Item 1. BUSINESS.
As used in this Report (unless the context otherwise requires) “Learning Tree”, “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 information technology (“IT”) professionals and managers. Since our founding in 1974, we have provided high-quality training to over 2.4 million IT professionals and managers. In fiscal year 2015, while presenting courses in 38 countries, we trained 59,925 course participants from approximately 7,000 organizations, including large national and multinational companies, government organizations, and small and medium-size companies.
We offer a broad proprietary library of intensive instructor-led courses from one to five days in length, which at October 2, 2015 comprised 345 different course titles representing 4,503 hours of training, including 122 multi-day IT course titles, 70 multi-day management course titles, and 153 1-Day Boot Camp 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, Canada, Sweden and Japan, and with the sale of our French subsidiary in February 2015, through a licensee arrangement in France. In fiscal year 2015 we generated approximately 40% of our revenues outside of the United States. We coordinate, plan and deliver our courses at our own education centers, external hotel and conference facilities and customer sites worldwide. 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.
We use a well-defined systematic approach to develop and update the Learning Tree course library so as to provide training that is immediately applicable by course participants to their work in a broad range of applications and industries. After assessing market need, courses may be translated into Swedish and Japanese. Our proprietary course development process also allows us to efficiently and effectively customize our courses to specific customer requirements for delivery at their sites.
Based on their sophistication and quality, select Learning Tree courses are recommended for one to two semester hours of college credit by the American Council on Education. In the United Kingdom, our courses can be used to gain a Master’s degree in Professional Computing at Staffordshire University under a program administered by the Faculty of Computing, Engineering and Technology. We are a trusted continuing professional education (“CPE”) provider of the International Information Systems Security Certification Consortium. In addition, we are on the National Association of State Boards of Accountancy National Registry of CPE sponsors; a Registered Education Provider of the Project Management Institute; an APMG International Accredited Training Organization; an International Institute of Business Analysis (“IIBA”) Endorsed Education Provider; and a SFIA Foundation Accredited Training Partner.
Business Strategy
Our long-term objective is to grow our position as a leading worldwide provider of training and workforce development to IT professionals and managers and to become the provider of choice for large national and multinational companies, medium-size companies and government organizations. Over the past few years, we have started working with clients to address the life cycle of organizational performance challenges. To that end, we recently introduced IT Workforce Optimization Solutions, a comprehensive suite of services to support IT organizations in: defining organizational structure, processes, and job roles; assessing current staff skills and abilities; and implementing performance improvements by enhancing the skills and abilities of staff and helping to implement process improvements. Workforce Optimization Solutions augments and enhances our core training capabilities enabling Learning Tree to partner with our customers in helping them develop a high-performing organization through workforce development and process improvement.
Commitment to Quality Training. For the past 41 years, we have set the highest standards of excellence in educating and training IT professionals and managers 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 instructional delivery, including our patented MagnaLearn™ Instructional Enhancement System, AdaptaLearn™ Hands-On Learning System, After-Course Instructor Coaching, Computing Sandbox for Practice and Experiments, as well as the latest up-to-date hands-on course equipment, continuing 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. As of October 2, 2015, we had 605 course instructors located around the world. Learning Tree instructors are practicing professionals with expert subject knowledge. Our average instructor has over 20 years of “hands-on, real world” experience in the fields that they teach. Learning Tree instructors teach an average of approximately 9 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 IT and management 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 IT and management 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 of over 90%.
Broad Proprietary Course Library. We offer a broad, proprietary course library which as of October 2, 2015 totaled 345 instructor-led one- to five-day course titles comprising a total of 4,503 hours of classroom instruction covering a wide range of IT and management topics.
The following table itemizes the number of Learning Tree course titles by curriculum as of October 2, 2015:
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 professional IT staff and managers. 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 our performance-based management training platform. Our 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.
As of October 2, 2015, we offered 122 multi-day titles in our IT curriculum, compared to 117 multi-day titles at the end of fiscal year 2014. As of October 2, 2015, we offered 70 multi-day titles in our management curriculum, compared to 62 multi-day titles at the end of fiscal year 2014. During fiscal year 2015 we developed and added 153 one-day courses to our course library, bringing the total number of courses offered to 345. To assist participants in their long-term professional development, we offer Learning Tree Specialist and Expert Certifications in 25 different disciplines in which participants earn their Learning Tree-issued certification by successfully completing either two or three specific Learning Tree courses in a particular field, and demonstrating mastery by passing the certification examination associated with the specific courses. Expert Certification also requires the successful completion of an in-depth, hands-on assessment exam.
Over our 41-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 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 2015, in addition to the 153 new 1-Day Boot Camp course titles, we introduced 20 new multi-day course titles and retired 8 multi-day titles. 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 our advertised 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 605 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 our Learning Tree courses both domestically and internationally.
In fiscal year 2015, we presented 5,128 course events at Learning Tree Education Centers and at third-party and customer sites in a total of 38 countries. We currently operate wholly owned subsidiaries in the United States (since 1974), 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. In fiscal year 2015 our foreign operations produced approximately 40% of our revenues. See Note 9 of “Notes to Consolidated Financial Statements” for certain financial data regarding operating segments and geographic regions. 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, medium-sized companies and government organizations throughout the world, and seek to build continuing relationships both with these 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. Of our 100 largest clients in fiscal year 2010, 99 were still our clients five years later in fiscal year 2015. In fiscal year 2015, we provided training to 59,925 course participants, and over 150 of our corporate and government customers purchased more than $100,000 of Learning Tree training. No one commercial customer or government agency accounted for 10% or more of our revenues in fiscal year 2015.
Backlog. Our sales backlog at October 2, 2015 was $17.8 million. This compares to a sales backlog of $21.8 million at October 3, 2014. We reasonably expect the entire backlog to be executed within fiscal year 2016.
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 IT professionals and managers 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. We send targeted, personalized e-mails through our automated e-mail marketing system to advise prospective course participants of upcoming events. 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 Form 10-K.
As of October 2, 2015, our telemarketing sales team consisted of 78 telemarketers and related support staff. 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 advanced business intelligence techniques to identify regions of our database that are profitable to mail, email and/or call, and those that are not.
As of October 2, 2015, we employed a field sales team of 34 direct field sales representatives and related support staff. Our direct sales force primarily focuses on selling training and services that are delivered on-site for our customers at their locations.
To encourage repeat purchases from existing customers, we have introduced My Learning Tree for attendees and managers of attendees. Learning Tree customers are provided with their own ‘My Learning Tree’ account, which attendees and their managers can use to access a growing list of unique benefits. We also offer multiple-course discount programs-Learning Tree “Training Passports” and Learning Tree “Training Vouchers”-and provide the Specialist and Expert 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 two, 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 Voucher program allows corporate customers to buy Vouchers in quantities from three to hundreds at volume-discounted prices, for future courses to be taken by any person in the customer organization generally over a twelve-month period.
Markets and Competition
Instructor-Led Training. The IT and management 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 introduce, maintain and 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 IT training and management education. 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 multi-vendor configurations. We leverage the real-world expertise of Learning Tree instructors and authors to ensure that we offer courses 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 simulation-centric educational methodology.
We believe that many competitive third-party training providers-whether in IT or management-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 four 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 many organizations must supplement their internal training resources with externally supplied training. This is 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 IT and management 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’s September 30 budget year, many who are on the calendar year, and many whose fiscal years coincide with the United Kingdom 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.
E-Learning and Blended Learning. IT and management 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, consistent with the prior ten years, for the 2015 State of the Industry report, instructor-led classroom delivery continued to be the most widely used method for delivery of corporate training, with approximately 66% of all training being instructor-led. 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. The use of technology-based IT training formats, such as Internet-based e-learning, has gained 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 technology-based training formats and how they might effectively be integrated into our training programs. We developed Learning Tree AnyWare™, our proprietary live online learning platform that integrates participants in remote online locations into live class events in another location. Remote participants use an ordinary Internet connection to connect to our AnyWare™ 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 two in-class MagnaLearn™ projection screens. They are able to participate in discussions, ask questions, work in breakout sessions, and complete the same hands-on exercises under the guidance of an expert instructor 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 providing greater flexibility for our customers by providing them with more scheduled course dates from which to choose. With the use of our AnyWare™ product, our clients anywhere in the world can choose to participate in any course event being taught at any of our education centers, without the need to travel or commute to the actual course site.
As of October 2, 2015, we had a total of 43 Learning Tree AnyWare™ Learning Centers, including 35 stand-alone AnyWare™ Learning Centers in strategic locations in North America, six in the United Kingdom, two in Sweden, and another nine located within our North American Education Centers. These AnyWare™ Learning Centers provide our customers convenient access to our courses via our AnyWare™ platform in a setting optimized for equipment, communication, Internet connectivity speed, and learning environment, at a location near to where they live or work, eliminating any added travel costs to attend a course at one of our education centers. Our typical stand-alone Learning Tree AnyWare™ Learning Center has the capacity to handle three to five attendees per day. They are typically located in short-term rental facilities that allow us to more easily address changes in demand. The AnyWare™ Learning Centers located within our existing North American Education Centers have the capacity to handle eight attendees each with some able to accommodate up to 15 attendees.
Employees
Our executive officers have extensive experience in the training and education industry with an average of over 20 years of experience with us and over 29 years of relevant industry experience.
On October 2, 2015, we had a total of 343 full-time equivalent employees, 116 of whom were employed outside the United States. We also utilized the services of 605 expert instructors to teach our courses on an “as-needed” basis.
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.
“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”, “ANYWARE”, “ANYWARE” and Design, “ANYWARE LEARNING CENTER”, “ANWARE LIVE”, “ANYWARE LIVE” and Design, “LEARNING TREE ANYWARE ENTERPRISE”, “LEARNING TREE ANYWARE ENTERPRISE” and Design, and “LEARNING TREE ANYWARE YOUR EXPERTISE DELIVERED ANYWHERE!” and Design, “BE THERE! …WITH ANYWARE”, “EDUCATION IS OUR BUSINESS”, “EDUCATION YOU CAN TRUST”, “WE BRING EDUCATION TO LIFE”, “PRODUCTIVITY THROUGH EDUCATION”, “REALITYPLUS” and 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”, “ADAPTALEARN”, “ADAPTALEARN” and Design, “MY GOLD CLUB” and Design, “MY LEARNING TREE”, “MY LEARNING TREE” and Design, “LIVELINKED”, “LIVELINKED” and Design, “LIVELINKED CLASSROOM”, “LIVELINKED CLASSROOM” and Design, “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 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 worldwide basis.
We have obtained patent protection in the United States and a number of foreign countries related to our Learning Tree AnyWareTM live online learning platform.
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 Title IV funding and are generally exempt from the governmental regulation of public education providers. However, our results of operations could be affected by current or future licensing or regulatory requirements.
Available Information
We make available free of charge on our website (www.learningtree.com) our Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such material is electronically filed or furnished to the SEC. Information contained on our website is not part of this Form 10-K. Our 10-K may also be obtained free of charge by written request to the Chief Financial Officer, Learning Tree International, Inc., 1831 Michael Faraday Dr., Reston, VA 20190. Members of the public may read and copy any document that Learning Tree files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information that issuers, including Learning Tree, file electronically with the SEC.
Item 1A.
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.
Price Fluctuations and Limited Market for Our Common Stock
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:
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variations in our revenues, gross margins, earnings or other financial results;
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fluctuations in general conditions in the economy, our market, and the markets served by our customers;
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announcements of developments related to our business;
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announcements concerning new products or enhancements by us or our competitors;
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developments in our relationships with our customers;
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market perceptions of new means of delivering training;
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introductions of new technologies both by our customers and technology vendors; and
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limited public float and low daily trading volume.
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 price could be affected even by the potential for sales by these persons. In addition to the 13,224,349 shares of common stock outstanding as of December 1, 2015, as of that date, we are authorized to issue up to 850,000 shares of common stock upon the exercise of outstanding options, and an additional 281,850 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.
Our common stock is quoted on the OTCQX US Market (OTCQX) and has a limited trading market.
As of July 23, 2015, the Company’s common stock commenced being quoted on the OTCQX, and the quotation of our common stock on the OTCQX does not assure that a liquid trading market exists or will develop. Stocks traded on the OTCQX marketplace generally have limited trading volume and exhibit a wide spread between the bid/ask quotations than stocks traded on national exchanges. Moreover, a significant number of institutional investors have investment policies that prohibit them from trading in stocks on the OTCQX marketplace. As a result, investors may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities. This significantly limits the liquidity of the common stock, and may adversely affect the market price of our common stock. A limited market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or assets by using common stock as consideration.
We do not now, and are not expected to in the foreseeable future, meet the listing standards of the Nasdaq Stock Market or any other national securities exchange. We presently anticipate that our common stock will continue to be quoted on the OTCQX. As a result, investors must bear the economic risk of holding their shares of our common stock for an indefinite period of time.
Our common stock is a “penny stock” which may adversely impact the liquidity of our common stock.
The SEC has adopted regulations that generally define “penny stock” as an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market price of our common stock is, and is expected to continue to be in the near term, less than $5.00 per share and, therefore, a “penny stock.” Brokers and dealers effecting transactions in a “penny stock” must disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase the securities. Those rules may restrict the ability of brokers or dealers to sell the Company’s common stock and may affect the ability of our stockholders to sell their shares of our common stock. In addition, if our common stock continues to be quoted on the OTCQX as we expect, then our stockholders may find it difficult to obtain accurate quotations for our stock, and may find few buyers to purchase our stock and few market makers to support its price.
FINRA sales practice requirements may limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA has indicated its belief that there is a high probability that speculative low priced securities will not be suitable for at least some customers. These FINRA requirements make it more difficult for broker-dealers to recommend that at least some of their customers buy our common stock, which may limit the ability of our stockholders to buy and sell our common stock and could have an adverse effect on the market for our shares.
Limited Liquidity
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, cash flows from operations, and other financing available to us to finance our operating cash needs.
Due to the absence of any outstanding debt or line-of-credit agreement to provide liquidity, any adverse impact on our operating results could impact our cash flows from operations and our ability to meet our operating cash needs. This would likely have a material adverse impact on our stock 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 too 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:
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the frequency of our course events;
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the number of weeks during which our courses can be conducted in a quarter;
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the timing, timely delivery, frequency and size of, and the response to, our direct mail marketing and advertising campaigns;
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the timing of introduction of new course titles;
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the average length of courses, based on the current mix of course titles, which affects the average revenue per attendee; and
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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:
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cyclic or one-time budgetary considerations;
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government spending and budget cycles;
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factors specific to their business or industry; and
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weather, holiday and vacation considerations.
Use of Accounting Estimates. The preparation of our financial statements in conformity with Accounting Principles Generally Accepted in the United States 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 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. 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.
We may not be able to fully utilize our deferred tax assets and changes in our tax rates or exposure to additional tax liabilities could adversely affect our financial position. In fiscal year 2012, we established a valuation allowance against our deferred tax assets in the United States due to current year and projected future pre-tax book losses. We continued to maintain this valuation allowance throughout fiscal years 2013, 2014 and 2015. 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, primarily with respect to projected taxable income. The estimate of future taxable income can never be predicted with certainty. It is derived from budgets and strategic business plans but is dependent on numerous factors, some of which are beyond our control. Substantial variance of actual results from estimated future taxable profits, or changes in our estimate of future taxable profits, could lead to changes in deferred tax assets being realizable, and would require a corresponding adjustment to the valuation allowance. Our income tax provision could be significantly impacted by estimates surrounding our uncertain tax positions, decisions on repatriation of foreign earnings, and changes to our valuation allowance in future periods. As a result, we may not be able to use the full amount of our deferred tax assets and may be exposed to elevated tax rates or additional tax liabilities, which could adversely affect our financial position.
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:
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competitive forces within our current and anticipated future markets;
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our ability to attract customers and meet their expectations;
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currency fluctuations and other risks inherent in international operations;
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general economic conditions;
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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
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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 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.
We are moving our corporate operations center and may experience technological issues.
In December 2015, our company will be moving its operations center, including its core IT operations, to its new corporate location as well as integrating new technology. We may experience adverse technological issues in completing the move of our operations center that would adversely impact our operations and our ability to conduct business, including telephone and internet service.
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:
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internal training departments within our current and potential customers;
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computer hardware and software vendors and their Authorized Training and Education Center partners;
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independent education and training companies;
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academic providers; and
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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 40% 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.
Other Risks Associated with International Operations. Additionally, our results of operations may be adversely affected by other international risks, such as:
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difficulties in translating our courses into foreign languages;
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international political and economic conditions;
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changes in and/or compliance with government regulation in various countries;
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trade barriers;
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difficulty in staffing our foreign offices, and in training and retaining foreign instructors;
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adverse income tax and transfer pricing consequences; and
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potential costs associated with expansion into new territories or withdrawing from a territory.
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.
Our business depends largely on our ability to utilize knowledgeable instructors at our various locations.
Our business is based on successfully attracting and utilizing professional instructors with the knowledge and ability to effectively deliver our course materials to participants. Because we deliver course events at multiple locations throughout the world, we rely on some of our instructors to travel to such locations to teach our courses. If we are not able to timely send our instructors to locations due to restrictive immigration laws or otherwise, then we may incur additional costs in delivering the course event or face limitations in the local and number of course events we present internationally.
Risks Associated with Intellectual Property
Events outside of our control could pose a threat to our intellectual property rights, as well as to our products and services.
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.
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 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
Changes to laws and regulations can affect our operations and may limit our ability to operate in certain states and foreign jurisdictions or adversely impact our operating results.
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, state or foreign student aid or loan programs. However, changes to state and foreign 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 or foreign jurisdiction’s current or future licensing or regulatory requirements, then 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 or foreign jurisdiction. 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.
Risks Associated with Cyber Security
Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers, suppliers and business partners, and personal identifiable information of our customers and employees, in our data centers and on our networks. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, regulatory penalties, disrupt our operations and the services we provide to customers, damage our reputation, and cause a loss of confidence in our products and services, which could adversely affect our business/operating margins, revenues and competitive position.
Dependence on Key Vendors
Interruptions of services or support from our key vendors could result in an adverse impact to our operations and financial results.
We are reliant on key vendors for technical services and support. Any interruption of these services and/or support for a prolonged period of time could have a material adverse impact on our operations and financial results.
Control by Management
Our Chairman and Founder beneficially owns a majority of our outstanding shares, and therefore could have significant influence over our policies and affairs and is in a position to determine the outcome of corporate actions.
As of December 1, 2015, Dr. Collins, our Chairman of the Board of Directors beneficially owned (including shares owned with his wife, Mary Collins, a director of the Company) approximately 56.7% of our outstanding shares of common stock. Consequently, Dr. Collins and Mary Collins have significant influence over, and possess the voting power to control our policies and affairs and may be in a position to determine the outcome of corporate actions and transactions 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.
According to an amendment to the Schedule 13D filed by Dr. Collins and Mary Collins with the SEC on May 19, 2015, Dr. Collins had made a determination to explore potential alternatives for making an offer to purchase some or all of the shares of the Company's common stock not beneficially owned by him or his spouse or otherwise undertake a “going private” transaction of the Company. In a subsequent amendment to the Schedule 13D filed by Dr. Collins and Mary Collins with the SEC on December 14, 2015, it was reported that Dr. Collins, Mary Collins and the other reporting persons named in the Schedule 13D amendment determined not to make an offer to purchase all of the shares of outstanding Company common stock that was not owned by him, Mary Collins and the other reporting persons as of the time of the filing of the Schedule 13D amendment. The December 2015 Schedule 13D amendment did state, however, that in the future, Dr. Collins and the other reporting persons may re-consider a possible transaction in which he or the other reporting persons in the Schedule 13D would offer to acquire the remaining shares of outstanding Company common stock not beneficially owned by them, but are no assurances that they will make any such offer. The public announcement of the exploration of these potential transactions in the future, as well as the potential that such transaction may occur, may adversely impact the marketability of our common stock.
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:
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the difficulty of integrating acquired technologies, operations and personnel with our existing operations;
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the difficulty of developing and marketing new products and services;
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the diversion of our management’s attention as a result of evaluating, negotiating and integrating acquisitions or new business ventures;
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our exposure to unforeseen liabilities of acquired companies; and
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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:
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charges to our income to reflect the amortization of acquired intangible assets;
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write-offs for the impairment of the carrying value of goodwill or other intangible assets;
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interest costs and debt service requirements for any debt incurred in connection with an acquisition or new business venture; and
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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.
The United States government’s inability to agree on a federal budget may adversely impacted our operations and financial results. We believe the implementation by the U.S. federal government of the automatic spending cuts commonly referred to as “Sequestration” had a significant negative impact on our North American operations as our government customers faced uncertainty over whether the amount of funds allotted for training was actually available. This uncertainty led to lower enrollments and cancellation of existing enrollments from the government sector and to some degree from those of our commercial customers that rely heavily on government contracts. While the U.S. federal government has passed a budget agreement for fiscal year 2016, there is still not an allocation of that budget at an agency level. To the extent that the government agencies using our services are not allocated sufficient funds, then such agencies may not be able to continue using our services, which could adversely impact our operations and financial results.
United States government action or inaction with respect to the continuing budget deficit could adversely impact our operations and financial results. The inability of the United States Congress to enact a budget in a fiscal year, another sequestration, and or another shutdown of the United States Government could adversely impact demand for our services by limiting the funding available to many of our customers, particularly those in the government sector. Various entities of the United States government and United States government contractors, on a combined basis, account for more than fifteen percent of our business. Implementation of major legislative reductions to the federal budget could reduce, delay or cancel funding used by our government and government contractor customers to purchase our services, which would have a material adverse impact on our operations and financial results.
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.
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, as amended, our Bylaws, as amended, 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, as amended, and Bylaws, as amended, are:
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the division of our board of directors into three classes;
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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;
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certain limitations of the rights of stockholders to call a special meeting of stockholders; and
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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. Terrorist attacks in the United States and in other countries 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 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.
Item 1B. UNRESOLVED STAFF COMMENTS.
None.
Item 2.
Item 2. PROPERTIES.
Our corporate headquarters are currently located at 1831 Michael Faraday Dr., Reston, Virginia 20190. In September 2014, we sold and leased back this property, which is a 38,500 square foot office facility that we currently use for our corporate headquarters, as well as the sales, administrative and operations groups of our United States subsidiary. At the end of December 2015, we will move to 38,750 square feet of newly leased office space located at 13650 Dulles Technology Drive., Herndon, Virginia 20171. This facility, leased for ten years, will house our corporate headquarters as well as the sales, administrative and operations groups of our U.S. Subsidiary and a twelve classroom education center. We lease all of our other offices and education center classroom facilities. These other leases expire at various dates over the next six years.
We believe that our facilities are adequate and suitable for our needs. In general, at current attendee levels, we have 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. In June 2014 we extended our lease in Ottawa, CN for five years, but reduced our space from 20,006 sq. ft. to 13,742 sq. ft. while still maintaining the same number of classrooms. In Sweden, we moved to new space in January 2015 that is 9,741 sq. ft. smaller than our previous space of 21,151 sq. ft. and accommodates seven classrooms and our offices. During fiscal year 2016, our leases for space in Los Angeles, CA and Chicago, IL will expire. We do not plan to renew these leases following their expiration.
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, Stockholm, and Tokyo as well as in other rented facilities in those and other cities worldwide as well as at our clients’ facilities. Learning Tree courses presented in France after our sale of the French subsidiary are provided through a license agreement with the purchaser, Educinvest.
The following table contains certain information regarding Learning Tree Education Centers and offices at October 2, 2015:
(a)
We have closed the Education Center and Offices located in Los Angeles, CA. The lease ends in April 2016.
(b)
Includes a 38,500 square foot office facility that we sold in September 2014 and leased back. We will move to new leased facilities in December 2015.
(c)
The Education Center and Offices in France are now operated by our Licensee.
(d)
Excludes 3,000 square feet that we sublease to a single subtenant. The Sublease ends in March 2016.
Item 3.
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.
Item 4. MINE SAFETY DISCLOSURE.
Not Applicable.
PART II
Item 5.
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 OTCQX under the symbol “LTRE.” Prior to July 23, 2015, our common stock traded on the Nasdaq Stock Market. The following table sets forth, for the periods indicated, the range of high and low closing sales prices for our common stock:
As of December 1, 2015, the number of holders of our Common Stock was 675, consisting of 45 record holders and 630 stockholders whose stock is held by a bank, broker or other nominee.
Dividends
We did not pay any dividends in fiscal year 2015 or fiscal year 2014. We have no plans to pay any 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 the 2015 fiscal year, we did not make any unregistered sales of our securities.
Purchases of Equity Securities
On May 8, 2012, we announced that our Board of Directors amended our share repurchase program to authorize an additional $4.5 million for the repurchase of our common stock, par value $0.0001 per share. As of October 2, 2015, there was approximately $2.9 million available for share repurchases under the program. Under the share repurchase program, we may acquire shares of our common stock in the open market or in any private transaction, from time to time and in accordance with applicable laws, rules and regulations, but have no commitment to do so. We did not repurchase any shares during fiscal years 2015 and 2014.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of October 2, 2015 regarding securities issued and to be issued under our equity compensation plans that were in effect during fiscal year 2015:
For a description of the other material features of our equity compensation plan, see Note 6 of “Notes to Consolidated Financial Statements.”
Item 6.
Item 6. SELECTED FINANCIAL DATA.
Not Required for a Smaller Reporting Company
Item 7.
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 workforce development to business and government organizations for their IT professionals and managers. Since our founding in 1974, we have provided high-quality training to over 2.4 million IT professionals and managers. In fiscal year 2015, while presenting courses in 38 countries, we trained 59,925 course participants from approximately 7,000 organizations, including large national and multinational companies, government organizations, and small and medium-size companies.
Our long-term objective is to grow our position as a leading worldwide provider of training and workforce development to IT professionals and managers and to become the provider of choice for large national and multinational companies, medium-size companies and government organizations. Over the past few years, we have started working with clients to address the life cycle of organizational performance challenges. To that end, we recently introduced IT Workforce Optimization Solutions, a comprehensive suite of services to support IT organizations in: defining organizational structure, processes, and job roles; assessing current staff skills and abilities; and implementing performance improvements by enhancing the skills and abilities of staff and helping to implement process improvements. Workforce Optimization Solutions augments and enhances our core training capabilities enabling Learning Tree to partner with our customers in helping them develop a high-performing organization through workforce development and process improvement.
We offer a broad proprietary library of intensive instructor-led courses from one to five days in length, which, as of October 2, 2015, consisted of 345 different course titles representing 4,503 hours of training, including 122 multi-day IT course titles, 70 multi-day management course titles and 153 1-Day Boot Camp 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, Canada, Sweden and Japan. Subsequent to the sale of our subsidiary in France, we now operate in France through a license agreement with Educinvest. In fiscal year 2015, we generated approximately 40% of our revenues outside of the United States. We coordinate, plan and deliver our courses at our own education centers, external hotel and conference facilities and customer sites worldwide. 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. We use a well-defined systematic approach to develop and update the Learning Tree course library so as to provide training that is immediately applicable by course participants to their work in a broad range of applications and industries. After assessing market need, courses may be translated into Swedish and Japanese. Our proprietary course development process also allows us to customize our courses to specific customer requirements for delivery at their 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. Our IT courses are designed around highly practical hands-on exercises that provide participants with extensive in-class experience mastering the tools and techniques they can apply immediately upon returning to their jobs. Similarly, many of our management courses utilize our innovative proprietary learning methodology that provides an environment in which course participants learn entirely by doing through extensive multi-media simulations. Throughout these courses, participants 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, 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.
We had 605 instructors as of October 2, 2015, who are practicing professionals with expert subject knowledge, and who average over 20 years of “hands-on, real world” experience. Learning Tree instructors teach an average of approximately 9 course events per year on an “as-needed” basis. When they are not teaching, Learning Tree instructors use and hone their IT and management skills either as full-time employees for other companies or as independent consultants.
We have structured our business so that over half 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 41 years, we continue to emphasize excellence in training and developing IT professionals and managers 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. Of our 100 largest clients in fiscal year 2010, 99 were still our clients five years later in fiscal year 2015. 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.
Recent Developments. Effective October 7, 2015, Richard A. Spires was appointed as the Chief Executive Officer (CEO) of the Company. Prior to his appointment as CEO, Mr. Spires served on the Board of Directors (“Board”) of the Company and will continue to serve as a director of the Company. In connection with Mr. Spires’ appointment, Dr. David C. Collins resigned as CEO, but Dr. Collins will continue to serve as Chairman of the Board.
RESULTS OF OPERATIONS
The following table summarizes our consolidated statements of operations for the periods indicated expressed as percentages of revenues:
FISCAL YEAR 2015 COMPARED WITH FISCAL YEAR 2014
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 2015 ended on October 2, 2015 and our fiscal year 2014 ended on October 3, 2014. Our fiscal year 2015 consisted of 52 weeks, while our fiscal year 2014 consisted of 53 weeks. During our fiscal year 2015, we sold our operating unit in France to an independent third party who continues to operate as a Learning Tree Licensee. We have reclassified the results of operations for France, including operating statistics, as discontinued operations in these financial statements. (See Note [14] of “Notes to Consolidated Financial Statements for further information on the discontinued operations.)
In fiscal year 2015, our worldwide revenues from continuing operations decreased to $94.9 million from $107.1 million in fiscal year 2014. Loss from continuing operations was $(9.8) million in fiscal year 2015 compared to $0 in fiscal year 2014. Net loss for fiscal year 2015 was $(12.6) million compared to a net income of less than $0.1 million in fiscal year 2014.
Revenues. Our fiscal year 2015 revenues from continuing operations decreased by 11.4% compared to fiscal year 2014. The decrease in revenues primarily resulted from a 4.4% decrease in average revenue per participant, and a 7.3% decrease in the number of course participants. The decrease in average revenue per participant primarily resulted from the introduction of 1-Day Boot Camp courses, as average revenue per participant for a one day course is lower than average revenue per participant for a multi-day course, as well as changes in foreign exchange rates that unfavorably impacted revenues by 3.9% when compared to the prior year. The decrease in the number of course participants was partially the result of having one less week in fiscal year 2015 when compared to fiscal year 2014.
Revenues in North America of $66.5 million in fiscal 2015 decreased 5.7% compared to $70.6 million in fiscal year 2014. For North America operations, average revenue per participant decreased 3.7% while the number of participants decreased 2.3% year over year. The decrease in average revenue per participant year over year was primarily the result of introducing 1-Day Boot Camp courses. Revenues from the U.S. government and government contractors that purchased courses under our government contract schedules totaled $24.3 million for fiscal year 2015 compared to $22.8 million for fiscal year 2014.
Revenues from our continuing European operations decreased 23.0% to $26.4 million in fiscal year 2015 from $34.2 million in fiscal year 2014, which was primarily due to a 19.6% year over year decrease in the number of participants, partially offset by a 3.8% year over year increase in the average revenue per participant. Changes in exchange rates negatively impacted year over year European revenues by $2.4 million or 7.0% of European revenues.
During fiscal year 2015, we provided 198,334 attendee-days of training worldwide, a decrease of 9.9% from 220,091 attendee-days in fiscal year 2014. In our IT courses during fiscal year 2015, we provided 120,386 attendee-days of IT training worldwide, an 8.4% decrease from 131,467 attendee-days in fiscal year 2014. In our management courses in fiscal year 2015, we provided 77,948 attendee-days of training worldwide, a 12.0% decrease from 88,624 attendee-days in fiscal year 2014.
Cost of Revenues. Our cost of revenues from continuing operations primarily includes the variable costs of course instructors and their travel expenses, course materials, refreshments and freight, and the fixed costs of course equipment and classroom facilities. During fiscal year 2015, we presented 4,589 events, 0.6% more than the 4,561 events during fiscal year 2014. The average number of participants per event declined to 12.5 in fiscal year 2015 from 13.6 in fiscal year 2014. Our cost of revenues for fiscal year 2015 decreased to $55.8 million from $60.7 million in fiscal year 2014. Our cost of revenues as a percentage of our revenues increased to 58.8% for fiscal year 2015 from 56.7% in fiscal year 2014.
The increase in cost of revenues as a percentage of revenues in fiscal year 2015 primarily reflects the 4.4% decrease in average revenue per participant, which was partially offset by a 0.9% decrease in average cost per participant. As a result, gross profit declined 15.6% to $39.1 million in fiscal year 2015 from $46.3 million in fiscal year 2014.
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.
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 2015, course development expenses were 8.6% of revenues compared to 6.8% during fiscal year 2014. In fiscal year 2015, we increased our overall spending on course development to $8.1 million compared with $7.2 million in fiscal year 2014. This $0.9 million reflected an increase in activities associated with new course development, which was primarily due to the costs incurred for the development of 153 new 1-Day Boot Camp course titles. In addition, in fiscal year 2015, we introduced 13 new multi-day IT course titles and seven new multi-day management course titles compared to 12 multi-day IT and 11 multi-day management course titles in fiscal year 2014.
At the end of fiscal year 2015, the Learning Tree library of instructor-led courses numbered 345 titles, comprising 4,503 hours of training, compared with 179 titles at the end of fiscal year 2014. The increase in the number of titles in fiscal year 2015 reflected the net effect of introducing 153 one-day course titles and adding 20 new multi-day titles and while retiring only eight 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 2, 2015, we had 122 multi-day IT titles in our course library, compared with 117 at the end of fiscal year 2014. Our library of multi-day management titles numbered 69 as of October 2, 2015, compared with 62 management titles at the end of fiscal year 2014. Our library of 1-Day Boot Camp courses numbered 153 at October 2, 2015, compared to no such courses at the end of fiscal year 2014.
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 expenses were 22.8% of revenues in fiscal year 2015 compared to 21.3% of revenues in fiscal year 2014. Sales and marketing expenses decreased to $21.6 million in fiscal year 2015 from $22.8 million in fiscal year 2014. The overall decrease of $1.2 million was primarily due to changes in foreign exchange rates.
General and Administrative Expenses. Our general and administrative expenses were 20.0% of revenues in fiscal year 2015 compared to 20.8% of revenues in fiscal year 2014. General and administrative expenses were $19.0 million in fiscal year 2015 compared to $22.3 million in fiscal year 2014. The decrease was primarily due to lower salary and benefit costs due to reduced staffing levels, the absence of the $0.5 million restructuring charge recorded in fiscal year 2014, and the favorable impact of changes in foreign exchange rates.
Other Operating Items. In fiscal year 2015, we realized a small loss of less than $0.1 million from the disposal of equipment. In fiscal year 2014 we recognized a $6.3 million gain on the sale of our Corporate Headquarters facility located in Reston, Virginia.
Other Income (Expense), Net. Other income (expense), net in fiscal year 2015 was $0.4 million compared to less than $(0.1) million in fiscal year 2014. The difference was primarily due to foreign exchange gains in fiscal year 2015.
Income Taxes. In fiscal year 2015, our income tax provision was $0.5 million compared to $0.3 million in fiscal year 2014. Our effective rate for fiscal year 2015 was (5.0) % compared to 83.7% in fiscal year 2014. The effective rate for fiscal year 2015 is primarily related to true ups of the actual 2014 return to provision estimates for US taxes, and the income tax expense of our foreign subsidiaries. The effective rate for fiscal year 2014 was primarily attributable to state and foreign taxes. In fiscal year 2012 we established a valuation allowance against deferred tax assets in the United States and France due to current year and projected future pre-tax book losses. This valuation allowance has been maintained to date. 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.
In the fourth quarter of fiscal year 2013, we recorded a deferred tax liability for federal income and foreign withholding taxes on approximately $10.1 million of our international subsidiaries’ undistributed earnings as of September 27, 2013. During fiscal year 2014 we repatriated $6.7 million from two of our foreign subsidiaries. Based on future forecasts and budgets, we do not currently plan to repatriate additional cash from the foreign subsidiaries to the United States. The remaining balance of the deferred tax liability established in fiscal year 2013 was reversed in fiscal year 2014. Due to the continued maintenance of the valuation allowance against deferred tax assets in the United States, the net impact to tax expense for fiscal year 2014 is only the reversal of the less than $0.1 million of foreign withholding taxes accrued in fiscal year 2013. We believe that it is reasonable to assert that the undistributed earnings for our foreign subsidiaries are indefinitely reinvested as of October 2, 2015. Therefore, no additional tax expense or deferred tax liability for federal income tax and foreign withholding taxes on the undistributed earnings of our foreign subsidiaries is recorded for the fiscal year 2015.
GEOGRAPHIC DATA
Learning Tree Education Centers are located in five countries. The North America operations recorded revenues of $66.5 million in fiscal year 2015 compared to revenues of $70.6 million in fiscal year 2014. Revenues from our European continuing operations were $26.4 million in fiscal year 2015 compared to $34.2 million in fiscal year 2014. Our Asian operations recorded revenues of $2.0 million in fiscal year 2015 compared to $2.2 million in fiscal year 2014. See Note 9 of “Notes to Consolidated Financial Statements” for further information on segment reporting.
On March 3, 2015, we entered into an Agreement (“Agreement”) to sell our subsidiary in France, Learning Tree International S.A. LTRE (FR), to Educinvest for consideration of € 1 (One Euro). The Sale Transaction was consummated on the same date that the Agreement was signed by the parties.
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
In fiscal year 2015, inflation did not have a significant impact on our net sales, revenues and income from continuing operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). The standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2014, and early adoption is permitted. We did not early adopt ASU 2014-08, which will be effective for us for fiscal year ending September 30, 2016 and will apply to disposals that have not yet been reported in our financial statements as of the adoption date. Accordingly, we will evaluate the impact of the standard on any disposals that occur after adoption.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date of ASU 2014-09 by one year to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2016. Accordingly, the standard is effective for us on September 30, 2018 using either a full retrospective or a modified retrospective approach. We are currently evaluating which transition approach to use and the impact that the standard will have on our financial statements.
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). The standard requires management to evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. ASU 2014-15 is effective for reporting periods ending after December 15, 2016, with early adoption permitted. We do not expect to early adopt ASU 2014-15. We are currently evaluating the impact that this standard will have 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 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 and for seasonal factors. Our quarterly revenues and income fluctuate due to the seasonal spending patterns of our customers, which are affected by factors including: (i) cyclic or one-time budgetary considerations; (ii) factors specific to their business or industry; (iii) weather, holiday and vacation considerations; and (iv) other considerations.
We use the 52/53-week fiscal year method to better align our external financial reporting with the manner in which we operate our business. Under this method, each fiscal quarter ends on the Friday closest to the end of the calendar quarter. Since all courses have a duration of five days or less, and all courses begin and end within the same calendar week, under the 52/53 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. In most years, including fiscal year 2015, each fiscal quarter has 13 weeks; however, fiscal year 2014 had 53 weeks, with 14, 12, 13, and 14 weeks in our first, second, third and fourth quarters, respectively.
See Note 13 of “Notes to Consolidated Financial Statements” for our unaudited quarterly financial data for the eight fiscal quarters ended October 2, 2015. 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 October 2, 2015 included cash and cash equivalents on hand of $17.9 million. During fiscal year 2015, the total of our cash and cash equivalents decreased by $11.9 million primarily as a result of our net loss for fiscal year 2015 resulting in cash used in continuing operations of $9.5 million, $2.3 million used for capital expenditures, and the $0.2 million effect of exchange rates on cash and cash equivalents.
Cash Flows. Our cash and cash equivalents from continuing operations decreased by $11.9 million to $17.9 million at October 2, 2015 from $29.9 million at October 3, 2014.
Cash used in operating activities totaled $9.5 million in fiscal year 2015 as compared to cash used in operating activities of $2.8 million in fiscal year 2014, primarily due to the loss from continuing operations of $9.8 million. Cash used in investing activities totaled $2.2 million during fiscal year 2015 compared to cash provided by investing activities of $7.9 million for fiscal year 2014. The change was the result of net proceeds received from the sale of our Reston, Virginia corporate headquarters building of $9.4 million in fiscal year 2014, and $0.8 million in higher capital expenditures for purchases of equipment and other capital assets during fiscal year 2015. The effect of exchange rates on cash and cash equivalents during fiscal year 2015 was ($0.2) million compared to ($0.1) million in fiscal year 2014.
Liquidity. Our ability to access the capital markets is limited. 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, cash flows from operations, and other lease financing available to us to finance our operating cash needs. We believe that such funds will be sufficient to satisfy our anticipated cash requirements for our fiscal year 2016. .
Capital Requirements. During fiscal year 2015, we made capital expenditures of $2.3 million for the purchase of equipment worldwide, mostly computers and other equipment for use in our courses. We plan to 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 anticipate that the capital expenses associated with the relocation of our office, and the relocation of our Reston education center to our new office facility will be fully underwritten by the tenant improvement allowance we are receiving from the landlord. 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 ten years. In addition to requiring monthly/quarterly 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. We record the expense for these asset retirement obligations ratably over the life of the lease. We have no asset retirement payments coming due in fiscal year 2016.
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 and Policies
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 Passport products for which historical utilization data is not available, we would assume that the estimated average number of courses to be attended would be equal to the number of courses available on the Passport. For the Unlimited Passport program, we utilized historical data to estimate the expected number of courses that would be attended. Assumed utilization rates may be revised in future periods after sufficient time has passed to amass additional 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 the life of a Training Voucher beyond the normal twelve month expiration date. Training Vouchers purchased under government rate schedules have no expiration date.
Allowance for Doubtful Accounts. 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, 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. 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 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 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.
Income Taxes. We account for income taxes in accordance with ASC 740, Income Taxes. ASC 740 prescribes the use of the asset and liability method to compute the differences between the tax bases of assets and liabilities and the related financial amounts, using currently enacted tax laws. If necessary, a valuation allowance is established, based on the weight of available evidence, to reduce deferred tax assets to the amount that is more likely than not to be realized. Realization of the deferred tax assets, net of deferred tax liabilities, is principally dependent upon achievement of sufficient future taxable income. We exercise significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets.
Although we believe that our tax estimates are reasonable, the ultimate tax determination involves significant judgments that could become subject to examination by tax authorities in the ordinary course of business. We periodically assess the likelihood of adverse outcomes resulting from these examinations to determine the impact on our deferred taxes and income tax liabilities and the adequacy of our provision for income taxes. Changes in income tax legislation, statutory income tax rates or future taxable income levels, among other things, could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.
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. The estimated forfeiture rate used for fiscal years 2015 and 2014 was 35% and zero, respectively.
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.
OUTLOOK
Effect of Exchange Rates. In fiscal year 2015, approximately 40% of our annual business was 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 as of December 1, 2015 remain constant for the remainder of our first quarter of fiscal year 2016, we would expect to report an unfavorable effect of approximately 4.1% on our revenues during our first quarter of fiscal year 2016 compared to the same quarter of fiscal year 2015. 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 U.S. dollars, including our corporate management and centralized IT, marketing and course development activities which are located here in the United States.
Number of Course Weeks. As a result of our 52/53 week accounting policy and the timing of holidays, our first quarter of fiscal year 2016 will have 11 available training weeks, the same number of available training weeks in our first quarter of fiscal year 2015.
First Quarter Revenues. We currently expect revenues from continuing operations for our first quarter of fiscal year 2016 of between $19.4 million and $20.4 million, compared to revenues from continuing operations of $24.4 million in our first quarter of fiscal year 2015.
First Quarter Gross Profit. We expect a gross profit percentage in our first quarter of fiscal year 2016 of between 36.7% and 37.7% compared to 43.7% in our first quarter of fiscal year 2015.
First Quarter Operating Expenses. We expect overall operating expenses for our first quarter of fiscal year 2016 to be between $10.8 million and $11.4 million, compared to $12.1 million in our first quarter of fiscal year 2015.
First Quarter Income (Loss) from Continuing Operations. As a result of the above factors, we expect to experience a first quarter of fiscal year of 2016 operating loss of between $(3.1) million and $(4.3) million compared with a $(1.4) million operating loss from continuing operations in our first quarter of fiscal year 2015.
First Quarter Other Income, Net. We expect first quarter other income (expense), net to be less than $0.1 million.
First Quarter Pre-Tax Income (Loss). Overall, we expect to report a pre-tax loss for our first quarter of fiscal year 2016 of between $(3.1) million and $(4.4) million, compared to a pre-tax loss of $(1.2) million in the first quarter of fiscal year 2015.
Item 7A.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required for a Smaller Reporting Company
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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 its subsidiaries as of October 2, 2015 and October 3, 2014 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity, and cash flows for the years then ended. These consolidated 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 its subsidiaries at October 2, 2015 and October 3, 2014, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
McLean, Virginia
December 15, 2015
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
The accompanying notes are an integral part of these consolidated financial statements.
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(amounts in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(amounts in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
LEARNING TREE INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
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 information technology (“IT”) professionals and managers worldwide. These courses are delivered primarily at our leased education centers located in the United States, the United Kingdom, Canada, Sweden and Japan. Such course events are also conducted in hotel and conference facilities and at customer sites throughout the world. Almost all of our course titles are also available 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 2015 ended on October 2, 2015, and our fiscal year 2014 ended on October 3, 2014. Thus, these consolidated financial statements report our consolidated financial position as of October 2, 2015, and October 3, 2014 and the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for the fiscal years ended October 2, 2015 and October 3, 2014. Fiscal year 2015 was a 52-week year, while fiscal year 2014 was a 53-week year.
Certain items in the consolidated financial statements have been reclassified to conform to the current presentation.
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 as of October 2, 2015:
Learning Tree International USA, Inc. (U.S.)
Learning Tree International, K.K. (Japan)
Learning Tree International Ltd. (United Kingdom)
Learning Tree International AB (Sweden)
Learning Tree International Inc. (Canada)
Advanced Technology Marketing, Inc. (U.S.)
AnyWare Live, 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 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 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. Assumed utilization rates may be revised in future periods after sufficient time has passed to amass additional 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.
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 and comprehensive loss. 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, dividend yield 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 and comprehensive loss is based on awards ultimately expected to vest, it has been reduced for estimated pre-vesting forfeitures. Forfeitures were estimated based on historical experience.
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 $612 and $814 in fiscal years 2015 and 2014, 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 October 2, 2015 and October 3, 2014, we had no available for sale securities.
Restricted interest-bearing investments at October 2, 2015 consisted of cash deposits of $2,185 (1,439 British Pounds), $184 (1,534 Swedish Krona) and $896 which were pledged as collateral to secure our obligations under leases for education center facilities located in the United Kingdom, Sweden, and the United States, respectively. This compares to restricted interest-bearing investments of cash deposits of $2,297 (1,439 British Pounds), $209 (1,519 Swedish Krona) and $725 at October 3, 2014. The United Kingdom deposits are held in trust by the landlord with interest accruing to us and paid on an annual basis. The deposits 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 is in an interest bearing restricted account held by our bank and serves as collateral for letters of credit issued to our landlords by our bank.
h. Marketing Expenses
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 2015 and 2014 were $8,942 and $10,413 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:
Total depreciation and amortization expense amounted to $4,318 and $5,154 in fiscal years 2015 and 2014, respectively. 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 and comprehensive loss.
In September 2014, we sold and leased back for one year, our corporate headquarters, located at 1831 Michael Faraday Dr., Reston, Virginia, which is a facility that we currently use for our corporate headquarters, as well as the sales, administrative and operations groups of our United States subsidiary. The Company’s carrying value of the headquarters property at the time of sale was approximately $3,600. The sale and the leaseback were accounted for as separate transactions based on their respective terms since the lease is determined to be minor. As such, we recognized a gain on the sale of $6,322 which is shown on the other operating items line of our consolidated statement of operations and comprehensive loss.
The fair value of a liability for an asset retirement obligation (“ARO”) 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 AROs.
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 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 loss
We report comprehensive income (loss) in the consolidated statements of operations and comprehensive loss. Other comprehensive loss represents changes in stockholders’ equity from non-owner sources and is comprised of foreign currency translation adjustments. At the end of fiscal year 2015, accumulated other comprehensive loss consisted of cumulative foreign currency translation adjustments of $(578) compared to cumulative foreign currency translation adjustments of $(325) in fiscal year 2014.
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 assets and liabilities 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.
The tax effects of uncertain tax positions are recognized in the financial statements only if the position is more likely than not to be sustained on audit, based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized. It is our accounting policy to account for ASC 740-10 related penalties and interest as a component of the income tax provision in the consolidated statements of operations and comprehensive loss.
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 consolidated statements of operations and comprehensive loss. 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 and comprehensive loss.
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. We have vacated space in leased facilities subject to operating leases and 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.
In September 2012, we announced our intention to close the Los Angeles, CA office facility effective December 2012. Our lease for these facilities runs through April 2016. We recorded a restructuring charge for the estimated liability associated with future rentals due under the property lease as of the cease use date. The fair value of the lease 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, discounted using a credit adjusted risk free rate. In addition, the estimated useful life of leasehold improvements was adjusted for the December 2012 closure date. In June 2014, we re-evaluated the estimated sublease rentals as we have been unable to find a subtenant for the facility. As a result, we recorded an additional $529 restructuring charge in our third quarter of fiscal year 2014.
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.
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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
r. Recently Issued Accounting Pronouncements
In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). The standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2014, and early adoption is permitted. We do not expect to early adopt ASU 2014-08, which will be effective for us for fiscal year ending September 30, 2016 and will apply to disposals that have not yet been reported in our financial statements as of the adoption date. Accordingly, we will evaluate the impact of the standard on any disposals that occur after adoption.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). The standard is a comprehensive new revenue recognition model that requires revenue to be recognized in a manner to depict the transfer of goods or services to a customer at an amount that reflects the consideration expected to be received in exchange for those goods or services. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is not permitted. Accordingly, the standard is effective for us on September 30, 2019 using either a full retrospective or a modified retrospective approach. We are currently evaluating which transition approach to use and the impact that the standard will have on our financial statements.
In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” (“ASU 2014-15”). The standard requires management to evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. ASU 2014-15 is effective for reporting periods ending after December 15, 2016, with early adoption permitted. We do not expect to early adopt ASU 2014-15. We are currently evaluating the impact that this standard will have 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 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 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 ARO liabilities, which primarily consist of classroom facilities at our education centers:
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.
(Loss) income before provision for income taxes consists of the following:
The provision for income taxes consists of the following:
The following is a reconciliation of the provision for income taxes to the United States federal statutory tax rate:
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 would not be realized. Realization will be based on our ability to generate sufficient future taxable income. In fiscal year 2012 we established a valuation allowance against our deferred tax assets in the United States and France due to current year and projected future pre-tax book losses. We continued to maintain this valuation allowance throughout fiscal years 2014 and 2015. As of October 2, 2015, we had a net deferred tax asset of $342.
As of October 2, 2015, we had foreign tax credit carry-forwards of approximately $25, which expire, if unused in the years 2021-2023.
Deferred income tax assets and liabilities consist of the following:
We recognize interest and penalties related to unrecognized tax benefits as a component of income tax expense. For fiscal year 2015, we recognized an expense of $51 attributable to interest for uncertain tax positions. As of October 2, 2015 and October 3, 2014, we had $706 and $656 accrued, respectively for interest and penalties for uncertain tax positions. As of October 2, 2015, $772 of our total unrecognized tax benefits would favorably affect our effective tax rate if recognized. During fiscal year 2015, we reversed $117 of unrecognized tax benefits associated with the prior intercompany transactions with France. This tax benefit reduced the loss from discontinued operations. 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 related to these intercompany transactions. 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 2009 through 2015.
The aggregate change in the balance of gross unrecognized tax benefits, which excludes interest and penalties, is as follows:
In the fourth quarter of fiscal year 2013, we accrued a provision for income taxes on a portion of the undistributed earnings of our foreign subsidiaries based on our estimated future US cash needs that we anticipated would be funded through distributions from the foreign subsidiaries. We are subject to federal income and potentially foreign withholding taxes when earnings are distributed. In the second quarter of fiscal year 2014, we repatriated $1,194 and $5,473 from our subsidiaries in Sweden and the United Kingdom, respectively. There were no withholding taxes and the deferred tax liability that was established in fiscal year 2013 was reduced by the amount of the dividend. There was no impact on the fiscal year 2014 effective tax rate since the tax ramifications of this dividend were provided for in fiscal year 2013. In the fourth quarter of fiscal year 2014, we reevaluated our position regarding future needs to repatriate foreign earnings and taking into consideration the net proceeds received from the sale of our headquarters facility, believed there was a reasonable basis for reinvesting the undistributed earnings of our foreign subsidiaries for the foreseeable future. Therefore, the remaining deferred taxes previously provided for foreign subsidiary earnings in fiscal year 2013 have been reversed during fiscal year 2014. For 2015, we believe no additional funds will be repatriated from our foreign subsidiaries in the foreseeable future. It is not practical to calculate the tax effect on unremitted foreign earnings.
4. COMMITMENTS AND CONTINGENCIES
a. Commitments
As of October 2, 2015, we had various non-cancelable operating leases for facilities that expire at various dates through 2026 and certain leases for office equipment requiring annual payments as follows:
Rental expense, excluding sublease income, was $9,114 and $9,737 for fiscal years 2015 and 2014, respectively. Sublease rental income for fiscal years 2015 and 2014 was $120 and $48, 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.
5. STOCKHOLDERS’ EQUITY
We did not purchase any shares of our common stock during fiscal years 2015 and 2014. 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 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. 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 fourth per year over four years (in some instances, subject to achieving certain financial targets in the year with respect to which they are granted) and have ten-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.
The fair value of each option award was estimated on the date of grant using a Black-Scholes option-pricing formula. 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 “Compensation-Stock Compensation”, 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%.
A summary of option activity under the 2007 Plan and previous plans during fiscal years 2014 and 2015 is presented below:
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 $72 and $69 for fiscal years 2015 and 2014, respectively. As stock-based compensation expense recognized in the consolidated statements of operations and comprehensive loss is based on awards ultimately expected to vest, it has been reduced for estimated pre-vesting forfeitures. Prior to fiscal year 2014, we reduced the estimated forfeiture rate for executive personnel to zero.
If the non-vested stock options fully vest, they will result in future expense of $158 over a weighted-average remaining amortization period of 2.2 years. The total income tax benefit relating to stock options and recognized in the consolidated statements of operations and comprehensive loss was $0 for both fiscal years 2015 and 2014.
Restricted Stock
As noted above, our 2007 Plan permits us to grant shares of restricted stock. Grants of restricted stock 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.
We did not issue any shares of restricted stock during fiscal years 2015 or 2014 and there were no shares of restricted stock outstanding as of the end of fiscal years 2015 or 2014.
Restricted Stock Units
As noted above, our 2007 Plan permits us to grant restricted stock units (RSUs), which entitle holders to receive shares of common stock upon vesting. During fiscal year 2013, we granted 54,685 RSUs to the outside directors. These stock units were subject to a three year vesting schedule. The compensation for the outside directors was changed during fiscal year 2013 to eliminate further grants of RSUs and to replace them with an increased cash retainer. Outside directors holding unvested RSUs were given an option to voluntarily forfeit their unvested RSUs and transition immediately to the increased cash retainer or wait until all of the RSUs had vested before transitioning to the increased cash retainer. All of the outside directors impacted by this change elected to voluntarily forfeit their unvested RSUs. During fiscal years 2015 and 2014, we did not grant any RSUs.
A summary of the restricted stock unit activity is as follows:
For fiscal years 2015 and 2014, we recognized $4 and $254, respectively, in compensation costs related to RSUs.
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. We make contributions at a rate of 30% of the first 6% of employee compensation contributed. We contributed $40 and $53, net of forfeitures of $229 and $208, to our 401(k) Plan for fiscal years 2015 and 2014, 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 2015 and 2014 our cost for these plans was approximately $470 and $587, respectively.
8. INCOME (LOSS) PER SHARE
Income (loss) per share-basic is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Income (loss) 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 2015 and 2014, 250,000 and 200,000 stock options, respectively, were anti-dilutive and excluded from the income (loss) per share-diluted calculation.
The following table sets forth the calculation of basic and diluted income (loss) per share:
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 one commercial customer or government agency that amounted to 10% or more of our revenues in fiscal years 2015 or 2014.
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, 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 $4,049 and $5,336 in fiscal years 2015 and 2014, respectively. Summarized financial information by reportable segment for fiscal years 2015 and 2014, is as follows:
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
Deferred Facilities Rent and Other
11. VALUATION AND QUALIFYING ACCOUNTS
Activity with respect to our provision for doubtful accounts is summarized as follows:
Activity with respect to our valuation allowance for deferred tax assets is summarized as follows:
Activity with respect to our Los Angeles lease liability is summarized as follows:
12. RELATED PARTY TRANSACTIONS
Dr. David C. Collins, our Chairman of the Board, oversees (with the concurrence of the Nominating and Governance Committee of our Board of Directors) a charitable program under which we donated $32 and $209 during fiscal years 2015 and 2014, respectively, to charitable organizations.
13. QUARTERLY DATA (UNAUDITED)
We use the 52/53-week fiscal year method to better align our external financial reporting with the manner in which we operate our business. Under this method, each fiscal quarter ends on the Friday closest to the end of the calendar quarter. Since all courses have a duration of five days or less, and all courses begin and end within the same calendar week, under the 52/53 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. In most years, including fiscal year 2015, each fiscal quarter has 13 weeks; however, fiscal year 2014 had 53 weeks, with 14, 12, 13, and 14 weeks in our first, second, third and fourth quarters, respectively.
In our fourth quarter of fiscal year 2014, we sold and leased back for one year, with options for two six-month extensions, our corporate headquarters, which we currently use for our corporate headquarters, as well as the sales, administrative and operations groups of our United States subsidiary. The sale and the leaseback were accounted for as separate transactions based on their respective terms since the lease was determined to be minor. As such, we recognized a gain on the sale of $6,322 which is shown on the other operating items line of the quarterly data tables.
NOTE 14-DISCONTINUED OPERATIONS
On March 3, 2015, we entered into an Agreement (“Agreement”) to sell our subsidiary in France, LTRE (FR), to Educinvest for consideration of € 1 (One Euro). The sale transaction was consummated on the same date that the Agreement was signed by the parties. The purchase price was established in recognition of the potential liabilities being assumed by Educinvest related to continuation of the LTRE(FR) business. As part of the sale transaction, Learning Tree and Educinvest concurrently entered into a license agreement, dated March 3, 2015 (the “License Agreement”). After the closing of the sale transaction, we agreed to provide certain temporary services to Educinvest, including the use of its website and the operational systems in place for a period of two years after the closing date. In connection with the sale transaction, we also agreed that during the term of the License Agreement we will not, without the prior written consent of Educinvest, (i) establish a physical presence in mainland France in competition with the business of LTRE(FR) as carried on as of the closing of the sale transaction or (ii) solicit employees of LTRE(FR), except for persons responding to general recruitment advertisements not specifically targeting LTRE(FR).
The sale of LTRE(FR) resulted in a loss on sale of $2,501. This loss plus the results of operations for LTRE(FR) for fiscal years ended October 2, 2015 and October 3, 2014 have been reclassified to the income (loss) from discontinued operations line on the Condensed Consolidated Statements of Operations and Comprehensive Loss presented herein. In addition, historical Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Cash Flow amounts have also been reclassified as discontinued operations.
The assets and liabilities classified as discontinued operations in our condensed consolidated balance sheet for the fiscal year ended October 3, 2014 is set forth below. There were no assets or liabilities classified as discontinued operations as of October 2, 2015.
The summarized operating results of LTRE(FR) included in our condensed consolidated statement of operations is as follows:
15. RESTRUCTURING ACTIVITY
In September 2012, we announced a worldwide reduction in force involving approximately 40 employees and recorded a $1,300 charge for employee severance and accelerated depreciation of leasehold improvements. In the first quarter of fiscal year 2013 we closed the Los Angeles, CA office facility. The closure of the office in Los Angeles completed the move of corporate functions to the Reston, VA corporate headquarters. In fiscal year 2013, we recorded a restructuring charge of $1,300 for the estimated liability associated with future rentals due under the property lease as of the cease use date and for employee severance costs for those employees who chose not to relocate to our offices in Virginia. The fair value of the lease 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, discounted using a credit adjusted risk free rate. In June 2014, we re-evaluated the estimated sublease rentals as we have been unable to find a subtenant for the facility. As a result, we recorded an additional $529 restructuring charge in fiscal year 2014.
16. SUBSEQUENT EVENTS
We have evaluated all events subsequent to the balance sheet date of October 2, 2015 and have determined there are no subsequent events that require disclosure.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable
Item 9A.
Item 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
An evaluation was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of October 2, 2015. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of October 2, 2015.
Management’s Annual Report on Internal Control over Financial Reporting
Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Under Section 404 of the Sarbanes-Oxley Act of 2002, our management is required to assess the effectiveness of our internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether our internal control over financial reporting is effective.
Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted a review, evaluation, and assessment of the effectiveness of our internal control over financial reporting as of October 2, 2015, based upon the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on these review activities, our management concluded that our internal control over financial reporting was effective as of October 2, 2015.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements should they occur. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the control procedures may deteriorate.
This Form 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Form 10-K.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the fourth quarter of fiscal year 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. OTHER INFORMATION
None
PART III
Item 10.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference to our definitive Proxy Statement to be delivered to stockholders in connection with our 2016 Annual Meeting of Stockholders.
Item 11.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our definitive Proxy Statement to be delivered to stockholders in connection with our 2016 Annual Meeting of Stockholders.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The remaining information required by this item is incorporated by reference to our definitive Proxy Statement to be delivered to stockholders in connection with our 2016 Annual Meeting of Stockholders.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference to our definitive Proxy Statement to be delivered to stockholders in connection with our 2016 Annual Meeting of Stockholders.
Item 14.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to our definitive Proxy Statement to be delivered to stockholders in connection with our 2016 Annual Meeting of Stockholders.
PART IV
Item 15.
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Schedules
The financial statements of Learning Tree International, Inc. as set forth under Item 8 are filed as part of this report.
All schedules for which provision is made in the applicable accounting regulations of the SEC are omitted because such schedules are not required under the related instructions, are not applicable or the required information is given in the financial statements.
(b) Exhibits
The exhibits set forth in the Exhibit Index are filed as part of this Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant, Learning Tree International, Inc., a corporation organized and existing under the laws of the State of Delaware, has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Reston, Commonwealth of Virginia, on the 15th day of December 2015.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this annual report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ RICHARD SPIRES
Chief Executive Officer and Director
December 15, 2015
Richard Spires
(Principal Executive Officer)
/s/ MAX SHEVITZ
President
December 15, 2015
Max Shevitz
/s/ DAVID W. ASAI
Chief Financial Officer
December 15, 2015
David W. Asai
(Principal Financial Officer and Principal Accounting Officer)
/s/ DAVID C. COLLINS, PH.D.
Chairman of the Board
December 15, 2015
David C. Collins, Ph.D.
/s/ W. MATHEW JUECHTER
Director
December 15, 2015
W. Mathew Juechter
/s/ HOWARD A. BAIN III
Director
December 15, 2015
Howard A. Bain III
/s/ HENRI HODARA, PH.D.
Director
December 15, 2015
Henri Hodara, Ph.D.
/s/ JOHN R. PHILLIPS, PH.D.
Director
December 15, 2015
John R. Phillips, Ph.D.
/s/ MARY COLLINS
Director
December 15, 2015
Mary Collins
EXHIBIT INDEX
EXHIBIT
NUMBER
DESCRIPTION
3.1
Restated Certificate of Incorporation, filed October 6, 1995, as amended by Certificate of Amendment filed June 6, 1997, Certificate of Amendment filed January 24, 2002, and Certificate of Amendment filed June 19, 2007
Incorporated by reference from Registrant’s Annual Report on Form 10-K for the fiscal year ended October 2, 2009.
3.2
Bylaws of Registrant, as amended through November 3, 2014
Incorporated by reference from Registrant’s Current Report on Form 8-K filed October 9, 2015.
4.1
Form of Common Stock Certificate
Incorporated by reference from Registrant’s Annual Report on Form 10-K for the fiscal year ended October 2, 2009.
10.1
Employment Agreement between Registrant and Richard A. Spires, dated October 7, 2015 **
Filed herewith.
10.2
Amended and Restated Employment Agreement between Registrant and Max Shevitz, dated as of January 26, 2012, as amended on October 1, 2013**
Incorporated by reference from Registrant’s Annual Report on Form 10-K for the fiscal year ended September 27, 2013.
10.3
Form of Award Agreement for 200,000 and 100,000 Non-Qualified Stock Options granted to Richard A. Spires on October 7, 2015 and October 26, 2015, respectively **
Filed herewith.
10.4
Employment Agreement between Registrant and Magnus Nylund, dated as of October 1, 2005 **
Incorporated by reference from Registrant’s Current Report on Form 8-K filed October 3, 2005.
10.5
Employment Agreement between Registrant and David Asai, dated as of April 8, 2013**
Incorporated by reference from Registrant’s Current Report on Form 8-K filed April 9, 2013.
10.6
2007 Equity Incentive Plan **
Incorporated by reference from Registrant’s Definitive Proxy Statement Amendment #2 on Schedule 14A filed May 7, 2007.
10.7
Amendment of 2007 Equity Incentive Plan adopted December 30, 2009 **
Incorporated by reference from Registrant’s Current Report on Form 8-K filed January 4, 2010.
10.8
2007 Equity Incentive Plan Form of Restricted Stock Award Agreement **
Incorporated by reference from Registrant’s Registration Statement on Form S-8 filed January 9, 2008.
10.9
2007 Equity Incentive Plan Form of Stock Option Award Agreement **
Incorporated by reference from Registrant’s Registration Statement on Form S-8 filed January 9, 2008.
10.10
2007 Equity Incentive Plan Form of Stock Award Agreement **
Incorporated by reference from Registrant’s Current Report on Form 8-K filed November 6, 2009.
10.11
2007 Equity Incentive Plan Form of Stock Award Agreement **
Incorporated by reference from Registrant’s Quarterly Report on Form 10-Q for the period ended April 2, 2010.
10.12
Office Lease between Registrant and Metropolitan Life Insurance Company
Incorporated by reference from Registrant’s Quarterly Report on Form 10-Q for the period ended July 1, 2005.
10.13
Facility Lease Agreement between Learning Tree International Inc. and T.E.C. Leaseholds Limited
Incorporated by reference from Registrant’s Quarterly Report on Form 10-Q for the period ended December 30, 2005.
10.14
Amendment of Facility Lease Agreement between Learning Tree International Inc. and TEC Leaseholds Limited effective January 6, 2010
Incorporated by reference from Registrant’s Current Report on Form 8-K filed April 9, 2010.
10.15
Office Lease between Registrant and TrizecHahn One NY Plaza LLC
Incorporated by reference from Registrant’s Quarterly Report on Form 10-Q for the period ended March 31, 2006.
10.16
First Amendment to Leasing Agreement by and between Registrant and PRIM 1801 Rockville Pike, LLC
Incorporated by reference from Registrant’s Current Report on Form 8-K filed March 1, 2007.
10.17
Lease Agreement (Deed of Lease) by and between Registrant and Carlyle-Lane-CFRI Venture II, LLC
Incorporated by reference from Registrant’s Current Report on Form 8-K filed May 4, 2007.
10.18
Lease Agreement between Registrant and Reston Town Center Property LLC
Incorporated by reference from Registrant’s Current Report on Form 8-K filed January 11, 2010
10.19
Lease Agreement between Learning Tree International Limited and Postel Properties Limited
Incorporated by reference from Registrant’s Current Report on Form 8-K filed March 7, 2011.
10.20
Form of Indemnification Agreement **
Incorporated by reference from Registrant’s Annual Report on Form 10-K for the fiscal year ended October 1, 2004.
10.21
Lease among Laxton Properties Limited, Learning Tree International Limited, and Registrant for the ground and basement floors of Euston House
Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 16, 2012.
10.22
Lease among Laxton Properties Limited, Learning Tree International Limited, and Registrant for the first floor of Euston House
Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 16, 2012.
10.23
Lease among Laxton Properties Limited, Learning Tree International Limited, and Registrant for the second floor of Euston House
Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 16, 2012.
10.24
Lease among Laxton Properties Limited, Learning Tree International Limited, and Registrant for part of the sixth floor of Euston House
Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 16, 2012.
10.25
Surrender of a leasehold property among Laxton Properties Limited, Learning Tree International Limited, and Registrant
Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 16, 2012.
10.26
Employment Agreement between Registrant and Gregory L. Adams, dated November 6, 2014 **
Incorporated by reference from the Registrant’s Current Report on Form 8-K filed November 7, 2014.
10.27
2nd Lease and Storage Lease Amending and Extension Agreement, dated as of February 12, 2014, countersigned and effective as of May 7, 2014, by and between 160 Elgin Leaseholds, Inc. and Learning Tree International Inc.
Incorporated by reference from Registrant’s Quarterly Report on Form 10-Q for the period ended March 28, 2014.
10.28
Lease Agreement between Registrant and Vasakronan
Incorporated by reference from the Registrant’s Quarterly Report on Form 10-Q for the period ended June 27, 2014.
10.29
Deed of Lease for the sale of Registrant’s 1831 Michael Faraday Drive, Reston, Virginia property
Incorporated by reference from Registrant’s Annual Report on Form 10-K for the period ended October 3, 2014.
10.30
Termination of Rental Lease between Registrant and Förvaltningsbolaget Marievik HB
Incorporated by reference from Registrant’s Current Report filed on Form 8-K filed June 19, 2014.
Code of Business Conduct and Ethics
Incorporated by reference from Registrant’s Annual Report on Form 10-K for the fiscal year ended September 27, 2013.
21.1
Subsidiaries of the Registrant
Filed herewith.
23.1
Consent of BDO USA, LLP Independent Registered Public Accounting Firm
Filed herewith.
31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
Filed herewith.
31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
Filed herewith.
32.1
Section 1350 Certification by Principal Executive Officer
Filed herewith.
32.2
Section 1350 Certification by Chief Financial Officer
Filed herewith.
101.INS
XBRL Instance Document
Filed herewith.
101.SCH
XBRL Taxonomy Extension Schema Document
Filed herewith.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
Filed herewith.
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
Filed herewith.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
Filed herewith.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
Filed herewith.
**
This exhibit is a management contract, compensatory plan or arrangement.