities, a provision is made in the financial statements at the earlier of the date the expense is incurred or the date of the obligation. The costs of assets sold or retired are eliminated from the accounts along with the related accumulated depreciation or amortization, and any resulting gain or loss is included in the statements of operations.

The fair value of a liability for an asset retirement obligation associated with a leased facility is recorded as an asset (leasehold improvements) and a liability when there is a legal obligation associated with the retirement of a long-lived asset and the amount can be reasonably estimated. See also Note 2 relating to asset retirement obligations.

 

j. Long-Lived Assets

We periodically review the carrying value of our long-lived assets, such as equipment, property and leasehold improvements for impairment or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In making such evaluations, we compare the expected future cash flows to the carrying amount of the assets. If the total of the expected future cash flows is less than the carrying amount of the assets, we are required to make estimates of the fair value of the long-lived assets in order to calculate the impairment loss equal to the difference between the fair value of the assets and their book value. We make significant assumptions and estimates in this process regarding matters that are inherently uncertain, such as estimating cash flows, remaining useful lives, discount rates and growth rates. The resulting cash flows are

 

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computed over an extended period of time, which subjects those assumptions and estimates to an even larger degree of uncertainty. While we believe that our estimates are reasonable, different assumptions regarding such cash flows could materially affect the valuation of long-lived assets.

 

k. Deferred Revenues

Deferred revenues primarily relate to unearned revenues associated with Training Passports, Training Vouchers and advance payments received from customers for course events to be held in the future.

 

l. Comprehensive Income

We report comprehensive income in the Consolidated Statements of Stockholders’ Equity and Comprehensive Income. Other comprehensive income (loss) represents changes in stockholders’ equity from non-owner sources and is comprised of foreign currency translation adjustments and unrealized losses on available-for-sale securities, net of tax. At the end of fiscal year 2011, accumulated other comprehensive income (loss) consisted of foreign currency translation adjustments of $(210) and unrealized losses on available for sale securities of $(7), compared to foreign currency translation adjustments of $181 and unrealized losses on available for sale securities of $(1) in fiscal year 2010.

 

m. Income Taxes

We provide for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) ASC 740, Income Taxes. Deferred income taxes result from temporary differences between the tax basis of assets and liabilities and the basis reported in our consolidated financial statements. Deferred tax liabilities and assets are determined based on the difference between financial statement and tax basis of assets and liabilities using enacted rates expected to be in effect during the year in which the differences reverse. Valuation allowances are provided against assets, including net operating losses, if it is anticipated that some or the entire asset may not be realized through future taxable earnings or implementation of tax planning strategies.

 

n. Foreign Currency

We translate the financial statements of our foreign subsidiaries from the local (functional) currencies to U.S. dollars. The rates of exchange at each fiscal year end are used for translating the assets and liabilities and the average monthly rates of exchange for each year are used for the statements of operations. Gains or losses arising from the translation of the foreign subsidiaries’ financial statements are included in the accompanying consolidated balance sheets as a separate component of stockholders’ equity. Gains or losses resulting from foreign currency transactions are included in the consolidated statements of operations.

To date, we have not sought to hedge the risk associated with fluctuations in currency exchange rates, and therefore we continue to be subject to such risk.

 

o. Deferred Facilities Rent

Operating Lease Activities:

We lease education center and administrative office space under various operating lease agreements. Certain lease agreements include provisions that provide for cash incentives, graduated rent payments and other inducements. We recognize rent expense on a straight-line basis over the related terms of such leases. The value of lease incentives and/or inducements, along with the excess of the rent expense recognized over the rentals paid, is recorded as deferred facilities rent in the accompanying consolidated balance sheets.

Lease Termination Activities:

We record liabilities for costs that will be incurred under a contract without economic benefit at estimated fair value. In the United Kingdom we have vacated space in leased facilities subject to operating leases and

 

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recorded the estimated liability associated with future rentals at the cease-use date. The fair value of the liability at the cease-use date was determined based on the remaining cash flows for lease rentals, and minimum lease payments, reduced by estimated sublease rentals and certain subtenant reimbursements that could be reasonably obtained for the property, discounted using a credit-adjusted risk-free rate. The liability is adjusted for changes, if any, resulting from revisions to estimated cash flows after the cease-use date, measured using the original historical credit-adjusted risk-free rate. Changes due to the passage of time are recognized as an increase in the carrying amount of the liability and as accretion expense. During fiscal year 2011, our general and administrative expense included a charge for $303 for an expected period of vacancy in our U.K. education facility.

 

p. Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values because of the short-term nature of these instruments. Available for sale securities are carried at market value.

 

q. Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

r. Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board, or FASB, issued guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.

In May 2011, the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.

Other recent accounting pronouncements issued by the FASB (including the Emerging Issues Task Force), the American Institute of Certified Public Accountants and the SEC did not, or management believes will not, have a material impact on our present or future consolidated financial statements.

 

2. ASSET RETIREMENT OBLIGATIONS

We record a liability equal to the fair value of the estimated cost to retire an asset. The asset retirement obligation (“ARO”) liability is recorded in the period in which the obligation meets the definition of a liability, which is generally when the asset is placed in service and whereby we have contractual commitments to remove leasehold improvements and to return the leased facility back to a specified condition when the lease terminates. For a facility lease, this is typically at the inception of the lease.

When the ARO liability is initially recorded, we increase the carrying amount of the related long-lived asset (leasehold improvements) by an amount equal to the calculated liability. The liability is subsequently accreted to

 

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its present value each period, and the capitalized cost is depreciated over the useful life of the related asset, which is the lease term. The ARO liability is recorded at fair value, and accretion expense (included in general and administrative expenses) is recognized over time as the discounted liability is accreted to its expected settlement value. The fair value of the ARO liability is measured using the expected future cash outflows related to the lease and calculated by using inflation rates in effect at the time of adoption and incorporating a market-risk premium, and discounted at our credit-adjusted risk-free interest rate at the time of adoption. Any difference between costs incurred upon settlement of an asset retirement obligation and the recorded liability will be recognized as a gain or loss in our earnings.

Each ARO liability is based on a number of assumptions requiring judgment. We cannot predict the type of revisions to these assumptions that will be required in future periods due to the availability of additional information, technology changes, the price of labor costs and other factors.

The following table presents the activity for our AROs, which primarily consist of classroom facilities at our education centers:

 

     Fiscal Year Ended  
     October 1,
2010
    September 30,
2011
 

ARO balance, beginning of year

   $ 3,458      $ 3,291   

Liabilities incurred

     0        279   

Accretion expense

     178        191   

Gain on settlement of ARO liability

     (332     (103

Foreign currency translation

     (13     (60
  

 

 

   

 

 

 

ARO balance, end of year

   $ 3,291      $ 3,598   
  

 

 

   

 

 

 

 

3. INCOME TAXES

We file a consolidated United States Federal income tax return which includes all of our domestic operations. Our domestic subsidiaries also file income tax returns based on our operations in certain state and local jurisdictions. We file separate tax returns for each of our foreign subsidiaries in the countries in which they operate.

Income before provision for income taxes consists of the following:

 

     Fiscal Year Ended  
     October 2,
2009
    October 1,
2010
     September 30,
2011
 

Domestic

   $ (748   $ 2,519       $ 2,847   

Foreign

     3,779        3,235         2,505   
  

 

 

   

 

 

    

 

 

 

Total

   $ 3,031      $ 5,754       $ 5,352   
  

 

 

   

 

 

    

 

 

 

 

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The provision for income taxes consists of the following:

 

     Fiscal Year Ended  
     October 2,
2009
    October 1,
2010
    September 30,
2011
 

Current tax provision:

      

U.S. Federal

   $ 1,061      $ (2,228   $ (35

State

     197        381        339   

Foreign

     709        1,119        930   
  

 

 

   

 

 

   

 

 

 
     1,967        (728     1,234   
  

 

 

   

 

 

   

 

 

 

Deferred tax provision:

      

U.S. Federal

     295        2,179        731   

State

     (217     (25     13   

Foreign

     (217     (60     132   
  

 

 

   

 

 

   

 

 

 
     (139     2,094        876   
  

 

 

   

 

 

   

 

 

 

Provision for income taxes

   $ 1,828      $ 1,366      $ 2,110   
  

 

 

   

 

 

   

 

 

 

The following is a reconciliation of the provision for income taxes to the United States Federal statutory tax rate:

 

     Fiscal Year Ended  
     October 2,
2009
    Effective
Tax rate
%
    October 1,
2010
    Effective
Tax rate
%
    September 30,
2011
    Effective
Tax rate
%
 

Income taxes at the U.S. statutory rate

   $ 1,061        35   $ 2,014        35   $ 1,855        35

Tax-exempt interest

     (114     (4     (47     (1     (2     0   

Equity compensation

     482        16        335        6        13        0   

Penalties

     140        5        1        0        0        0   

Other permanent differences

     124        4        166        3        485        9   

Effects of foreign taxes and tax credits

     (131     (4     (205     (3     (193     (4

Dividend from foreign subsidiaries

     666        22        0        0        0        0   

State income taxes

     (21     (1     168        3        148        2   

Uncertain tax positions

     90        3        (1,066     (19     (184     (3

Change in valuation allowance

     (469     (16     0        0        0        0   

Other

     0        0        0        0        (12     0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total provision for income taxes

   $ 1,828        60   $ 1,366        24   $ 2,110        39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Deferred income tax assets and liabilities consist of the following:

 

     Fiscal Year Ended  
     October 1,
2010
    September 30,
2011
 

Domestic operations:

    

Deferred tax assets:

    

Deferred facilities rent charges

   $ 1,876      $ 1,972   

Foreign tax credit carryforwards

     286        286   

State tax operating loss carryforwards

     4        4   

Accrued vacation

     425        475   

Equity compensation

     300        436   

Depreciation and amortization

     2,468        2,239   

Deferred benefits for uncertain tax positions

     1,792        932   

Other

     68        55   

Deferred tax liabilities:

    

Prepaids

     (438     (282
  

 

 

   

 

 

 

Domestic net deferred tax assets

     6,781        6,117   

Foreign operations:

    

Deferred tax assets:

    

Deferred benefits for uncertain positions

     172        90   

Depreciation and other

     1,243        1,021   

Deferred tax liabilities:

    

Deferred revenue

     (272     0   

Depreciation and other

     (21     (276
  

 

 

   

 

 

 

Foreign net deferred tax assets

     1,122        835   
  

 

 

   

 

 

 

Domestic and foreign deferred tax assets

     7,903        6,952   

Valuation allowances

     0        0   
  

 

 

   

 

 

 

Net deferred tax assets

   $ 7,903      $ 6,952   
  

 

 

   

 

 

 

As of September 30, 2011, we had foreign tax credit carry-forwards of approximately $286, which expire, if unused, in the years 2014 to 2020.

Significant management judgment is required in determining our provision for income taxes and in determining whether any deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carry-forwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be realized. Realization is based on our ability to generate sufficient future taxable income.

As of the end of our fourth quarter of fiscal year 2009, we reversed the valuation allowance for our foreign tax credit carryovers and for our deferred tax assets in a foreign jurisdiction. Because of changes we made to our intercompany agreements with our foreign subsidiaries and the improved financial performance of their operations, we determined that it was more likely than not that the benefits from the foreign tax credit carryovers would be realized. We also determined that it was more likely than not that we would realize the benefits for the deferred tax assets in the foreign jurisdiction because of the improved financial performance of our operations in the foreign jurisdiction. The reversal of the valuation allowances for these items resulted in a net benefit of approximately $469.

 

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The aggregate change in the balance of gross unrecognized tax benefits, which excludes interest and penalties, is as follows:

 

     Fiscal Year Ended  
     October 2,
2009
    October 1,
2010
    September 30,
2011
 

Balance, beginning of year

   $ 5,391      $ 3,808      $ 2,033   

Increases related to tax positions taken during a prior period

     0        0        0   

Decreases related to tax positions taken during a prior period

     0        0        0   

Increases related to tax positions taken during the current period

     20        20        5   

Decreases related to settlements with taxing authorities

     0        0        (417

Decreases related to expiration of the statute of limitations

     (1,603     (1,795     (462
  

 

 

   

 

 

   

 

 

 

Balance end of year

   $ 3,808      $ 2,033      $ 1,159   
  

 

 

   

 

 

   

 

 

 

For fiscal year 2011, $268 of our released unrecognized tax benefits favorably affected our effective tax rate. As of September 30, 2011, $960 of our total unrecognized tax benefits would favorably affect our effective tax rate if recognized. For fiscal year 2011, we recognized an expense of $81 attributable to interest for uncertain tax positions. As of September 30, 2011, we had $720 accrued for interest and $240 accrued for penalties for uncertain tax positions. We do not believe it is reasonably possible that the amount of unrecognized tax benefits will significantly change within the next 12 months due to changes in circumstances other than the normal expiration of the statute of limitations.

We file income tax returns in the United States and various state, local, and foreign jurisdictions, and remain subject to examinations by these jurisdictions for fiscal years 2007 through 2011.

We have not provided for United States federal income and foreign withholding taxes of international subsidiaries’ undistributed earnings as of September 30, 2011, because such earnings are intended to be reinvested indefinitely. The undistributed earnings were approximately $22,220 as of September 30, 2011. Because of the availability of United States foreign tax credits, it is not practicable to determine the United States federal income tax liability that would be payable if such earnings were not reinvested.

 

4. COMMITMENTS AND CONTINGENCIES

 

a. Commitments

We have various non-cancelable operating leases for facilities that expire at various dates through 2021 and certain leases for office equipment requiring annual payments as follows:

 

Fiscal Year Ending

   Minimum
Lease
Payments
     Less
Sublease
Proceeds
     Net Lease
Commitments
 

2012

   $ 12,404       $ 2,167       $ 10,237   

2013

     11,499         2,105         9,394   

2014

     11,449         1,986         9,463   

2015

     10,980         800         10,180   

2016

     9,988         415         9,573   

Thereafter

     19,038         866         18,172   
  

 

 

    

 

 

    

 

 

 
   $ 75,358       $ 8,339       $ 67,019   
  

 

 

    

 

 

    

 

 

 

 

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Rental expense, not including sublease income, was $12,693, $12,123 and $12,458 for fiscal years 2009, 2010 and 2011, respectively. Sublease rental income for fiscal years 2009, 2010 and 2011 was $2,806, $2,625 and $2,188, respectively.

 

b. Contingencies

Currently, and from time to time, we are involved in litigation incidental to the conduct of our business. We are not a party to any lawsuit or proceeding that, in the opinion of management, is likely to have a material adverse effect on our consolidated financial position or results of operations, except as noted below.

As previously disclosed, on April 7, 2010 we paid $4.5 million to settle a contract dispute. The terms of the settlement were consistent with our previously disclosed reserves, $0.2 million accrued in fiscal year 2008 and $4.3 million accrued in fiscal year 2009, and accordingly did not have an effect on our financial statements in fiscal year 2010.

 

5. STOCKHOLDERS’ EQUITY

During fiscal year 2009 we purchased 2,642,386 shares of Common Stock at a cost of $25,161. During fiscal year 2010 we purchased 438,853 shares of Common Stock at a cost of $4,839. During fiscal year 2011 we purchased 47,058 shares of Common stock at a cost of $428. All of our Common Stock repurchases were made in open-market transactions and not pursuant to any publicly traded plans. We may make purchases of common stock in the future, but we have no commitments to do so.

 

6. STOCK-BASED COMPENSATION

Effective January 23, 2007, our stockholders approved the 2007 Equity Incentive Plan (our “2007 Plan”). Our 2007 Plan is administered by the Compensation and Stock Option Committee of our Board of Directors. Our 2007 Plan permits the granting of nonqualified stock options, incentive stock options, stock appreciation rights (or SARs), restricted stock, restricted stock units, performance units and performance shares to our employees, officers, directors and consultants in an amount up to an aggregate of 1,000,000 shares of Common Stock. Option awards have been granted with an exercise price equal to the market price of our stock at the date of grant and generally vest one third per year over three years (in some instances, subject to achieving certain financial targets in the year with respect to which they are granted) and have five-year contractual terms. However, the exercise price, vesting schedule and period required for full exercisability of the options is at the discretion of the Compensation and Stock Option Committee of our Board of Directors. We recognize compensation cost for these awards on a straight-line basis (or, on a graded basis for those options with performance conditions) over the requisite service period for the entire award, which is equal to the vesting period. We have a policy of issuing new shares of Common Stock to satisfy share option exercises.

Our 1999 Stock Option Plan terminated upon shareholder approval of our 2007 Plan, and no further grants of awards can be made under that plan although the rights of holders of options previously granted and outstanding under that plan were not affected. The fair value of each option award was estimated on the date of grant using a Black-Scholes option-pricing formula that used the assumptions noted in the following table. Expected volatilities were based on the historical volatility of our stock measured over a period commensurate with the expected life of granted stock options. The expected term of options represented the period of time that options granted were expected to be outstanding and was determined based on the simplified method as discussed in ASC 718, as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The risk-free interest rate assumption was based on the U.S. Treasury rate at the date of the grant, which most closely resembled the expected life of options. The expected dividend yield was 0%.

 

     Year Ended
October 2, 2009
 

Expected volatility

     41% – 46%   

Expected dividends

     —     

Expected life (in years)

     3.60 – 3.70   

Risk-free interest rate

     1.3% – 2.2%   

 

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A summary of option activity under the 2007 Plan and previous plans during fiscal years 2009, 2010, and 2011 is presented below:

 

Options

   Shares     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
 

Outstanding at October 3, 2008

     643,000      $ 14.04         

Options granted

     225,000      $ 10.52         

Options exercised

     0      $ 0.00         

Options forfeited, expired and unearned

     (476,000   $ 12.97         
  

 

 

         

Outstanding at October 2, 2009

     392,000      $ 13.32         

Options granted

     0      $ 0.00         

Options exercised

     (49,000   $ 10.97         

Options forfeited, expired and unearned

     (183,000   $ 13.65         
  

 

 

         

Outstanding at October 1, 2010

     160,000      $ 13.66         2.2       $ 0.00   

Options granted

     0      $ 0.00         

Options exercised

     0      $ 0.00         

Options forfeited, expired and unearned

     (5,000   $ 14.85         
  

 

 

         

Outstanding at September 30, 2011

     155,000      $ 13.62         1.2       $ 0.00   

Vested and expected to vest at September 30, 2011

     17,000      $ 10.22         1.0       $ 0.00   

Exercisable at September 30, 2011

     138,000      $ 14.02         1.8       $ 0.00   

The weighted average grant-date fair value of options granted during fiscal years 2009 was $3.57. There were no options granted in fiscal years 2010 and 2011. The total intrinsic value of options exercised during fiscal year 2010 was $102. There were no options exercised in fiscal years 2009 or 2011.

We had 16,668 non-vested options outstanding as of September 30, 2011.

Stock-based compensation expense related to employee stock options is included in cost of revenues and operating expenses consistent with the respective employee salary costs. These costs totaled $559, $106 and $66 for fiscal years 2009, 2010 and 2011, respectively. As stock-based compensation expense recognized in the consolidated statement of operations is based on awards ultimately expected to vest, it has been reduced for estimated pre-vesting forfeitures. During fiscal year 2009, we reduced to zero the estimated forfeiture rate for executive personnel.

The total income tax benefit (expense) relating to stock options and recognized in the consolidated statement of operations was $187, $187 and $212 for fiscal years 2009, 2010 and 2011, respectively. As of September 30, 2011, there was $15 of total unrecognized compensation costs related to non-vested stock options granted under the 2007 Plan. That cost is expected to be recognized over a weighted-average remaining period of less than one year.

During fiscal year 2010 we received $497 for the exercise of stock options.

Restricted Stock

As noted above, our 2007 Plan permits us to grant shares of restricted stock. Shares awarded under the plan entitle the shareholder to all rights of common stock ownership except that the shares may not be sold, transferred, pledged, exchanged or otherwise disposed of during the restriction period, and may be repurchased by us for nominal consideration if the employee ceases to be employed by us during that period. The restriction period is determined by the Compensation and Stock Option Committee of our Board of Directors.

 

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During fiscal year 2009, we issued 42,519 shares of restricted stock to certain employees and outside directors. The vesting of these shares was subject to meeting certain financial performance targets during fiscal year 2009, which were not met. As a result, none of these shares will vest.

We did not issue any shares of restricted stock during fiscal years 2010 and 2011.

The fair value of our restricted stock awards is equal to the market price of our stock on the date of grant. The following table provides a summary of restricted stock activity for fiscal years 2009, 2010 and 2011:

 

     Shares     Weighted Average
Grant Date Fair
Value
 

Nonvested at October 3, 2008

     23,827      $ 15.10   

Granted

     42,519      $ 10.61   

Vested

     (10,705   $ 14.46   

Cancelled and forfeited

     (42,519   $ 10.61   
  

 

 

   

Nonvested at October 2, 2009

     13,122      $ 15.61   

Granted

     0      $ 0.00   

Vested

     (10,711   $ 14.47   

Cancelled and forfeited

     (131   $ 20.70   
  

 

 

   

Nonvested at October 1, 2010

     2,280      $ 20.70   

Granted

     0      $ 0.00   

Vested

     (2,280   $ 20.70   

Cancelled and forfeited

     0      $ 20.70   
  

 

 

   

Nonvested at September 30, 2011

     0      $ 20.70   
  

 

 

   

For fiscal years 2009, 2010 and 2011 we recognized $96, $29 and $4, respectively, in compensation costs related to restricted stock awards.

Restricted Stock Units

As noted above, our 2007 Plan permits us to grant restricted stock units, which entitle holders to receive shares of common stock upon vesting. During fiscal year 2011, we granted 66,847 restricted stock units to certain employees and outside directors. These stock units were earned subject to meeting certain financial performance targets during fiscal year 2011, which were met. As a result, these stock units will vest ratably on December 7, over the next three fiscal years. A summary of the stock unit activity is as follows:

 

     Restricted Stock
Units
    Weighted Average
Grant Date Fair
Value
 

Nonvested at October 2, 2009

     0      $ 0.00   

Granted

     57,135      $ 10.52   

Vested

     0      $ 0.00   

Forfeited

     (1,764   $ 10.52   
  

 

 

   

Nonvested at October 1, 2010

     55,371      $ 10.52   

Granted

     66,847      $ 10.85   

Vested

     (18,455   $ 10.52   

Forfeited

     (1,290   $ 10.72   
  

 

 

   

Nonvested at September 30, 2011

     102,473      $ 10.73   
  

 

 

   

For fiscal years 2010 and 2011 we recognized $324 and $531, respectively, in compensation costs related to restricted stock units.

 

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7. EMPLOYEE BENEFIT PLANS

We have adopted a defined contribution plan for the benefit of our domestic employees who have met the eligibility requirements. The Learning Tree International 401(k) Plan (our “401(k) Plan”) is a profit-sharing plan qualifying under Section 401(k) of the Internal Revenue Code.

Qualified employees may elect to contribute to our 401(k) Plan on a pre-tax basis. The maximum amount of employee contribution is subject only to statutory limitations. Prior to April 1, 2009, we made contributions at a rate of 75% of the first 6% of employee compensation contributed. Starting April 1, 2009 we made contributions at a rate of 50% of the first 2% of employee compensation contributed. Starting October 1, 2010 we made contributions at a rate of 30% of the first 6% of employee compensation contributed. We contributed $532, $158 and $165 to our 401(k) Plan for fiscal years 2009, 2010, and 2011, respectively.

We have adopted or participate in country-sponsored defined contribution plans for the benefit of our employees of all of our foreign subsidiaries. Contributions to these plans are subject to tenure and compensation level criteria, as well as certain limitations. For fiscal years 2009, 2010 and 2011 our cost for these plans was approximately $576, $531, and $640, respectively.

 

8. EARNINGS PER SHARE

Income per share—basic is computed by dividing net income by the weighted average number of shares of Common Stock outstanding during the period. Income per share—diluted includes the dilutive effect, if any, of nonvested restricted stock grants, nonvested restricted stock units and of outstanding options to purchase common stock, using the treasury stock method. For fiscal years 2009, 2010, and 2011, 391,949, 159,986 and 155,475 stock options, respectively, were anti-dilutive and excluded from the Income per share—diluted calculation. For fiscal year 2009, nonvested restricted common stock grants of 13,122 were anti-dilutive and excluded from the Income per share—diluted calculation.

The following table sets forth the calculation of basic and diluted earnings per share:

 

     Fiscal Year Ended  
     October 2,
2009
     October 1,
2010
     September 30,
2011
 

Numerator:

        

Net income

   $ 1,203       $ 4,388       $ 3,242   
  

 

 

    

 

 

    

 

 

 

Denominator:

        

Weighted-average shares outstanding—basic

     15,181         13,722         13,496   

Dilutive effect of stock options, restricted stock and restricted stock units

     —           17         18   
  

 

 

    

 

 

    

 

 

 

Weighted-average shares outstanding—diluted

     15,181         13,739         13,514   
  

 

 

    

 

 

    

 

 

 

Income Per Share:

        

Income per common share—basic

   $ 0.08       $ 0.32       $ 0.24   
  

 

 

    

 

 

    

 

 

 

Income per common share—diluted

   $ 0.08       $ 0.32       $ 0.24   
  

 

 

    

 

 

    

 

 

 

 

9. OPERATING SEGMENT INFORMATION

Our worldwide operations involve the design and delivery of instructor-led classroom training courses and related services to business and government organizations. The training and education we offer is presented by our instructors in a virtually identical manner in every country in which we operate, regardless of whether presented in leased classroom space or external facilities, of the content of the class being taught, the language of the presentation or the printed course materials, or of the location or method of distribution. We did not have sales to any single customer that amounted to 10% or more of our revenues in fiscal years 2009, 2010 or 2011.

 

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We conduct and manage our business globally, and our management makes financial decisions and allocates resources based on the information we receive from our internal management systems. Our reportable segments are: the United States, Canada, the United Kingdom, France, Sweden and Japan. As a measure of segment performance, our Chief Operating Decision Maker reviews revenues and gross profit for each segment. Intersegment sales were $605, $1,216 and $2,058 in fiscal years 2009, 2010 and 2011, respectively.

Summarized financial information by reportable segment for fiscal years 2009, 2010 and 2011, is as follows:

 

     Fiscal Year Ended  
     October 2,
2009
     October 1,
2010
     September 30,
2011
 

Revenues:

        

United States

   $ 64,939       $ 65,624       $ 64,708   

Canada

     13,468         13,025         13,972   

United Kingdom

     30,651         27,899         32,077   

France

     14,535         12,344         12,936   

Sweden

     6,333         6,539         8,095   

Japan

     2,633         2,039         1,994   
  

 

 

    

 

 

    

 

 

 

Total

   $ 132,559       $ 127,470       $ 133,782   
  

 

 

    

 

 

    

 

 

 

Gross profit:

        

United States

   $ 35,347       $ 34,231       $ 34,264   

Canada

     8,487         7,826         8,539   

United Kingdom

     15,438         13,763         15,594   

France

     8,520         7,019         7,233   

Sweden

     3,765         4,024         5,164   

Japan

     1,759         1,409         1,347   
  

 

 

    

 

 

    

 

 

 

Total

   $ 73,316       $ 68,272       $ 72,141   
  

 

 

    

 

 

    

 

 

 

Depreciation and amortization (included in gross profit):

        

United States

   $ 2,130       $ 2,321       $ 1,732   

Canada

     323         316         181   

United Kingdom

     935         958         726   

France

     491         332         253   

Sweden

     166         163         101   

Japan

     21         26         10   
  

 

 

    

 

 

    

 

 

 

Total

   $ 4,066       $ 4,116       $ 3,003   
  

 

 

    

 

 

    

 

 

 

 

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Summarized financial information by reportable segment for fiscal years 2009, 2010 and 2011 is as follows:

 

     Fiscal Year Ended  
     October 2,
2009
     October 1,
2010
     September 30,
2011
 

Total assets:

        

United States

   $ 92,505       $ 55,356       $ 55,175   

Canada

     5,374         5,311         4,879   

United Kingdom

     23,381         23,898         25,588   

France

     9,035         8,221         8,630   

Sweden

     5,115         5,806         6,038   

Japan

     1,410         1,581         1,842   
  

 

 

    

 

 

    

 

 

 

Total

   $ 136,820       $ 100,173       $ 102,152   
  

 

 

    

 

 

    

 

 

 

Long-lived assets:

        

United States

   $ 13,397       $ 11,974       $ 11,700   

Canada

     601         426         561   

United Kingdom

     4,624         3,852         4,909   

France

     1,919         1,280         1,133   

Sweden

     494         275         187   

Japan

     97         93         84   
  

 

 

    

 

 

    

 

 

 

Total

   $ 21,132       $ 17,900       $ 18,574   
  

 

 

    

 

 

    

 

 

 

Capital expenditures:

        

United States

   $ 952       $ 1,992       $ 2,667   

Canada

     72         200         397   

United Kingdom

     376         434         2,178   

France

     687         264         313   

Sweden

     46         64         93   

Japan

     1         25         9   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,134       $ 2,979       $ 5,657   
  

 

 

    

 

 

    

 

 

 

 

10. DEFERRED FACILITIES RENT AND OTHER

The following tables show details of the following line items in our consolidated balance sheets.

Current Portion of Deferred Facilities Rent and Other

 

     Fiscal Year Ended  
     October 1,
2010
     September 30,
2011
 

Deferred rent

   $ 505       $ 555   

Sublease loss accruals

     793         439   
  

 

 

    

 

 

 
   $ 1,298       $ 994   
  

 

 

    

 

 

 

Deferred Facilities Rent and Other

 

     Fiscal Year Ended  
     October 1,
2010
     September 30,
2011
 

Deferred rent

   $ 4,913       $ 5,474   

Sublease loss accruals

     938         814   

Other minimum lease payments

     584         638   
  

 

 

    

 

 

 
   $ 6,435       $ 6,926   
  

 

 

    

 

 

 

 

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11. AVAILABLE FOR SALE SECURITIES

Securities are classified consistent with how we manage, monitor, and measure them on the basis of the nature and risks of the security. The amortized cost of these securities and their respective fair values are as follows:

 

September 30, 2011:    Amortized
Cost Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value  

Commercial Paper

   $ 0       $ 0       $ 0      $ 0   

Corporate Securities

     2,363         0         (11     2,352   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 2,363       $ 0       $ (11   $ 2,352   
  

 

 

    

 

 

    

 

 

   

 

 

 
October 1, 2010:    Amortized
Cost Basis
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair Value