UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x                              Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2007 or

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

Commission File Number      000-22844

LAUREATE EDUCATION, INC.

(Exact name of registrant as specified in its charter)

Maryland

 

52-1492296

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

650 S. Exeter Street, Baltimore, Maryland

 

21202

(Address of principal executive offices)

 

(Zip Code)

 

1001 Fleet Street, Baltimore, Maryland

(Former address if changed since last period)

Registrant’s telephone number, including area code:   (410) 843-6100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x. No o.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   x

Accelerated filer   o

Non-accelerated filer   o

 

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

The registrant had 52,030,933 shares of Common Stock, par value $.01 per share, outstanding as of July 30, 2007.

 




 

INDEX

.

 

 

 

 

 

PART I.—FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Consolidated Balance Sheets—June 30, 2007 and December 31, 2006

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations—Three-months ended June 30, 2007 and June 30, 2006

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Operations—Six-months ended June 30, 2007 and June 30, 2006

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statements of Cash Flows—Six-months ended June 30, 2007 and June 30, 2006

 

 

 

 

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements—June 30, 2007

 

 

 

 

 

 

 

 

 

Item 2.

 

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

 

 

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

 

 

 

 

 

 

PART II.—OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

 

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

N/A

 

 

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

N/A

 

 

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

N/A

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

N/A

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

 

 

 

 

 

 

 

 

SIGNATURES

 

 

 

 

i




 

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

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

138,229

 

$

106,886

 

Restricted cash

 

 

33,602

 

Available-for-sale securities

 

277

 

62

 

 

 

 

 

 

 

Receivables:

 

 

 

 

 

Accounts receivable

 

181,364

 

188,567

 

Notes receivable

 

119,092

 

110,157

 

Other receivables

 

10,318

 

12,430

 

 

 

310,774

 

311,154

 

Allowance for doubtful accounts

 

(60,113

)

(51,460

)

 

 

250,661

 

259,694

 

 

 

 

 

 

 

Inventory, net

 

6,479

 

5,803

 

Deferred income taxes

 

7,381

 

5,830

 

Income tax receivable

 

40,846

 

2,633

 

Prepaid expenses and other current assets

 

23,907

 

20,877

 

Total current assets

 

467,780

 

435,387

 

 

 

 

 

 

 

Notes receivable, less current portion, net of allowance of $12,227 and $11,761 at June 30, 2007 and December 31, 2006, respectively

 

105,861

 

96,958

 

 

 

 

 

 

 

Property and equipment:

 

 

 

 

 

Land

 

139,146

 

126,598

 

Buildings

 

382,377

 

334,702

 

Construction in-progress

 

43,765

 

58,510

 

Furniture, computer equipment and software

 

340,783

 

295,902

 

Leasehold improvements

 

113,947

 

98,848

 

 

 

1,020,018

 

914,560

 

Accumulated depreciation and amortization

 

(216,193

)

(185,248

)

 

 

803,825

 

729,312

 

 

 

 

 

 

 

Goodwill

 

588,032

 

579,811

 

Other intangible assets:

 

 

 

 

 

Tradenames and accreditations

 

297,030

 

261,009

 

Other intangible assets, net of accumulated amortization of $24,828 and $21,184 at June 30, 2007 and December 31, 2006, respectively

 

22,704

 

4,209

 

 

 

907,766

 

845,029

 

 

 

 

 

 

 

Deferred income taxes

 

28,343

 

34,870

 

Deferred costs, net of accumulated amortization of $19,511 and $19,418 at June 30, 2007 and December 31, 2006, respectively

 

29,780

 

26,928

 

Other assets

 

45,199

 

34,529

 

Total assets

 

$

2,388,554

 

$

2,203,013

 

 

1




 

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

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

 

 

(unaudited)

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

51,263

 

$

40,788

 

Accrued expenses

 

64,563

 

60,987

 

Accrued compensation and benefits

 

71,033

 

68,497

 

Deferred revenue

 

283,723

 

290,242

 

Current portion of long-term debt

 

62,026

 

95,668

 

Current portion of due to shareholders of acquired companies

 

8,381

 

21,781

 

Income tax payable

 

11,455

 

23,141

 

Deferred income taxes

 

3,040

 

1,571

 

Other current liabilities

 

5,734

 

6,679

 

Total current liabilities

 

561,218

 

609,354

 

 

 

 

 

 

 

Long-term debt, less current portion

 

419,901

 

327,734

 

Due to shareholders of acquired companies, less current portion

 

35,993

 

23,484

 

Deferred income taxes

 

33,882

 

28,159

 

Income tax payable

 

58,029

 

 

Other long-term liabilities

 

44,539

 

38,163

 

Total liabilities

 

1,153,562

 

1,026,894

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

Minority interest and minority ownership put arrangements

 

73,044

 

45,424

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $.01 per share—authorized 10,000 shares, no shares issued and outstanding as of June 30, 2007 and December 31, 2006

 

 

 

 

 

 

 

 

 

Common stock, par value $.01 per share—authorized 90,000 shares, issued and outstanding shares of 51,726 and 51,426 as of June 30, 2007 and December 31, 2006, respectively

 

517

 

514

 

Additional paid-in capital

 

547,950

 

538,541

 

Retained earnings

 

541,572

 

537,144

 

Accumulated other comprehensive income

 

71,909

 

54,496

 

Total stockholders’ equity

 

1,161,948

 

1,130,695

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

2,388,554

 

$

2,203,013

 

 

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

2




 

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

 

 

Three months ended June 30,

 

 

 

2007

 

2006

 

 

 

 

 

(as restated—
Note 2)

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Revenues

 

$

375,776

 

$

303,119

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Direct costs

 

295,441

 

234,831

 

General and administrative expenses

 

10,330

 

11,420

 

Transaction costs

 

3,546

 

 

Total costs and expenses

 

309,317

 

246,251

 

 

 

 

 

 

 

Operating income

 

66,459

 

56,868

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest and other income

 

4,875

 

4,282

 

Gain on sale of Chancery Software, Ltd.

 

809

 

9,322

 

Interest expense

 

(7,903

)

(3,662

)

Foreign currency exchange loss

 

(290

)

(203

)

 

 

(2,509

)

9,739

 

 

 

 

 

 

 

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

 

63,950

 

66,607

 

Income tax expense

 

(389

)

(12,133

)

Minority interest in income of consolidated subsidiaries, net of tax

 

(4,363

)

(9,645

)

Equity in net (loss) income of affiliates, net of tax

 

(161

)

(102

)

 

 

 

 

 

 

Income from continuing operations

 

59,037

 

44,727

 

Loss from discontinued operations, net of income tax expense of $0 in 2007 and $314 in 2006

 

(8

)

(1,504

)

Loss on disposal of discontinued operations, net of income tax (expense) benefit of $(103) in 2007 and $415 in 2006

 

(103

)

(1,182

)

Net income

 

$

58,926

 

$

42,041

 

 

 

 

 

 

 

Earnings available to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

59,037

 

$

44,727

 

Effect of minority put arrangements

 

(6,176

)

 

Income from continuing operations available to common shareholders

 

$

52,861

 

$

44,727

 

 

 

 

 

 

 

Net income

 

$

58,926

 

$

42,041

 

Effect of minority put arrangements

 

(6,176

)

 

Net income available to common shareholders

 

$

52,750

 

$

42,041

 

 

 

 

 

 

 

Earnings per common share, basic:

 

 

 

 

 

Income from continuing operations available to common shareholders

 

$

1.02

 

$

0.87

 

Net income available to common shareholders

 

$

1.02

 

$

0.82

 

 

 

 

 

 

 

Earnings per common share, diluted:

 

 

 

 

 

Income from continuing operations available to common shareholders

 

$

0.98

 

$

0.84

 

Net income available to common shareholders

 

$

0.98

 

$

0.79

 

 

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

3




 

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

 

 

Six months ended June 30,

 

 

 

2007

 

2006

 

 

 

 

 

(as restated—
Note 2)

 

 

 

(Unaudited)

 

 

 

 

 

 

 

Revenues

 

$

659,300

 

$

538,229

 

 

 

 

 

 

 

Costs and expenses

 

 

 

 

 

Direct costs

 

568,372

 

460,191

 

General and administrative expenses

 

21,366

 

21,271

 

Transaction costs

 

12,849

 

 

Total costs and expenses

 

602,587

 

481,462

 

 

 

 

 

 

 

Operating income

 

56,713

 

56,767

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest and other income

 

10,970

 

8,004

 

Gain on sale of Chancery Software, Ltd.

 

809

 

9,322

 

Interest expense

 

(15,501

)

(7,783

)

Foreign currency exchange loss

 

(622

)

(314

)

 

 

(4,344

)

9,229

 

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

 

52,369

 

65,996

 

Income tax benefit (expense)

 

1,257

 

(12,365

)

Minority interest in income of consolidated subsidiaries, net of tax

 

(5,855

)

(11,963

)

Equity in net (loss) income of affiliates, net of tax

 

(350

)

(211

)

 

 

 

 

 

 

Income from continuing operations

 

47,421

 

41,457

 

 

 

 

 

 

 

Loss from discontinued operations, net of income tax expense of $0 in 2007 and $314
in 2006

 

(17

)

(1,673

)

Gain (loss) on disposal of discontinued operations, net of income tax (expense) benefit of $(368) in 2007 and $991 in 2006

 

337

 

(921

)

Net income

 

$

47,741

 

$

38,863

 

 

 

 

 

 

 

Earnings available to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

47,421

 

$

41,457

 

Effect of minority put arrangements

 

(20,937

)

 

Income from continuing operations available to common shareholders

 

$

26,484

 

$

41,457

 

 

 

 

 

 

 

Net income

 

$

47,741

 

$

38,863

 

Effect of minority put arrangements

 

(20,937

)

 

Net income available to common shareholders

 

$

26,804

 

$

38,863

 

 

 

 

 

 

 

Earnings per common share, basic:

 

 

 

 

 

Income from continuing operations available to common shareholders

 

$

0.51

 

$

0.81

 

Net income available to common shareholders

 

$

0.52

 

$

0.76

 

 

 

 

 

 

 

Earnings per common share, diluted:

 

 

 

 

 

Income from continuing operations available to common shareholders

 

$

0.49

 

$

0.78

 

Net income available to common shareholders

 

$

0.50

 

$

0.73

 

 

 

 

 

 

 

 

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

4




 

LAUREATE EDUCATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)

 

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

 

 

(as restated—
Note 2)

 

 

 

(Unaudited)

 

Operating activities

 

 

 

 

 

Net income

 

$

47,741

 

$

38,863

 

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

 

 

 

 

 

Depreciation and amortization of fixed assets

 

27,450

 

23,408

 

Amortization

 

9,533

 

6,367

 

(Gain) Loss on disposal of discontinued operations

 

(337

)

921

 

Gain on sale of Chancery Software, Ltd.

 

(809

)

(9,322

)

Gain on sale of assets

 

(854

)

 

Non-cash interest expense

 

1,062

 

1,033

 

Non-cash stock compensation expense

 

5,929

 

6,711

 

Bad debt expense

 

11,977

 

8,753

 

Minority interest in consolidated subsidiaries

 

5,855

 

11,963

 

Equity in net income (loss) of affiliates

 

350

 

211

 

Deferred income taxes

 

(7,040

)

(4,558

)

Other non-cash items

 

1,924

 

(1,835

)

Changes in operating assets and liabilities:

 

 

 

 

 

Receivables

 

(1,026

)

40,796

 

Inventory, prepaid expenses and other current assets

 

(2,452

)

(6,059

)

Accounts payable and accrued expenses

 

11,190

 

19,142

 

Income tax receivable

 

(2,733

)

1,241

 

Income tax payable

 

(290

)

(4,504

)

Deferred revenue and other current liabilities

 

(12,233

)

(35,508

)

Net cash provided by operating activities

 

95,237

 

97,623

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Purchase of available-for-sale securities

 

(190

)

(431

)

Change in restricted cash

 

33,602

 

 

Purchase of property and equipment, net

 

(86,179

)

(85,867

)

Cash loaned in exchange for notes receivable

 

(2,609

)

(3,123

)

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

 

(49,060

)

(10,440

)

Expenditures for deferred costs

 

(14,375

)

(2,068

)

Change in other long-term assets

 

(621

)

832

 

Net cash used in investing activities

 

(119,432

)

(101,097

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from exercise of options

 

4,900

 

17,862

 

Proceeds from issuance of long-term debt

 

174,542

 

63,240

 

Payments on long-term debt

 

(125,310

)

(69,043

)

Change in other long-term liabilities and other financing activities

 

(1,020

)

1,876

 

Net cash provided by financing activities

 

53,112

 

13,935

 

Effects of exchange rate changes on cash

 

2,426

 

88

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

31,343

 

10,549

 

Cash and cash equivalents at beginning of period

 

106,886

 

106,014

 

Cash and cash equivalents at end of period

 

$

138,229

 

$

116,563

 

 

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

5




 

Laureate Education, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

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

Note 1 — Description of Business and Basis of Presentation

Laureate Education, Inc. and subsidiaries (the “Company”) provides higher education programs and services to students through the global network of licensed campus-based and online universities and higher education institutions (“higher education institutions”). The Company’s educational offerings are delivered through three separate reportable segments: Campus Based - Latin America (“Latin America”), Campus Based - Europe (“Europe”) and Laureate Online Education. The campus-based segments of Latin America and Europe own or maintain controlling interests in thirteen and ten separately licensed higher education institutions, respectively. The Latin America segment has locations in Mexico, Chile, Brazil, Peru, Ecuador, Panama, Costa Rica, and Honduras. The Europe segment has locations in Spain, Switzerland, France, and Cyprus. The Laureate Online Education segment provides career-oriented degree programs to working adult students through Walden E-Learning, Inc. (“Walden”), Laureate Online Education BV, and Canter and Associates (“Canter”).

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the fiscal year ended December 31, 2006, included in the Company’s Annual Report on Form 10-K. Operating results for the three- and six-month periods ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

Certain amounts previously reported for 2006, including a reclassification of $4,214 from additional paid-in capital to retained earnings and a reclassification from prepaid expenses and other current assets to cash of $9,899, have been reclassified to conform to the 2007 presentation. As discussed more fully in Note 4, certain business components are classified as discontinued operations in the accompanying consolidated financial statements.

On June 3, 2007, the Company entered into an Amended and Restated Agreement and Plan of Merger (the “Amended and Restated Merger Agreement”) with Wengen Alberta, Limited Partnership, an Alberta limited partnership (“Parent”), and L Curve Sub Inc., a Maryland corporation and a direct subsidiary of Parent (“L Curve”). The Amended and Restated Merger Agreement amends and restates the Agreement and Plan of Merger dated as of January 28, 2007 among the same parties. Pursuant to the Amended and Restated Merger Agreement, L Curve assigned some of its rights and obligations under the Amended and Restated Merger Agreement to M Curve Sub Inc., a Maryland corporation and a direct subsidiary of Parent (“M Curve”, and together with L Curve, the “Purchasers”), including the right to acquire shares of the Company’s common stock in the Offer (as defined below). On June 8, 2007, L Curve and M Curve commenced a tender offer (the “Offer”) to purchase all of the Company’s outstanding shares of common stock, par value $0.01 per share (the “Shares”), at a price of $62.00 per Share, net to the seller in cash (subject to applicable withholding tax), without interest, on the terms and subject to the conditions set forth in the Amended and Restated Merger Agreement. The Amended and Restated Merger Agreement was filed in a Current Report on Form 8-K filed with the Securities and Exchange Commission on June 4, 2007. The foregoing description of the Amended and Restated Merger Agreement is qualified in its entirety by reference to the full text of the Amended and Restated Merger Agreement.

On July 6, 2007, at 12:00 midnight, Eastern Standard Time, the initial offering period expired. During the initial offering period, the Company’s stockholders had tendered and not withdrawn, and the Purchasers accepted for payment, 30,696,311 shares of the Company’s common stock (including shares tendered pursuant to the guaranteed delivery procedures), which represented approximately 53% of the then outstanding shares of the Company’s common stock on a fully diluted basis and approximately 59% of the then outstanding shares and therefore satisfied the “minimum condition” of the Offer, which required the tender of a majority of the Company’s outstanding shares on a fully diluted basis (other than any shares held by Parent and its subsidiaries).

6




 

On July 9, 2007, Parent commenced a subsequent offering period, which expired at 5:00 p.m., Eastern Standard Time, on July 18, 2007. As of the expiration of the subsequent offering period, the Company’s stockholders had tendered a total of 46,524,370 shares of the Company’s common stock, which represented approximately 89% of the then outstanding shares.

In the Amended and Restated Merger Agreement, the Company granted Purchasers the option (the “Top-Up Option”) to purchase, at a price per Share equal to $62.00, a number of newly issued Shares equal to the number of Shares that, when added to the number of Shares owned, directly or indirectly, by Parent or Purchasers at the time of exercise of the Top-Up Option, constitutes one Share more than 90% of the total Shares that would be outstanding immediately after the issuance of all Shares subject to the Top-Up Option. On July 25, 2007, the Company received written notice that the Purchasers intended to exercise the Top-Up Option on August 14, 2007 and acquire 3,034,734 shares of the Company’s common stock (the “Top-Up Shares”). The Top-Up Shares will be paid for the delivery by the Purchasers of a promissory note (a “Note”) for the aggregate principal amount of approximately of $188,153,508. The Note will be due and payable one year from the date of its issue, bear interest at the rate of 3% per annum, and is pre-payable at any time without penalty at Purchasers’ option. The Top-Up Shares will be issued without registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption from registration set forth in Section 4(2) of the Securities Act.

Immediately after the issuance of the Top-Up Shares, Purchasers will own more than 90% of the outstanding shares of the Company’s common stock and permit the completion of a “short-form” merger under applicable Maryland law, without a vote of the Company’s stockholders. Accordingly, Purchasers will acquire the remaining shares of the Company’s common stock in a “short-form” merger in which all remaining Company stockholders who did not tender their shares in the Offer will receive the same $62.00 per share in cash paid in the Offer.

Subsequent to June 30, 2007, as a result of the Purchaser's acquisition of approximately 89% of the then outstanding shares, the Company expects to voluntarily apply purchase accounting at the Laureate Education, Inc. reporting entity level as of July 31, 2007 pursuant to Staff Accounting Bulletin Topic 5J, “Push Down Basis of Accounting Required in Certain Limited Circumstances”.

As a result of the merger process, the Company expects to incur significant additional indebtedness of approximately $1,840,000 which consists of several types of debt instruments including a revolving credit facility and other fixed instruments with maturities ranging from seven to nine years.

Note 2 — Significant Accounting Policies

Effect of Minority Share Ownership Purchase Arrangements on 2006 Financial Statements

In the fourth quarter of 2006, the Company reevaluated the accounting for and the financial statement presentation of new and pre-existing put and call option agreements entered into in connection with certain acquisitions. The three and six months ended June 30, 2006 have been restated to reflect the proper accounting of these pre-existing put and call agreements.

The following amounts represent the impact on each financial statement line affected by the Company’s accounting of the minority share ownership purchase arrangements on the statement of operations for the quarter and six-months ended June 30, 2006.

 

Three-Months
Ended
June 30, 2006

 

Six-Months
Ended
June 30, 2006

 

Statement of Operations

 

 

 

 

 

Increase (decrease) to:

 

 

 

 

 

Direct costs

 

$

121

 

$

245

 

Operating income

 

(121

)

(245

)

 

 

 

 

 

 

Interest expense

 

(519

)

(1,033

)

Minority interest in income of consolidated subsidiaries, net of tax

 

4,702

 

2,841

 

Income from continuing operations

 

4,062

 

1,563

 

 

 

 

 

 

 

Net income

 

$

4,062

 

$

1,563

 

 

 

 

 

 

 

Increase (decrease) to:

 

 

 

 

 

Earnings per common share, basic:

 

 

 

 

 

Income from continuing operations

 

$

0.08

 

$

0.03

 

Net income

 

$

0.08

 

$

0.03

 

 

 

 

 

 

 

Earnings per common share, diluted:

 

 

 

 

 

Income from continuing operations

 

$

0.08

 

$

0.03

 

Net income

 

$

0.08

 

$

0.03

 

 

7




 

Income Taxes

The Company accounts for income taxes using the liability method. Under the liability method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e. temporary differences) and are measured at prevailing enacted tax rates that will be in effect when these differences are expected to be settled or realized.

The Company also measures its interim income tax provision using Financial Accounting Standards Board Interpretation No. (“FIN”) 18, Accounting for Income Taxes in Interim Periods. FIN 18 measures the seasonality of any subsidiary, or controlled entity that operates at an annual loss for which no income tax benefit is recognized. This seasonality can cause volatility in the interim effective rates. FIN 18, however, has no effect on the Company’s annual effective tax rate.

As more fully described in Note 10, the Company adopted FIN 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) effective January 1, 2007. FIN 48 is a significant change to accounting for income taxes. FIN 48 creates a single model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position must meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Inherent in this calculation are critical judgments by management related to the determination of the basis for the Company’s tax positions.

Deferred Costs

The Company defers direct and incremental costs associated with the development of online educational programs and campus-based curriculum. Direct and incremental costs associated with the development of education programs includes external contract labor for course design and content development, external content experts and industry leaders who consult on program design, media production costs, and certain direct internal labor costs. Deferred costs are charged to earnings ratably over the period that the associated product revenues are recorded to earnings.

During the first quarter of 2007, the Company identified errors in accounting for certain deferred costs. As a result, the Company wrote off $2,609, net of taxes of $1,207, of prior period expenses that were improperly capitalized. The write off is not material to either the current year or prior year financial statements.

Impact of Recently Issued Accounting Standards

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”), which allows entities to voluntarily choose, to measure many financial assets and financial liabilities at fair value. SFAS 159 is effective in fiscal years beginning after November 15, 2007. The Company will adopt SFAS 159 on January 1, 2008. The Company is reviewing this pronouncement and assessing what impact it will have on the Company’s financial position or results of operations.

Note 3 — Equity-Based Compensation

The Company recognizes equity-based compensation under the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment”.

8




 

The total compensation expense recognized for the three-month period is as follows:

 

Three-months ended
June 30, 2007

 

Three-months ended
June 30, 2006

 

Stock options (net of estimated forfeitures)

 

$

1,787

 

$

1,460

 

Non-vested restricted stock and unit awards

 

$

859

 

$

1,796

 

 

The total compensation expense recognized for the six-month period is as follows:

 

Six-months ended
June 30, 2007

 

Six-months ended
June 30, 2006

 

Stock options (net of estimated forfeitures)

 

$

3,649

 

$

2,996

 

Non-vested restricted stock and unit awards

 

$

2,280

 

$

3,715

 

 

The Company recognizes these compensation costs on a straight-line basis over the requisite service period of the award, for all awards in which service is the only vesting condition. The Company has awarded restricted stock and unit awards in which the vesting is based on Company performance metrics. The compensation cost for performance based awards is recognized when it is probable that the performance levels will be met.

Note 4 — Discontinued Operations

WSI Business

During the first quarter of 2005, the Company closed the sale of its Wall Street Institute (“WSI”) business. During 2006 and 2005, WSI Education S.a.r.l. received preliminary field audit reports assessing Italian value added taxes (“VAT”) owed related to services provided by the WSI business unit in 2004 and 2003 and prior to its disposition. Under the terms of the sale agreement with WSI, the Company agreed to indemnify WSI from obligations that may arise as a result of an Italian VAT assessment related to periods prior to the closing of the sale of the WSI business unit on February 28, 2005. However, the Company is entitled to the value of the tax benefit of any indemnification. In the first quarter of 2005, the Company issued a $12,000 standby letter of credit in favor of WSI Education S.a.r.l for the VAT tax indemnification related to the sale of WSI. The Company has filed, on behalf of WSI Education S.a.r.l., an appeal with the Italian authorities and a complaint against the Italian Republic at the European Union Commission for restraint of trade based on the VAT exemption only being available to Italian owned companies. In the third quarter of 2006, the Company received notification that the Italian Court denied the stay of payment request, which sought to defer payment of the tax and interest portion of the obligation that is normally required to commence court proceedings. As a result, the Company deposited approximately $3,000 with the Italian tax authority, representing approximately 50% of the 2003 and prior total tax and interest assessed to date. In July 2007, the Company received notification that the Italian authorities had found in favor of WSI Education S.a.r.l. and denied the VAT assessment. The Italian tax authorities have 60 days in which to file an appeal. If the Court’s decision is supported during the appeal, the Company expects that the $3,000 deposit will be returned, and the $12,000 letter of credit will be released. The Company believes that a loss from this matter is not probable, nor is it possible to estimate the ultimate outcome of this issue. No expense for any potential adverse outcome of this matter has been recorded in the consolidated financial statements.

Other

During the first quarter of 2007, the Company recorded a gain on disposal of discontinued operations of approximately $411, net of $265 of tax, due to the termination of a lease. The Company entered into an agreement to terminate a lease in

9




 

which rental payments had been accrued in discontinued operations, related to a 2000 business sale. See Note 14, Material Guarantees, for further discussion of the lease termination transaction.

Summarized Financial Information of Discontinued Operations

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

 

WSI

 

Other

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues

 

$

 

$

 

$

 

$

1,988

 

Pretax loss from discontinued operations

 

$

(8

)

$

(14

)

$

 

$

(1,176

)

 

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

 

WSI

 

Other

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues

 

$

 

$

 

$

 

$

3,787

 

Pretax (loss) income from discontinued operations

 

$

(17

)

$

(25

)

$

 

$

(1,334

)

 

Note 5 — Acquisitions

During the six-month period ending June 30, 2007, the Company purchased Universidad del Desarrollo Professional (“UNIDEP”) and de Cultura Superior Valle del Bravo de Reynosa, A.C. (“UVB”), educational institutions in Mexico. The acquired institutions will be combined into the Company’s Mexico operations. UNIDEP serves a lower tuition segment, which is a large and underserved market in Mexico. This acquisition provides a solid platform to expand in this key growth segment of Mexico and is a key part of the Company’s growth strategy. The UVB acquisition was made to extend UVM’s geographical scope into eastern Mexico into key markets targeted by UVM, expand the Health Sciences platform, and provide further national scale to UVM’s operations. These transactions had a total purchase price of $54,092, paid in cash of $36,072, $11,648 to be paid through notes and $6,372 of debt assumed. UNIDEP and UVB’s results of operations are included in the Company’s Statement of Operations since the date of the acquisition.

The Company accounted for these acquisitions using the purchase method of accounting, allocating the purchase price to its acquired identifiable tangible and intangible assets and liabilities assumed based on estimated fair values at the date of acquisition, with the excess of $14,828 recorded as goodwill. The preliminary allocation of the purchase price is subject to revision based on final determination of fair values.

Note 6 — Notes Receivable (Long-term)

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

 

June 30,
2007

 

December 31,
2006

 

Trade notes receivable (long-term), net of allowance of $12,227 and $11,761 at June 30, 2007 and December 31, 2006, respectively

 

$

46,171

 

$

42,702

 

Notes receivable (long-term):

 

 

 

 

 

Kendall College (“Kendall”)

 

36,737

 

33,031

 

WSI Education S.a.r.l.

 

15,374

 

14,994

 

Other

 

7,579

 

6,231

 

 

 

$

105,861

 

$

96,958

 

 

10




 

Of the balance of long-term trade notes receivable, $7,656 and $10,373 was unearned as of June 30, 2007 and December 31, 2006 and is included in deferred revenue on the Company’s balance sheet. Tuition revenues are generally billable, and the full amount of notes receivable and related deferred revenue are recorded, when a note agreement is signed by the student.

Note 7— Other Intangible Assets

The following table summarizes other intangible assets as of June 30, 2007:

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Subject to amortization:

 

 

 

 

 

 

 

Student rosters

 

$

25,090

 

$

(21,801

)

$

3,289

 

Contract rights

 

20,038

 

(1,169

)

18,869

 

Non-compete agreements

 

1,385

 

(1,261

)

124

 

Other

 

1,019

 

(597

)

422

 

Total

 

$

47,532

 

$

(24,828

)

$

22,704

 

 

The following table summarizes other intangible assets as of December 31, 2006:

 

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net Carrying
Amount

 

Subject to amortization:

 

 

 

 

 

 

 

Student rosters

 

$

22,945

 

$

(19,484

)

$

3,461

 

Non-compete agreements

 

1,363

 

(1,151

)

212

 

Other

 

1,085

 

(549

)

536

 

Total

 

$

25,393

 

$

(21,184

)

$

4,209

 

 

Amortization expense for intangible assets was $2,173 and $3,499 for the three- and six-months ended June 30, 2007, respectively, and $1,128 and $2,276 for the three- and six-months ended June 30, 2006 respectively. The estimated future amortization expense for intangible assets for the remaining six-month period of 2007 is $2,089. The estimated future amortization expense for intangible assets for each of the five years subsequent to December 31, 2007 is as follows: 2007 - $2,089; 2008 - $3,310; 2009 - $2,859; 2010 - $2,401; 2011 and beyond - $12,045.

Note 8 — Long-Term Debt

Long-term debt consists of the following:

 

 

June 30,

 

December 31,

 

 

 

2007

 

2006

 

Long-term credit lines under the $525,000 credit agreement with JPMorgan Chase Bank, National Association and certain other parties thereto bearing interest at rates ranging from 6.83% to 6.89%

 

$

279,119

 

$

208,040

 

Various unsecured lines of credit bearing interest at variable rates ranging from 3.45% to 10.00%

 

61,042

 

74,923

 

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

 

49,871

 

52,220

 

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

 

27,928

 

27,981

 

Capital lease obligations bearing interest at rates ranging from 2.60% to 9.00%

 

21,960

 

22,699

 

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

 

16,114

 

18,638

 

Various notes payable bearing interest at variable rates ranging from 6.50% to 9.15%

 

9,210

 

2,988

 

Fixed Purchase Price Arrangements (See Notes 2 and 14)

 

8,857

 

8,446

 

Similar Exchange Contract Arrangements (See Notes 2 and 14)

 

7,826

 

7,467

 

 

 

481,927

 

423,402

 

Less: current portion of long-term debt

 

62,026

 

95,668

 

Total long-term debt, net of current portion

 

$

419,901

 

$

327,734

 

 

11




 

During the second quarter of 2007 the Company entered into a Second Amendment (the “Amendment”) to a Credit Agreement (“Bank Facility”) with JPMorgan Chase Bank, National Association and certain parties thereto. The Bank Facility prior to the Amendment included a revolving line of credit in the maximum principal amount of $200,000 (“U.S. Tranche”) and a revolving line of credit in the maximum principal amount of $150,000 (“Spanish Tranche” and together with the U.S. Tranche, “Revolving Credit Facility”). The Amendment increased the U.S. Tranche commitments by an aggregate principal amount of up to an additional $175,000, provides for an increase in the maximum amount of the Revolving Credit Facility that would be available for letters of credit from $35,000 to $110,000, amends the definition of Change in Control in the Bank Facility such that the acquisition of a controlling interest in the Company pursuant to the Offer would not constitute a Change in Control, and imposes restrictions or prohibitions on the Company’s ability to make certain restricted payments and to engage in certain transactions with affiliates.

As contemplated by this Amendment, the Company received additional U.S. sub-facility commitments in an aggregate amount of $175,000 from certain of the existing lenders under the Credit Agreement as well as two additional lenders that joined the Credit Agreement. After the amendment the total amount available under the Credit Agreement is now $525,000. In connection with the new commitments under the Bank Facility, the Company provided an irrevocable notice of termination of commitments under the Bank Facility to the facility agent to be effective on December 31, 2009. The notice of termination effectively shortens the maturity date of the Credit Agreement from August 16, 2011 to December 31, 2009.

Note 9 — Due to Shareholders of Acquired Companies

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

 

 

June 30,
2007

 

December 31,
2006

 

Amounts payable to former shareholders of:

 

 

 

 

 

Universidad Tecnologica Centroamericana (“UNITEC”)

 

$

14,519

 

$

15,038

 

Universidade Anhembi Morumbi (“UAM”)

 

12,470

 

10,831

 

Universidad del Desarrollo Profesional (“UNIDEP”)

 

8,407

 

 

Instituto de Cultura Superior Valle del Bravo de Reynosa, A.C. (“UVB”)

 

3,515

 

 

Universidad Peruana de Ciencias Aplicadas (“UPC”)

 

3,088

 

3,059

 

Universidad del Noroeste (“UNO”)

 

1,842

 

1,882

 

Compania de Servicios Educativos (“CSE”)

 

433

 

528

 

Universidad Latinoamericana de Ciencia y Tecnologia (“ULACIT”)

 

100

 

100

 

Universidad Andres Bello (“UNAB”)

 

 

13,827

 

 

 

44,374

 

45,265

 

Less: current portion of due to shareholders

 

8,381

 

21,781

 

Total due to shareholders, net of current portion

 

$

35,993

 

$

23,484

 

 

Due to the acquisition of UNIDEP in the second quarter of 2007, amounts payable to the former shareholders of UNIDEP are due in two equal principal payments of $4,167 plus interest on the second and third anniversary dates of the acquisition.

Due to the acquisition of UVB in the first quarter of 2007, amounts payable to the former shareholders of UVB are due in one balloon payment plus interest five years from the acquisition date.

Note 10 — Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized a charge of approximately $22,376 to the January 1, 2007 balance of retained earnings. The total amount of gross unrecognized tax benefits as of January 1, 2007 was $73,291 and related accrued interest and penalties was $10,178. If these unrecognized tax benefits and related interest and penalties were recognized, approximately $83,469, net of tax benefits, would be recorded as a component of income tax expense. The company elects to record changes in the

12




 

FIN48 opening balance in the current period income/loss from continuing operations. The Company will continue its practice to recognize interest and penalties related to uncertain tax positions as a component of income tax expense.

The Company files numerous consolidated and separate income tax returns in the United States federal jurisdiction along with various state and foreign jurisdictions. With few exceptions, as noted below, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2000. The Company is currently under examination for the 2003 federal income tax return and has open audits for 1997 through 2000. The Company is also currently under examination in the Netherlands for the years 2000 through 2003. It is reasonably possible that within the next 12 months the Company will resolve some tax matters with taxing authorities that could result in a reduction in our FIN 48 liability up to $7,500.

The Company’s income tax provisions for all periods consist of federal, state, and foreign income taxes. The tax provisions for the three-month and six-month periods ended June 30, 2007 and 2006 were based on the estimated effective tax rates applicable for the 2007 and 2006 full years, after giving effect to significant items related specifically to the interim periods, including the mix of income for the period between higher and lower taxed jurisdictions. The Company’s effective tax rate from continuing operations was 0.6% and (2.4)% for the three- and six-months ended June 30, 2007 respectively and 18.2% and 18.7% for the three- and six-month ended June 30, 2006, respectively. For the three-months ended June 30, 2007, the Company released approximately $3,800 due to the tentative settlement of the 2000 Prometric IRS issue. This is recognized as a discrete event in the second quarter and significantly reduces the three-month and six-month effective tax rates. For the six-months ended June 30, 2007 and 2006, the effective rate includes the impact of FIN 18. FIN 18 only applies to interim periods and has no effect on the Company’s annual effective rate. The Company has operations in multiple countries, many of which have statutory tax rates lower than the United States. Generally lower tax rates in these foreign jurisdictions along with the Company’s intent and ability to permanently reinvest foreign earnings outside of the United States results in an effective tax rate significantly lower than the statutory rate in the United States.

On February 8, 2006, the Company received notice of certain adjustments proposed by the Internal Revenue Service (the “IRS”) with respect to the Company’s 2000 federal income tax return. The proposed adjustments primarily relate to the gain on the sale of the Company’s Prometric testing subsidiary in 2000 for $775,000. The IRS claimed that the Company owes additional taxes of approximately $54,600 plus penalties and interest. The Company and the IRS, during the second quarter of 2007, tentatively reached a settlement agreement which is subject to final IRS approval. As a result, approximately $3,800 of the FIN 48 liability was reversed through continuing operations.  Based on current information, the Company believes it is adequately reserved for this issue.

On February 23, 2006, the Company received a Notice of Deficiency from the IRS for the Company’s 1997 federal income tax return disagreeing with the Company’s exclusion from income of a break up fee it received in its attempted acquisition of National Education Corporation. The Company is appealing the Notice of Deficiency and paid the current amount of the assessment, $8,100, and the associated interest due of $5,900, in May 2006. These amounts had been previously accrued by the Company. The Company is preparing its appeal to be appropriately filed in the United States Court of Claims. The Company believes that it properly excluded the break up fee from income and intends to vigorously contest the IRS’s determination. Although the ultimate disposition of this issue is uncertain, based on current information, the Company believes that the outcome of this issue will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

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

13




 

Note 11 — Stockholders’ Equity

The components of stockholders’ equity are as follows:

LAUREATE EDUCATION, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity

(Dollar and share amounts in thousands)

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

Total

 

 

 

Common

 

Paid-In

 

Retained

 

Comprehensive

 

Stockholders’

 

 

 

Stock

 

Capital

 

Earnings

 

Income

 

Equity

 

Balance at December 31, 2006

 

$

514

 

$

538,541

 

$

537,144

 

$

54,496

 

$

1,130,695

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised for purchase of 204 shares of common stock, net of 11 replenishment shares

 

2

 

4,900

 

 

 

 

 

4,902

 

Non-cash stock compensation

 

 

 

5,929

 

 

 

 

 

5,929

 

Change in redemption value of minority ownership put arrangements

 

 

 

 

 

(20,937

)

 

 

(20,937

)

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative impact of change in accounting for uncertainties in income taxes (FIN 48 - see notes 2 and 10)

 

 

 

 

 

(22,376

)

 

 

(22,376

)

Other

 

1

 

(1,420

)

 

 

(215

)

(1,634

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income for the six months ended June 30, 2007

 

 

 

 

 

47,741

 

 

 

47,741

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

17,628

 

17,628

 

Total comprehensive income

 

 

 

 

 

65,369

 

Balance at June 30, 2007

 

$

517

 

$

547,950

 

$

541,572

 

$

71,909

 

$

1,161,948

 

 

Note 12 — Comprehensive Income

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

 

 

Three-months ended
June 30,

 

Six-months ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

(as restated —
Note 2)

 

 

 

(as restated —
Note 2)

 

Net income

 

$

58,926

 

$

42,041

 

$

47,741

 

$

38,863

 

Foreign currency translation adjustment

 

21,371

 

391

 

17,628

 

1,212

 

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

 

 

(6

)

 

9

 

Comprehensive income

 

$

80,297

 

$

42,426

 

$

65,369

 

$

40,084

 

 

14




 

Note 13 — Earnings Per Share

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

 

 

Three-months ended

 

Six-months ended

 

 

 

June 30,

 

June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

 

 

(as restated —
Note 2)

 

 

 

(as restated —
Note 2)

 

Numerator used in basic and diluted income per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

59,037

 

$

44,727

 

$

47,421

 

$

41,457

 

Loss from discontinued operations, net of tax

 

(8

)

(1,504

)

(17

)

(1,673

)

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

 

(103

)

(1,182

)

337

 

(921

)

Net income

 

$

58,926

 

$

42,041

 

$

47,741

 

$

38,863

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

59,037

 

$

44,727

 

$

47,421

 

$

41,457

 

Effect of minority put arrangements

 

(6,176

)

 

(20,937

)

 

Income from continuing operations available to common shareholders

 

$

52,861

 

$

44,727

 

$

26,484

 

$

41,457

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

58,926

 

$

42,041

 

$

47,741

 

$

38,863

 

Effect of minority put arrangements

 

(6,176

)

 

(20,937

)

 

Net income available to common stockholders

 

$

52,750

 

$

42,041

 

$

26,804

 

$

38,863

 

 

 

 

 

 

 

 

 

 

 

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

 

51,814

 

51,429

 

51,714

 

50,940

 

Net effect of dilutive stock options based on treasury stock method

 

1,882

 

1,669

 

1,839

 

1,943

 

Denominator for diluted earnings per share—weighted-average common shares outstanding and assumed conversions

 

53,696

 

53,098

 

53,553

 

52,883

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share basic:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.14

 

$

0.87

 

$

0.92

 

$

0.81

 

Effect of minority put arrangements

 

(0.12

)

 

(0.40

)

 

Income from continuing operations available to common shareholders

 

1.02

 

0.87

 

0.51

 

0.81

 

Loss from discontinued operations, net of tax

 

0.00

 

(0.03

)

0.00

 

(0.03

)

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

 

(0.00

)

(0.02

)

0.01

 

(0.02

)

Net income available to common shareholders

 

$

1.02

 

$

0.82

 

$

0.52

 

$

0.76

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.14

 

$

0.87

 

$

0.92

 

$

0.81

 

Effect of redeemable minority interests

 

(0.12

)

 

(0.40

)

 

Income from continuing operation available to common shareholders

 

$

1.02

 

$

0.87

 

$

0.51

 

$

0.81

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1.14

 

$

0.82

 

$

0.92

 

$

0.76

 

Effect of redeemable minority interests

 

(0.12

)

 

(0.40

)

 

Net income available to common stockholders

 

$

1.02

 

$

0.82

 

$

0.52

 

$

0.76

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share diluted:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

1.10

 

$

0.84

 

$

0.89

 

$

0.78

 

Effect of minority put arrangements

 

(0.12

)

 

(0.39

)

 

Income from continuing operation available to common shareholders

 

0.98

 

0.84

 

0.49

 

0.78

 

Loss from discontinued operations, net of tax

 

(0.00

)

(0.03

)

(0.00

)

(0.03

)

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

 

(0.00

)

(0.02

)

0.01

 

(0.02

)

Net income available to common shareholders

 

$

0.98

 

$

0.79

 

$

0.50

 

$

0.73

 

Income from continuing operations

 

$

1.10

 

$

0.84

 

$

0.89

 

$

0.78

 

Effect of redeemable minority interests

 

(0.12

)

 

(0.39

)

 

Income from continuing operation available to common shareholders

 

$

0.98

 

$

0.84

 

$

0.49

 

$

0.78

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1.10

 

$

0.79

 

$

0.89

 

$

0.73

 

Effect of redeemable minority interests

 

(0.12

)

 

(0.39

)

 

Net income available to common stockholders

 

$

0.98

 

$

0.79

 

$

0.50

 

$

0.73

 

 

Per share amounts may not sum due to rounding differences.

15




 

Note 14 — Commitments and Contingencies

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

Higher Education Institution

 

Date of Contingency

 

Additional
Ownership Share

 

Terms of Contingent Transaction

Company Call Right Arrangements:

 

 

 

 

 

 

UAM(1)

 

March 1, 2009

 

29%

 

The greater of 4 times recurring earnings before interest, taxes, depreciation and amortization (“EBITDA”) for certain specified periods or equivalent per share valuation of the Company’s initial 51% acquisition of UAM, adjusted for inflation

 

 

 

 

 

 

 

 

 

Beginning March 1, 2013 through March 1, 2023

 

20%

 

The greater of 4 times recurring EBITDA for certain specified periods or equivalent per share valuation of the Company’s initial 51% acquisition of UAM, adjusted for inflation

Minority Put Right Arrangements:

 

 

 

 

 

 

UAM(2), (5)

 

March 1, 2009

 

29%

 

Approximately 4 times recurring EBITDA for certain specified periods

 

 

 

 

 

 

 

 

 

Beginning March 1, 2013 through March 1, 2023

 

20%

 

Variable purchase price based on recurring EBITDA for certain specified periods

 

 

 

 

 

 

 

UVM(3), (5)

 

Beginning when minority owners receive the December 31, 2006 audited UVM financial statements through December 31, 2011

 

Up to 10%

 

Approximately 7 times earnings before interest and taxes (“EBIT”) of the previous calendar year times the percentage of shares being sold by minority owners

 

 

 

 

 

 

 

 

 

Beginning January 1, 2012 through December 31, 2012

 

Up to 10%

 

Approximately 7 times EBIT of the previous calendar year times the percentage of shares being sold by minority owners

 

16




 

Institut Francais de Gestion
(“ IFG”)(4), (5)

 

July through September 2008

 

10%

 

$1,083

 

 

 

 

 

 

 

Combination Exchange Arrangements:

 

 

 

 

Company Call Right Arrangements:

 

 

 

 

 

Cyprus College(6)

 

Beginning July 1, 2006

 

35%

 

6%—Based on 6.25 times 2006 audited recurring EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

January 1, 2012 or up to five years thereafter

 

20%

 

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

 

 

 

 

 

 

 

CH Holdings Netherlands BV(7)

 

On or before October 30, 2008

 

8.75%

 

$10,200 plus an amount equal to CH Holdings Netherlands BV’s total cash minus its long-term debt multiplied by the sellers ownership percentage

 

 

 

 

 

 

 

 

 

On or before October 30, 2008

 

21.25%

 

$10,200 plus an amount equal to CH Holdings BV’s total cash minus its long-term debt multiplied by the sellers ownership percentage

 

 

 

 

 

 

 

 

 

Beginning November 1, 2008 through November 1, 2018

 

20%

 

Approximately 6 times prior twelve months EBITDA plus CH Holdings Netherlands BV’s cash minus long-term debt multiplied by the sellers ownership percentage with a minimum payment of $20,000 divided by the total number of shares representing the 20% plus CH Holdings Netherlands BV’s cash minus long-term debt multiplied by the sellers ownership percentage

 

 

 

 

 

 

 

Minority Put Right Arrangements:

 

 

 

 

 

Cyprus College(6)

 

April 1, 2012 or up to five years thereafter

 

20%

 

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

 

 

 

 

 

 

 

CH Holdings Netherlands BV(7)

 

Beginning November 1, 2008 through November 1, 2018

 

20%

 

Approximately 6 times prior twelve months EBITDA plus CH Holdings BV’s cash minus long-term debt multiplied by the sellers ownership percentage

 

17




 

Similar Exchange Contract Arrangements:

 

 

 

 

UPC(8)

 

Period from April 1st to June 30th of each calendar year following 2006

 

20%

 

Approximately 4.25 times audited EBITDA for the preceding calendar year adjusted for a predefined rent formula minus the outstanding balance of all UPC’s long-term interest bearing debt plus the market value of any real estate owned by UPC multiplied by the sellers ownership percentage

 

 

 

 

 

 

 

Fixed Purchase Price Arrangements:

 

 

 

 

 

 

Ecole Centrale d’Electronique (“ECE”)(9)

 

December 31, 2008

 

30%

 

$9,475

 

 

 

 

 

 

 

Capital Contribution Obligations:

 

 

 

 

 

 

IFG(10)

 

On or before July 31, 2007

 

16%

 

$1,697

 

 

 

 

 

 

 

 

 

July 31, 2007

 

23%

 

$2,528

 

 

 

 

 

 

 

Contingent Earnouts (cash payments):

 

 

 

 

 

Laureate Online Education BV(11)

 

April 1, 2008

 

 

 

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

 

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

Company Call Right Arrangements

(1) Effective March 1, 2009, the Company has a call right to acquire a 29% interest from the minority owners for a variable purchase price equal to the greater of 4.0 times recurring EBITDA for certain specified periods with a minimum payment of the equivalent per share valuation of the Company’s initial 51% acquisition of UAM, as adjusted for local inflation. Beginning March 1, 2013, and continuing for ten years, the Company has another call right on the remaining 20% interest of the minority owners, with the purchase price determined based on a similar formula. No accounting for this arrangement is included in the Company’s financial statements.

Minority Put Right Arrangements

The below arrangements are accounted for as Minority Put Right Arrangements as described in Note 2.

(2) Effective March 1, 2009 the minority owners of UAM have a put right to require the Company to purchase an equity interest of 29% from the minority owners at a variable purchase price based on 4.0 times recurring EBITDA for certain specified periods. Beginning March 1, 2013, and continuing for ten years, the minority owners hold a second put right to require the Company to purchase the remaining 20% interest from the minority owners, with the purchase price determined based on a similar formula. As of June 30, 2007, the Company has recorded $4,513 in minority interest and minority ownership put arrangements on the consolidated balance sheet for this arrangement.

(3) As a part of the 10% step acquisition of UVM in 2006, there are two put options held by the minority owners for the remaining 10% interest. The first put option covers the time after which the minority owners receive the December 31, 2006 audited financial statements of UVM through December 31, 2011. During this period, the minority owners may exercise the first put option one time for each calendar year with the minimum shares transferred to the Company on each occasion equal to 25% of the shares held by the minority shareholder. Beginning January 1, 2012 through December 31, 2012, the minority

18




 

owners have a second put right to require the Company to purchase all remaining shares. The put price for both put options is equal to approximately 7.0 times EBIT of the previous calendar year times the percentage of shares being sold by the minority owners. As of June 30, 2007, the Company has recorded $19,924 in minority interest and minority ownership put arrangements on the consolidated balance sheet for this arrangement.

(4) During the period July through September 2008, the sellers of IFG may exercise a put option requiring the Company to purchase the remaining 10% ownership for approximately $1,083. As of June 30, 2007 the Company recorded $714 in minority interest and minority ownership put arrangements on the consolidated balance sheet for this arrangement.

(5) The $25,151 related to Minority Put right arrangements is the present value of the Redeemable Minority Interests associated with the Brazilian, Mexican and French acquisitions that is in excess of the minority interest for those entities. Also as part of a methodology election, the Company has chosen to adopt an accretion method which allows the Company to accrete changes in the redemption value over the period from the date of issuances to the earliest redemption date. As such, the Company has elected to only reflect a pro-rata portion of the change in liability based on the time elapsed in the Put instrument which is significantly lower than the final amount that will be required to settle the minority put arrangement. If the Minority put arrangements were all exercisable at June 30, 2007, the Company would be obligated to pay the minority shareholders $75,463.

Combination Exchange Contract Arrangements

As described in Note 2, there is no accounting for Combination Exchange Contract Arrangements described below as it is not probable that the Company will exercise its Call rights.

(6) As of June 30, 2007 the Company has not exercised its 6% share purchase option. Effective April 1, 2012 and exercisable up to five years thereafter, the minority owners of Cyprus College have a put right to require the Company to purchase an equity interest of 20% from the minority owners at a variable purchase price based on a variable scale for new enrollments and EBITDA for the calendar year preceding the exercise date. Beginning July 1, 2006, the Company has a call right to acquire up to a 35% interest from the minority owners for a variable purchase price based on a variable scale for new enrollment and 2006 EBITDA. Effective January 1, 2012 and exercisable up to five years thereafter, the Company has the call right to acquire the remaining 20% interest from the minority owners for a variable purchase price based on a variable scale for new enrollment and EBITDA for the calendar year preceding the exercise date.

(7) As a part of the acquisition of CH Holdings Netherlands BV, there are three purchase options that enable the Company to increase its ownership interest to 100%. The first option allows the Company to increase its ownership in CH Holdings Netherlands BV to 58.75% if by October 30, 2008 it makes an additional $10,200 payment plus an amount equal to CH Holdings Netherlands BV’s total cash minus its total long-term debt multiplied by the seller’s ownership percentage. After exercising the first call option and before October 30, 2008, the Company has a second call right to increase its ownership to 80% for an additional $10,200 plus an amount equal to CH Holdings Netherlands BV’s total cash minus its total long-term debt multiplied by the seller’s ownership percentage. There is a put/call option for the final 20% ownership that can be exercised prior to November 1, 2018 following the exercise of the second call option. The put option will be calculated at 6.0 times the prior twelve months EBITDA plus CH Holdings Netherlands BV’s total cash minus its total long-term debt multiplied by the seller’s ownership percentage. The call option will be calculated at 6.0 times the prior twelve months EBITDA plus CH Holdings Netherlands BV’s total cash minus its total long-term debt multiplied by the seller’s ownership percentage, with a minimum payment of $20,000 plus CH Holdings Netherlands BV’s cash minus its total long-term debt multiplied by the seller’s percentage.

Similar Exchange Contract Arrangements

The below arrangement is accounted for as a Similar Exchange Contract as described in Note 2.

(8) During the period of April 1st through June 30th of each calendar year following 2006, there are put and call options with similar terms which enable the Company to acquire or the minority owners to require the Company to purchase the remaining 20% ownership in UPC. The put and call options are set at approximately 4.25 times the audited EBITDA for the preceding calendar year adjusted for a predefined rent formula minus the outstanding balance of all long-term interest bearing debt at UPC plus the market value of any real estate owned by UPC at the time of the option multiplied by the

19




 

seller’s ownership percentage. As of June 30, 2007, the value of the debt reflected on the Company’s balance sheet is $7,826 for this Similar Exchange Contract.

Fixed Price Purchase Contract Arrangements

The below arrangement is accounted for as a Fixed Price Purchase Contract as described in Note 2.

(9) As part of the acquisition of ECE, the Company committed to purchase the remaining 30% ownership from the sellers on December 31, 2008 for approximately $9,475. The purchase obligation is denominated in Euros, and is subject to foreign currency exchange rate risk on the date of payment. As of June 30, 2007, the value of the debt reflected on the Company’s balance sheet is $8,857.

Capital Contribution Obligations

(10) As part of the acquisition of IFG, the Company committed to additional capital contributions, which will increase the Company’s share of ownership by diluting the present minority ownership. Pursuant to the amended agreement the Company contributed $4,143 resulting in an increase in ownership share of 39%. As of June 30, 2007 the contributions have been made, however the legal rights related to additional ownership are not effective until July 31, 2007.

 Contingent Earnouts (cash payments)

(11) Additional amounts of contingent consideration, not to exceed $10,000, are due the sellers of Laureate Online Education BV equal to four times the average of the audited EBITDA for the calendar years ending December 31, 2006 and 2007.  No payments were due under the December 31, 2006 contingent consideration arrangement based on 2006 earnings results. Excluding adjustments of EBITDA items and other negotiated amounts and using 2006 results to estimate the 2007 results, the Company would be obligated to the sellers for $0 under the April 1, 2008 payment.

Loss Contingencies

The Company is subject to legal actions arising in the ordinary course of its business. In management’s opinion, the Company has adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions and does not believe any settlement would materially affect the Company’s financial position, results of operations or cash flows. See additional discussion in Note 4 and Note 10.

Material Guarantees

Subsequent to the June 2003 divestiture of the Company’s K-12 business segments, all leases related to Sylvan Learning Centers were renegotiated or assigned in the name of Educate, Inc. (“Educate”) during the third quarter of 2003. Leases with remaining payments of $4,210 through December 2010 are guaranteed by the Company. Under the terms of an asset purchase agreement with Educate, the Company is indemnified against any losses suffered as a result of these lease guarantees. During 2004, the Company entered into an agreement to guarantee equipment lease payments owed by Kendall to Key Equipment Finance. Equipment leases with remaining payments of $3,261 through December 2011 are guaranteed by the Company. In connection with a lease termination agreement, entered into in the first quarter of 2007, the Company has been released of the guaranteed rental payments of a co-tenant. The Company recognized a loss of approximately $374 due to the lease termination fee agreed upon. However, along with the termination agreement the Company has guaranteed the sublease payments of two tenants within the building in which the Company vacated. If the sublease tenant is delinquent on any payment, the Company will be responsible for the delinquent amount. The total delinquent payments over the term of the guarantee cannot exceed $646. The fair values of the guarantees have been recorded as other long-term liabilities in the consolidated balance sheets.

20




 

Standby Letters of Credit

The Company has $12,700 outstanding in standby letters of credit. The Company is self-insured for workers compensation and other insurable risks up to predetermined amounts above which third party insurance applies. The Company is contingently liable to insurance carriers under certain of these policies and has provided a letter of credit in favor of the insurance carriers for $700. Additionally, in the first quarter of 2005, the Company issued a $12,000 standby letter of credit in favor of WSI Education S.a.r.l for the VAT tax indemnification related to the sale of WSI (see Note 4).

Commitments

Under terms of note agreements with Kendall, the Company has committed to providing total additional funding to Kendall of up to $5,500, of which $4,000 was unfunded as of the end of the second quarter of 2007. In the event the Company does not exercise its agreement to acquire Kendall, Kendall is obligated to enter into a lease agreement with the Company beginning March 31, 2008 to lease office space. The lease commitment specifies a term of 36 months and annual rent of $1,275.

As a part of the acquisition of Cyprus College, the Company committed to making a contribution of approximately $3,324 on or before November 30, 2008. The contributions will fund certain capital projects, if approved, and will not alter the relative equity interests. The contribution commitment is denominated in Cypriot Pounds and is subject to foreign currency exchange rate risk on the dates of payment.

Note 15 — Business and Geographic Segment Information

The Company provides higher education programs and services to students through a leading global network of licensed campus-based and online higher education institutions. The Company’s educational services are offered through three reportable segments: Latin America, Europe and Laureate Online Education.

The Company evaluates performance based on profit or loss from operations before income taxes, corporate general and administrative expenses, non-cash stock compensation expense and campus-based overhead expenses (“Segment profit”).

The Latin America segment consists of eleven separately licensed universities and two professional institutes, and has operations in Mexico, Chile, Brazil, Peru, Ecuador, Panama, Honduras and Costa Rica. The schools primarily serve 18- to 24-year-old students and of