<PAGE>
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 and
Exchange Act of 1934 for the quarter ended MARCH 31, 1997 or
--------------
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
---------- ----------
COMMISSION FILE NUMBER 0-22844
--------------
SYLVAN LEARNING SYSTEMS, 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.)
1000 LANCASTER STREET, BALTIMORE, MARYLAND 21202
------------------------------------------ ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410)843-8000
-------------
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 [ ].
The registrant had 23,579,707 shares of Common Stock outstanding as of April 30,
1997.
<PAGE>
SYLVAN LEARNING SYSTEMS, INC.
-----------------------------
INDEX
-----
PAGE NO.
--------
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - December 31, 1996 and
March 31, 1997........................................... 3
Statements of Income - Three months ended
March 31, 1996, three months ended March 31, 1997........ 5
Statements of Cash Flows - Three months ended
March 31, 1996, three months ended March 31, 1997........ 6
Notes to Unaudited Financial Statements - March 31, 1997.. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 10
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................... 15
SIGNATURES................................................... 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------------------------------
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
-------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $11,082 $11,902
Available-for-sale securities 16,299 10,081
Receivables:
Accounts receivable 31,519 34,389
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,565 3,228
Notes receivable 3,000 4,417
-------- --------
38,084 42,034
Allowance for doubtful accounts (1,379) (1,339)
-------- --------
36,705 40,695
Inventory 4,470 4,441
Deferred income taxes 620 620
Prepaid expenses 2,644 3,561
-------- --------
Total current assets 71,820 71,300
Notes receivable, less current portion 474 1,021
Costs and estimated earnings in excess of billings
on uncompleted contracts, less current portion 549 334
Property and equipment:
Furniture and equipment 30,557 33,477
Leasehold improvements 5,428 4,874
-------- --------
35,985 38,351
Accumulated depreciation (11,271) (12,922)
-------- --------
24,714 25,429
Intangible assets:
Goodwill 103,986 104,005
Contract rights 13,881 13,972
Other 2,570 2,570
-------- --------
120,437 120,547
Accumulated amortization (10,736) (12,046)
-------- --------
109,701 108,501
Deferred contract costs, net of accumulated amortization
of $2,067 as of December 31, 1996 and $2,945 as of
March 31, 1997 13,230 12,447
Investments in affiliates 3,896 4,747
Other investments 24,220 24,862
Other assets 1,975 2,852
-------- --------
Total assets $250,579 $251,493
======== ========
</TABLE>
3
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
($ in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
------------ -----------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 25,962 $ 18,720
Current portion of long-term debt 2,475 1,368
Billings in excess of costs and estimated earnings
on uncompleted contracts 65 589
Due to former shareholders of Wall Street Institute 4,921 250
Deferred revenue 9,413 9,951
Other current liabilities 596 510
------------ -----------
Total current liabilities 43,432 31,388
Bank loan - 7,334
Long-term debt, less current portion 1,575 -
Deferred income taxes 2,338 2,338
Due to former shareholders of Drake 8,143 8,143
Due to former shareholders of Wall Street Institute 15,150 -
Other long-term liabilities 350 342
Stockholders' equity:
Preferred stock, par value $.01 per share--authorized
10,000,000 shares, no shares were issued and
outstanding as of December 31, 1996 and March 31, 1997 - -
Common stock, par value $.01 per share--authorized
40,000,000 shares, issued and outstanding shares of
22,566,215 as of December 31, 1996 and 23,579,707
as of March 31, 1997 226 236
Additional paid-in capital 168,555 187,559
Foreign currency translation adjustments (4) (358)
Retained earnings 10,814 14,511
------------ -----------
Total stockholders' equity 179,591 201,948
------------ -----------
Total liabilities and stockholders' equity $ 250,579 $ 251,493
============= ===========
</TABLE>
See accompanying notes.
4
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
1996 1997
---------- ---------
(Unaudited) (Unaudited)
<S> <C> <C>
Revenues $ 34,557 $ 44,850
Cost and expenses:
Direct costs 29,620 36,397
General and administrative expenses 2,069 2,961
---------- ---------
Total expenses 31,689 39,358
---------- ---------
Operating income 2,868 5,492
Investment income 396 662
Interest expense (108) (71)
Equity in net income (loss) of unconsolidated
subsidiaries 92 (128)
---------- ---------
Income before income taxes 3,248 5,955
Income taxes (1,469) (2,258)
---------- ---------
Net income $ 1,779 $ 3,697
========== =========
Per common and common equivalent share
Net income $ 0.07 $ 0.14
========== =========
</TABLE>
See accompanying notes.
5
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
($ in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------------------
1996 1997
------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,779 $ 3,697
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation 1,076 1,651
Amortization 1,775 2,106
Provision for doubtful accounts 36 39
Equity in net loss (income) of unconsolidated subsidiaries (92) 128
Changes in operating assets and liabilities:
Accounts and notes receivable (7,535) (4,914)
Cost and estimated earnings in excess of billings
on uncompleted contracts 654 553
Inventory (248) 29
Prepaid expenses (225) 774
Other assets (71) (896)
Accounts payable and accrued expenses (1,390) (6,082)
Billings in excess of costs and estimated earnings
on uncompleted contracts 655 553
Other current liabilities (41) (87)
Deferred revenue and other long-term liabilities 874 589
-------- --------
Net cash used in operating activities (2,753) (1,860)
-------- --------
INVESTING ACTIVITIES
Loans to unconsolidated subsidiaries 35 (880)
Purchase of available-for-sale securities (4,626) (4,827)
Proceeds from sale of available-for-sale securities 12,833 11,045
Increase in other investments - (742)
Purchase of property and equipment (1,493) (2,366)
Expenditures for deferred contract costs and other assets (7) (11)
-------- --------
Net cash provided by investing activities 6,742 2,219
-------- --------
FINANCING ACTIVITIES
Payments to former shareholders of WSI - (4,671)
Proceeds from exercise of options and warrants 1,022 922
Proceeds from issuance of common stock 533 -
Payments on long-term debt and capital lease obligations (708) (2,600)
Payments on line of credit (3,500) -
Proceeds from bank loan - 7,164
-------- --------
Net cash provided by (used in) financing activities (2,653) 815
-------- --------
Effects of exchange rate changes on cash (21) (354)
-------- --------
Net increase in cash and cash equivalents 1,315 820
Cash and cash equivalents at beginning of period 2,529 11,082
-------- --------
Cash and cash equivalents at end of period $ 3,844 $11,902
======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, 1997
NOTE A - BASIS OF PRESENTATION
---------------------
The accompanying unaudited 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.
Operating results for the three months ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1997. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1996.
NOTE B - INCOME TAXES
------------
The tax provisions for the three month periods ended March 31, 1997 and 1996 are
based on the estimated effective tax rates applicable for the full years. The
Company's income tax provision of $2,258 for the three month period ended March
31, 1997 consists of federal, state, and foreign income taxes.
NOTE C - EARNINGS PER SHARE
------------------
Earnings per common and common equivalent share is computed using the weighted
average number of common and common equivalent shares outstanding during each
period presented. The weighted average number of shares used for the three
months ended March 31, 1997 and 1996 was 25,793,356 and 23,487,533,
respectively. The difference between the number of shares used to determine
earnings per common and common equivalent share and earnings per common share
assuming full dilution is immaterial. Common stock equivalents consist of stock
options and warrants (using the treasury stock method).
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute
7
<PAGE>
earnings per share and to restate all prior periods. Under the new requirements
for calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The impact is expected to result in an increase in primary
earnings per share for the quarters ended March 31, 1997 and 1996 of $0.01 and
$0.01 per share, respectively. The impact of Statement 128 on the calculation of
fully diluted earnings per share for these quarters is not expected to be
material.
NOTE D - RECLASSIFICATIONS
-----------------
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
NOTE E - SUBSEQUENT EVENTS
-----------------
On April 17, 1997, the Company announced it has entered into an agreement to
acquire all of the outstanding stock of I-R, Inc. and Independent Child Study
Teams, Inc. (collectively "Education Inroads") in two merger transactions that
would be accounted for as poolings-of-interests, in exchange for a total of 1.4
million shares of the Company's Common Stock, valued at $38.9 million as of that
date.
Educational Inroads, which had 1996 revenues of approximately $24 million,
provides remedial and special education services to public and non-public school
systems in New Jersey, Maryland, Louisiana, Washington, D.C. and other
districts. The transaction is expected to be consummated during the second
quarter of 1997, subject to federal antitrust regulation review.
On May 12, 1997, the Company terminated its agreement with NEC and as a result
received $30 million as a breakup fee. The $30 million gain, reduced by certain
transaction related expenses, will be recognized in the second quarter. As a
result of the negotiations in the initial signing of a definitive agreement with
NEC, the Company began initiating certain strategic business initiatives that
could result in restructuring charges in the second quarter of 1997. Even though
the NEC agreement was terminated, the Company still feels that some of the
strategic charges will be made. However, the Company's analysis is not complete
and therefore the amount of the restructuring charges, if any, is not known at
this time.
NOTE F - BANK LOAN
---------
The Company has borrowed $7.2 million during the first quarter of 1997 under its
revolving credit line which is described in Note 8 to the 1996 audited financial
statements.
8
<PAGE>
NOTE G - STOCKHOLDERS' EQUITY
--------------------
The components of stockholders' equity are as follows ($ in thousands):
<TABLE>
<CAPTION>
Foreign
Additional Currency Total
Common Paid-In Translation Retained Stockholders'
Stock Capital Adjustments Earnings Equity
--------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 226 $ 168,555 $ (4) $ 10,814 $ 179,591
Options and warrants exercised for
purchase price of 298,608 shares of
common stock, including income tax
benefit of $2,942 3 3,861 3,864
Issuance of 714,884 shares of common
stock in connection with the acquisition
of WSI 7 15,143 15,150
Foreign currency translation adjustment (354) (354)
Net income for the three months ended
March 31, 1997 3,697 3,697
--------- ---------- ------------ -------- -------------
Balance at March 31, 1997 $ 236 $ 187,559 $ (358) $ 14,511 $ 201,948
========= ========== ============ ======== =============
</TABLE>
NOTE H - CONTINGENCIES
-------------
On November 18, 1996, ACT, Inc. filed suit against the Company alleging that the
Company violated federal antitrust laws and committed various state law torts in
connection with the operations of its computer-based testing operations and in
obtaining a testing services contract from the NASD. The Company believes the
grounds of the lawsuit are without merit and intends to defend the lawsuit
vigorously. Management is unable to predict the ultimate outcome of the
lawsuit, but believes that the ultimate resolution of the matter will not have a
material effect on consolidated financial position.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
All statements contained herein that are not historical facts, including but
not limited to, statements regarding the anticipated impact of uncollectible
accounts receivable on future liquidity, expenditures to develop licensing and
certification tests under existing contracts, the Company's contingent payment
obligations relating to the PACE and Drake acquisitions, future capital
requirements, potential acquisitions and the Company's future development plans
are based on current expectations. These statements are forward looking in
nature and involve a number of risks and uncertainties. Actual results may
differ materially. Among the factors that could cause actual results to differ
materially are the following: changes in the financial resources of the
Company's clients, timing and extent of testing clients' conversions to
computer-based testing, revenues earned by the Company's PACE and Drake
operations, the availability of sufficient capital to finance the Company's
business plan on terms satisfactory to the Company; general business and
economic conditions; and the other risk factors described in the Company's
reports filed from time to time with the Commission. The Company wishes to
caution readers not to place undue reliance on any such forward looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
The Company generates revenue from three business segments: core educational
services which primarily consists of franchise sales, royalties, and Company-
owned Learning Center revenue; testing services, which consists of computer-
based testing fees paid to the Company primarily by test administrators; and
contract educational services, which consists of revenue attributable to
providing supplemental and remedial education services to school districts and
major corporations.
RESULTS OF OPERATIONS
Comparison of results for the quarter ended March 31, 1997 to results for the
quarter ended March 31, 1996.
Revenue. Total revenues increased by $10.3 million, or 30% to $44.9 million for
the quarter ended March 31, 1997 compared to the same period in 1996. This
increase resulted from higher revenues in all business segments - core
educational services, testing services, and contract educational services.
Core educational services revenue increased by $2.0 million, or 28%, to $9.2
million during the first quarter of 1997. Franchise royalties increased
$500,000 or 19%, for the quarter ended March 31, 1997. This increase in
franchise royalties was due to the net increase of 18 new Centers in new
territories and three new satellite Centers (Centers operating within existing
franchise territories) opened in the quarter ended March 31, 1997, combined with
an overall 14% increase in revenues at existing Learning Centers open for more
than one year. Franchise sales fees increased $500,000 to $700,000 for the
quarter ended March 31, 1997, compared to the same period in 1996. For the
quarter ended March 31, 1997, there were five franchise Center licenses and a
$500,000 area
10
<PAGE>
development agreement sold, compared to six franchise Center licenses sold in
the first quarter of 1996.
Revenue from Company-owned Learning Centers increased $1.5 million, or 44%, to
$4.9 million during the first quarter of 1997. $900,000 of the increase
resulted from the acquisition of eleven Centers from two franchisees which
occurred during the fourth quarter of 1996. Revenue growth related to student
enrollment increases at Centers operating over 12 months as of March 31, 1997
resulted in $600,000 of the increase.
Contract educational services revenue increased by $900,000, or 10% to $10.5
million in the first quarter of 1997 mainly due to higher volumes of training
and increases in Public and Non-public school contracts.
Testing services revenue increased by $7.4 million, or 42% to $25.2 million
during the first quarter of 1997, compared to the same period in 1996. The
increase in testing services revenues resulted primarily from the Company's
acquisition of the Wall Street Institute International, B.V. and its commonly
controlled affiliates (collectively, "WSI") during the fourth quarter of 1996,
increased volumes worldwide from Information Technology clients and professional
licensure and certification clients and increased services under the Educational
Testing Service contracts.
Cost and Expenses. Total expenses increased by $6.8 million, or 23% to $36.4
million for the quarter ended March 31, 1997 compared to the same period in
1996. Company-owned Learning Center expenses increased $1.3 million, to $4.3
million, or 88% of total Company-owned Learning Center services revenue in the
first quarter of 1997, compared to $3.0 million, or 90% of total Company-owned
Learning Center services revenue in the first quarter of 1996. $1.1 million of
the increase relates to the acquisition of eleven Centers from two franchisees.
The remaining increase in expenses were primarily advertising, labor and other
Center expenses associated with increased Center enrollment. Expenses for
Centers operating over 12 months as of March 31, 1997 accounted for $200,000 of
the increase for the quarter and represent 38% of incremental same Center
revenue.
Contract educational services expense increased by $400,000 to $8.9 million,
or 85% of contract educational services revenue during the first quarter of
1997, compared to $8.5 million or 89% of contract services revenue during the
first quarter of 1996. Operating expenses for PACE increased by $300,000 for
the first quarter of 1997.
Testing services expenses for the first quarter of 1997 increased by $5.2
million to $20.7 million, or 82% of total testing services revenue, compared to
$15.5 million, or 87% of total testing services revenue for the first quarter of
1996. The 1996 expenses include $1.2 million of non-recurring charges related
to the Drake acquisition. Therefore, the recurring expenses were 80% of test
revenues for the quarter. The increase in testing services expense as a
percentage of testing services revenues was primarily a result of
11
<PAGE>
increased salary and other operating costs resulting from the integration of
test delivery systems and growth in business that occurred after the first
quarter of 1996 and expected growth in business volumes in 1997.
General and administrative expenses increased by $900,000 to $3.0 million
during the first quarter of 1997 from $2.1 million in the first quarter of 1996,
and increased as a percentage of revenue from 6% to 7%. This percentage
increase resulted from increases in administrative staff salaries and expenses
as well as increases in rent expense related to the Company's new headquarters.
The Company's effective tax rate has decreased from 45% during the first
quarter of 1996 to 38% during the first quarter of 1997 mainly due to the effect
of higher earnings levels in certain lower tax jurisdictions
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $1.9 million for the three months ended
March 31, 1997 as compared to $2.8 million used in the comparable period of
1996. Cash flow from operations before working capital changes increased from
$4.6 million in the 1996 period to $7.6 million in the 1997 period, primarily as
a result of significant overall growth in income from Company operations before
considering non-cash charges, which primarily consist of depreciation and
amortization. The Company's investment in working capital has significantly
reduced cash flow, particularly as a result of the growth in accounts receivable
and reductions in accounts payable and accrued expenses. The increase in
accounts receivable relates to an overall increase in revenue of 30%.
Specifically, of the $4.9 million operating cash flow reduction attributable to
an increase in accounts receivable, $2.4 million is related to the ETS
international testing contract and the remainder results from higher receivables
levels in all business segments. The increase in testing receivables resulted
from an increase in billings and timing of payments under international testing
contracts. The average collection period for accounts receivable has been
approximately 60 days. The Company believes that uncollectible accounts
receivable will not have a significant effect on future liquidity, as a
significant portion of its accounts receivable are due from enterprises with
substantial financial resources, such as large corporations and governmental
units.
During the first quarter of 1997, the Company sold a net of $6.2 million of
available for sale securities, the proceeds of which were used to reduce
accounts payable and accrued expenses by $6.1 million, and to fund the purchases
of property and equipment of $2.4 million as described below.
The Company continues to incur expenditures for additions to property and
equipment, which totaled $2.4 million in the first quarter of 1997. These
additions primarily consist of furniture and equipment for general business
expansion, including expenditures for new Public and Non-public school
classrooms and equipment needed for
12
<PAGE>
overseas testing centers operated by the Company. Under the international
testing contract with ETS, the Company is reimbursed for overseas equipment
expenditures as the equipment is depreciated. This reimbursement includes a
financing charge over the reimbursement period.
The Company has entered into a loan agreement with a bank, (hereinafter, "the
credit line") that provides an unsecured revolving line of credit. The credit
line allows the Company to borrow a maximum of $15.0 million through the
expiration date of May 31, 1998, at which time the total outstanding principal
balance can be converted into a term loan, at the option of the Company. The
term loan would be repaid over 24 months from the time of conversion. The
credit line and the term loan, when converted, both bear interest at a floating
rate equal to the 30 day London Interbank Offered Rate ("LIBOR") plus 1.15% per
annum (6.84% at March 31, 1997). The balance on the credit line was $7.3
million at March 31, 1997.
During the first quarter of 1997, the Company received $922,000 as a result of
the exercise of stock options and warrants to purchase 298,608 shares of Common
Stock.
During the first quarter of 1997, the Company paid $4.7 million of the $4.9
million cash portion of the purchase price of WSI.
The Company believes that its capital resources will be sufficient on a short-
term basis and over the next 24 months to fund continued expansion of the
business, including working capital needs and expected investments in property
and equipment.
The Company continues to review other companies in the education and computer-
based testing industries for potential acquisitions. On March 12, 1997 the
Company announced an agreement to merge with National Education Corporation
("NEC"), a leading provider of distance education in vocational, academic and
professional studies and interactive media-based learning products and a leading
publisher of supplemental educational materials. NEC received a counter offer
that the Company considered to be higher than it was willing to offer for
acquiring NEC. Therefore, the Company agreed to terminate its agreement to
merge with NEC and on May 13, 1997, the Company received $30 million cash as a
breakup fee upon the termination. The Company plans to invest this cash in
short term low risk investments.
In April of 1997, the Company announced it has entered into an agreement to
acquire all of the outstanding stock of I-R, Inc. and Independent Child Study
Teams, Inc. (collectively, "Educational Inroads") in two merger transactions
that would be accounted for as poolings-of-interests. Educational Inroads,
which had 1996 revenues of approximately $24 million, provides remedial and
special educational services to public and non-public school systems in New
Jersey, Maryland, Louisiana, Washington, D.C. and other districts.
13
<PAGE>
CONTINGENT MATTERS
In connection with the PACE acquisition, the Company will be required to make
a contingent payment equal to 6.5 times PACE's 1997 earnings before interest and
income taxes ("EBIT"). If PACE's EBIT is less than $2.7 million for 1997, the
PACE shareholders may elect to have the payment calculation based on EBIT for
either calendar year 1998 or 1999. The contingent payment is payable partially
in cash and partially in Common Stock. The amount of any contingent payment to
the PACE Stockholders will be capitalized as goodwill when paid and amortized
over the remaining estimated recovery period. PACE is expected to meet its cash
needs from its operations. PACE provides most of its services to large
corporations with favorable credit histories. PACE operations are not capital
intensive and historically PACE has generated positive cash flow from
operations.
The agreement with Drake provides for future contingent payments based on
achievement of certain specified revenue targets between 1997 and 1998 (or 1999
at election of the Sellers) which, if earned would be paid in the first quarter
of 1999 or 2000. The contingent payments of up to $40 million are payable 12.5%
in cash (or more at the discretion of the Company) with the remainder in shares
of the Common Stock. The amount of any contingent payments will be capitalized
as goodwill when paid and amortized over the remaining estimated recovery
period.
EFFECTS OF INFLATION
Inflation has not had a material effect on the Company's revenue and income
from continuing operations in the past three years. Inflation is not expected
to have a material future effect.
QUARTERLY FLUCTUATIONS
The Company's revenues and operating results have varied substantially from
quarter to quarter and may continue to vary, depending upon the timing of
implementation of new computer-based testing contracts and contracts funded
under the Public and Non-public school or similar programs. Based on the
Company's limited experience, revenue generated by computer-based testing
services may vary based on the frequency or timing of delivery of individual
tests and the speed of test administrators' conversion of tests to computer-
based format. Revenue or profits in any period will not necessarily be
indicative of results in subsequent periods.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) EXHIBITS:
The following exhibits are included herein:
(11) Statement re: Computation of Per Share Earnings
(B) REPORTS ON FORM 8-K
During the first three months of 1997, the Company filed a report on
Form 8-K on February 4, 1997, with respect to the acquisition of WSI,
and a report on Form 8-K on March 18, 1997, with respect to the
acquisition of NEC.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
Sylvan Learning Systems, Inc.
Date: May 14, 1997 /s/ B. Lee McGee
----------------------------
B. Lee McGee, Vice President
and Chief Financial Officer
15
<PAGE>
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
SYLVAN LEARNING SYSTEMS, INC.
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
QUARTERS ENDED
MARCH 31,
--------------------------
1996 1997
------------ -----------
<S> <C> <C>
PRIMARY:
AVERAGE SHARES OUTSTANDING 21,230,481 23,921,988
DILUTIVE EFFECT OF STOCK OPTIONS - Based on the treasury
stock method using the average market price. 2,214,935 1,678,219
COMMON STOCK CONTINGENTLY ISSUABLE 42,117 193,149
----------- ----------
TOTAL 23,487,533 25,793,356
=========== ===========
INCOME FROM CONTINUING OPERATIONS $ 1,779 $ 3,697
CONTINGENT GOODWILL AMORTIZATION FOR ACQUISITIONS $ 30 $ 191
----------- ----------
SUPPLEMENTAL INCOME FROM CONTINUING OPERATIONS $ 1,749 $ 3,506
=========== ===========
PER SHARE AMOUNTS $ 0.07 $ 0.14
=========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
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0
0
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</TABLE>
