<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 SEPTEMBER 30, 1998 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)
<TABLE>
<S> <C>
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)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410)843-800
---------------
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 48,580,296 shares of Common Stock outstanding as of
October 31, 1998.
<PAGE>
SYLVAN LEARNING SYSTEMS, INC.
-----------------------------
INDEX
-----
<TABLE>
<S> <C>
PART I. - FINANCIAL INFORMATION Page No.
--------
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets - December 31, 1997 and
September 30, 1998............................................ 3
Consolidated Statements of Income - Three months ended
September 30, 1997, three months ended September 30, 1998..... 5
Consolidated Statements of Income - Nine months ended
September 30, 1997, nine months ended September 30, 1998...... 6
Consolidated Statements of Cash Flows - Nine months ended
September 30, 1997, nine months ended September 30, 1998...... 7
Notes to Unaudited Consolidated Financial Statements -
September 30, 1998............................................ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 15
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 23
SIGNATURES.............................................................. 23
</TABLE>
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, SEPTEMBER 30,
1997 1998
------------ -------------
(Restated) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,650 $ 29,639
Available-for-sale securities 82,926 29,020
Receivables:
Accounts receivable 61,453 66,316
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,900 6,635
Notes receivable 2,943 7,279
Tuition finance notes receivable 978 4,916
Other receivables 7,000 -
-------- --------
76,274 85,146
Allowance for doubtful accounts (2,508) (3,294)
-------- --------
73,766 81,852
Inventory 4,999 8,185
Deferred income taxes 3,738 3,719
Prepaid expenses and other current assets 6,550 10,528
-------- --------
Total current assets 201,629 162,943
Notes receivable, less current portion 6,232 5,206
Costs and estimated earnings in excess of billings
on uncompleted contracts, less current portion 352 567
Property and equipment:
Land and building 5,710 8,822
Furniture and equipment 58,709 99,063
Leasehold improvements 7,985 10,890
-------- --------
72,404 118,775
Accumulated depreciation (21,160) (31,301)
-------- --------
51,244 87,474
Intangible assets:
Goodwill 183,004 224,104
Contract rights 13,973 13,973
Other 2,522 4,777
-------- --------
199,499 242,854
Accumulated amortization (16,714) (24,856)
-------- --------
182,785 217,998
Deferred contract costs, net of accumulated amortization
of $6,205 as of December 31, 1997 and $10,129
as of September 30, 1998 10,324 10,771
Investments in and advances to affiliates 12,464 14,557
Other investments 28,017 29,049
Other assets 3,266 7,861
-------- --------
Total assets $496,313 $536,426
======== ========
</TABLE>
3
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ --------------
(Restated) (Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 40,707 $ 44,722
Income taxes payable 5,590 5,980
Current portion of long-term debt 1,213 962
Current portion of due to shareholders of
acquired companies 13,794 -
Deferred revenue 26,289 38,718
Other current liabilities 1,281 1,194
-------- --------
Total current liabilities 88,874 91,576
Long-term debt, less current portion 2,303 4,706
Bank line of credit - 4,284
Deferred income taxes 7,620 7,598
Due to shareholders of acquired companies,
less current portion 56,366 -
Other long-term liabilities 902 294
Commitments and contingent liabilities - -
-------- --------
Total liabilities 156,065 108,458
-------- --------
Stockholders' equity:
Preferred stock, par value $.01 per share--authorized
10,000,000 shares, no shares issued and outstanding
as of December 31, 1997 and September 30, 1998 - -
Common stock, par value $.01 per share--authorized
90,000,000 shares, issued and outstanding shares of
45,450,447 as of December 31, 1997 and 48,551,299
as of September 30, 1998 455 485
Additional paid-in-capital 301,897 370,786
Retained earnings 39,057 55,073
Foreign currency translation adjustments (1,161) 1,624
-------- --------
Total stockholders' equity 340,248 427,968
-------- --------
Total liabilities and stockholders' equity $496,313 $536,426
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
------------ -----------
(RESTATED)
<S> <C> <C>
REVENUES $ 71,375 $ 109,701
COST AND EXPENSES
Direct costs 57,124 85,749
General and administrative expense 3,664 3,637
--------- ----------
Total expenses 60,788 89,386
--------- ----------
Operating income 10,587 20,315
OTHER INCOME (EXPENSE)
Investment and other income (expense) 1,293 (58)
Interest expense (52) (351)
Equity in net loss of affiliates (433) (281)
--------- ----------
Income before income taxes 11,395 19,625
Income taxes (3,995) (6,673)
--------- ----------
Net income $ 7,400 $ 12,952
========= ==========
Earnings per common share, basic $ 0.17 $ 0.27
========= ==========
Earnings per common share, diluted $ 0.16 $ 0.26
========= ==========
See accompanying notes.
</TABLE>
5
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1997 1998
------------ -----------
(RESTATED)
<S> <C> <C>
REVENUES $ 201,123 $ 295,353
COST AND EXPENSES
Direct costs 184,086 247,554
General and administrative expense 16,538 11,321
Transaction costs related to pooling of interests - 5,000
Restructuring costs - 3,730
Loss on impairment of assets 4,000 -
----------- -----------
Total expenses 204,624 267,605
----------- -----------
Operating income (loss) (3,501) 27,748
OTHER INCOME (EXPENSE)
Investment and other income 2,993 3,231
Termination fee, net of transaction costs 28,500 -
Interest expense (674) (804)
Equity in net loss of affiliates (741) (2,603)
----------- -----------
Income before income taxes 26,577 27,572
Income taxes (9,867) (11,828)
----------- -----------
Net income $ 16,710 $ 15,744
=========== ===========
Earnings per common share, basic $ 0.40 $ 0.33
=========== ===========
Earnings per common share, diluted $ 0.39 $ 0.31
=========== ===========
See accompanying notes.
</TABLE>
6
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1998
------------- -------------
(Unaudited) (Unaudited)
(Restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 16,702 $ 15,744
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 5,994 10,071
Amortization 7,328 11,829
Non-cash issuance of common stock 18,500 -
Non-cash dividend received (1,500) (1,000)
Loss on impairment of assets 4,000 -
Non-cash contribution from ASPECT partners - 1,300
Provision for doubtful accounts 204 1,228
Deferred income taxes (55) (21)
Equity in net loss of unconsolidated subsidiaries 741 2,603
Changes in operating assets and liabilities:
Accounts and notes receivable (15,414) (4,921)
Cost and estimated earnings in excess of billings
on uncompleted contracts 688 (2,383)
Inventory (1,368) (1,905)
Prepaid expenses (932) (3,887)
Other assets (2,406) (3,212)
Accounts payable and accrued expenses (776) 2,116
Notes payable - 821
Billings in excess of costs and estimated earnings
on uncompleted contracts 46 (97)
Deferred revenue and other long-term liabilities 1,177 11,122
--------- ---------
Net cash provided by operating activities 32,929 39,408
--------- ---------
INVESTING ACTIVITIES
Purchase of available-for-sale securities (75,269) (2,105)
Proceeds from sale of available-for-sale securities 11,194 56,010
Increase in investments in and advances to affiliates (8,479) (5,016)
Increase in other investments (370) (32)
Purchase of property and equipment (19,634) (46,765)
Proceeds from sale of property and equipment 1,254 -
Cash paid for other acquired businesses (665) (5,167)
Expenditures for deferred contract costs and other assets (1,671) (717)
Acquisition of WSI franchisees, net of cash received - (14,643)
Acquisition of Canter Group, net of cash received - (24,262)
--------- ---------
Net cash used in investing activities (93,640) (42,697)
--------- ---------
FINANCING ACTIVITIES
Payments to former shareholders of WSI (4,670) (262)
Payments to former shareholders of Pace (369) (13,547)
Proceeds from exercise of options and warrants 12,304 9,052
Proceeds from issuance of long-term debt 291 1,332
Proceeds from bank lines of credit - 4,283
Proceeds from issuance of common stock 73,430 -
Payments on long-term debt and capital lease obligations (4,974) -
Cash paid for fractional shares of common stock - (58)
Repayment of distributions to shareholders - 237
Paydown of line of credit (1,000) (544)
--------- ---------
Net cash provided by financing activities 75,012 493
--------- ---------
Effects of exchange rate changes on cash (772) 2,785
--------- ---------
Net increase (decrease) in cash and cash equivalents 13,529 (11)
Cash and cash equivalents at beginning of period 18,564 29,650
--------- ---------
Cash and cash equivalents at end of period $ 32,093 $ 29,639
========= =========
</TABLE>
See accompanying notes.
7
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, 1998
NOTE A - BASIS OF PRESENTATION
---------------------
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. Operating results for the three months and nine months ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. As discussed in Note E, on May 6,
1998, the Company consummated its acquisition of all of the outstanding stock of
Aspect International Language Schools, B.V. and subsidiaries ("ASPECT"). The
acquisition has been accounted for as a pooling-of-interests and accordingly,
the Company's financial statements have been restated to include the results of
ASPECT for all periods presented. For further information, refer to the restated
annual financial statements and footnotes thereto included in the Company's
report on Form 8-K filed on July 29, 1998.
NOTE B - INCOME TAXES
------------
The tax provisions for the three and nine month periods ended September 30,
1998 and 1997 are based on the estimated effective tax rates applicable for the
full years, and after giving effect to significant unusual items related
specifically to the interim periods. The Company's income tax provisions for all
periods consist of federal, state, and foreign income taxes. The Company's
effective tax rate has increased from 37% during the first nine months of 1997
to 43% during the first nine months of 1998 due to significant transaction costs
related to the acquisition of ASPECT in May 1998 which are expensed for
financial reporting purposes but are non-deductible for income tax purposes.
The Company estimates that its effective income tax rate for the year ended
December 31, 1998 will be 38%. The Company estimates that its recurring
effective income tax rate for the year ended December 31, 1998 will be
approximately 34%.
8
<PAGE>
NOTE C - EARNINGS PER SHARE
------------------
The following table summarizes the computations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator used in basic and diluted
earnings per common share:
Net income $ 7,400 $12,952 $16,710 $15,744
======= ======= ======= =======
Denominator:
Denominator for basic earnings per
common share--weighted average
shares 43,623 48,534 41,315 48,147
Effect of dilutive securities:
Employee stock options 2,015 2,062 1,759 2,143
Common stock contingently issuable 248 - 248 -
------- ------- ------- -------
Total dilutive potential common shares 2,263 2,062 2,007 2,143
------- ------- ------- -------
Denominator for diluted earnings per
common share--weighted average
shares and assumed conversions 45,886 50,596 43,322 50,290
======= ======= ======= =======
Earnings per common share, basic $ 0.17 $ 0.27 $ 0.40 $ 0.33
Earnings per common share, diluted $ 0.16 $ 0.26 $ 0.39 $ 0.31
</TABLE>
NOTE D - RECLASSIFICATIONS AND STOCK SPLIT
---------------------------------
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
In February 1998, the Company declared a 3-for-2 stock split of its common
stock effective in the form of a stock dividend which was distributed on
May 22, 1998 to shareholders of record at the close of business on April 1,
1998. Accordingly, all share and per share data information have been restated
to retroactively reflect the stock split.
9
<PAGE>
NOTE E - ACQUISITIONS AND RESTRUCTURING CHARGES
--------------------------------------
ASPECT
Effective May 6, 1998 the Company acquired all of the common stock of
privately held ASPECT in exchange for 2,004,030 shares of Sylvan common stock
valued at $65 million. The acquisition was accounted for as a pooling-of-
interests and accordingly, the Company's consolidated financial statements for
periods prior to the merger have been restated to include the results of
operations, financial position and cash flows of ASPECT.
ASPECT, which had 1997 revenues of approximately $52 million, is a leading
provider of English as a Second Language programs for college-age students.
Founded in 1992, ASPECT delivers intensive English language programs at 19
schools in five countries.
Combined and separate results of operations of Sylvan and ASPECT during the
periods prior to the acquisition are as follows:
<TABLE>
<CAPTION>
Sylvan
Learning
Systems, Inc. ASPECT Combined
------------- -------- ---------
<S> <C> <C> <C>
Three Months Ended September 30, 1997
Revenues $ 58,464 $12,911 $ 71,375
Net income (loss) $ 7,527 $ (127) $ 7,400
Earnings per common share - diluted $ 0.17 $ 0.16
Nine Months Ended September 30, 1997
Revenues $168,003 $33,120 $201,123
Net income (loss) $ 17,669 $ (959) $ 16,710
Earnings per common share - diluted $ 0.43 $0.39
</TABLE>
In connection with the acquisition of ASPECT, Sylvan will incur certain
restructuring charges of $3.7 million, with an after-tax effect of
$3.4 million. These pre-tax charges, which were accrued in the quarter ended
June 30, 1998, include costs associated with termination benefits of certain
employees of ASPECT of $340,000 and costs associated with the consolidation and
restructuring of the combined operations of $3.4 million. Consolidation and
restructuring charges consist mainly of estimated obligations resulting from the
merger. These obligations relate to contract cancellation costs and the closing
of duplicate facilities. A pre-tax charge related to the cancellation of certain
contracts of $2.6 million is expected to result from the repurchase of certain
franchise rights previously sold for territories where ASPECT locations in
existence will violate the terms of master franchise agreements previously
entered into by the Company and certain master franchisees. A pre-tax charge of
$790,000 will result from the consolidation of duplicate facilities, lease
termination costs and the sale of certain facilities which will no longer be
used by the Company. Of the $3.7 million restructuring charge, $14,000 of
termination benefits were paid in the third quarter of 1998. The remainder is
included in accounts payable and accrued expenses at September 30, 1998. The
Company expects that the majority of the remaining accrued liability balance at
September 30, 1998 will be expended in 1999, with certain termination benefit
payments continuing through December 31, 2000.
10
<PAGE>
Also included in operating expenses for the nine months ended
September 30, 1998 are $6.2 million of shareholder non-recurring expenses and
transaction-related costs. Transaction-related charges of approximately
$5.0 million recorded include legal, accounting and advisory fees. The
shareholder non-recurring expenses of $1.2 million recorded represent
shareholder compensation and related expenses of ASPECT.
Canter
Effective January 1, 1998 the Company acquired all of the outstanding stock
of Canter and Associates, Inc. and Canter Educational Productions, Inc.
(collectively, "Canter"), commonly controlled companies, for an initial purchase
price of $25 million in cash. Additional contingent consideration is payable
over the next three years based upon Canter's meeting certain earnings
thresholds. The acquisition was accounted for using the purchase method of
accounting. During the first quarter of 1998, goodwill of approximately
$24.4 million was recorded and is being amortized over a period of 25 years.
Results of operations of Canter are included in the accompanying 1998
consolidated statement of income from January 1, 1998.
Canter develops and markets staff development materials, including books
and videotapes for teachers, as well as graduate level courses for educators
that are delivered primarily through distance learning. The companies provide
courseware for a complete distance learning Master's program offered by five
independent colleges and universities. Additionally, Canter provides courseware
for 11 other graduate level courses that are offered by 14 independent colleges
and universities nationwide.
11
<PAGE>
NOTE F - STOCKHOLDERS' EQUITY
--------------------
The components of stockholders' equity are as follows:
<TABLE>
<CAPTION>
Foreign
Additional Currency Total
Common Paid-In Retained Translation Stockholders'
Stock Capital Earnings Adjustments Equity
------------ ------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $455 $301,897 $39,057 $(1,161) $340,248
Options exercised for purchase
of 538 shares of common stock,
including income tax benefit
of $4,054 5 9,047 9,052
Issuance of 964 shares of
common stock in connection
with the acquisition of
NAI/Block 10 25,706 25,716
Issuance of 108 shares of
common stock in connection
with other acquisitions 1 1,040 34 1,075
Issuance of 24 shares of common
stock in connection with the
Employee Stock Purchase Plan 502 502
Issuance of 345 shares of
common stock to ex-PACE
shareholders 3 11,305 11,308
Issuance of 1,071 shares of
common stock in connection
with contingent consideration
related to the acquisition of
Drake 11 20,047 20,058
Cash paid for fractional shares (58) (58)
Capital contribution by ASPECT
partners 1,300 1,300
Foreign currency translation
adjustment 2,785 2,785
Repayment of distributions 238 238
Net income for the nine months
ended September 30, 1998 15,744 15,744
--------- ---------- ----------- ---------- -----------
Balance at September 30, 1998 $485 $370,786 $55,073 $ 1,624 $427,968
========= ========== =========== ========== ===========
</TABLE>
NOTE G - CONTINGENCIES
-------------
The Company is the defendant in a legal proceeding pending in the United
States District Court for the Northern District of Iowa, Civil Action No. C96-
334MJM, filed on November 18, 1996 by ACT, Inc., an Iowa nonprofit corporation
formerly known as American College Testing Program, Inc. ("ACT"). ACT's claim
arises out of the Company's acquisition of rights to administer testing services
for the National Association of Securities Dealers, Inc. ("NASD"). ACT has
asserted that the Company tortuously interfered with ACT's relations,
contractual and quasi-contractual, with the NASD, that the Company caused ACT to
suffer the loss of its
12
<PAGE>
advantageous economic prospects with the NASD and other ACT clients and that the
Company has monopolized and attempted to monopolize the computer-based testing
services market. ACT has claimed unspecified amounts of compensatory, treble and
punitive damages, as well as injunctive relief. If ACT were awarded significant
compensatory or punitive damages, it could materially adversely affect the
Company's results of operations and financial condition. Additionally, if ACT
were granted significant injunctive relief, the Company may be required to
dispose of, limit expansion or curtail existing operations of its Sylvan
Prometric division, which, in turn, would materially adversely affect the
Company's results of operations, financial condition and prospects for growth.
In February 1998, the Court ruled that ACT may proceed only on three of its five
antitrust theories and otherwise narrowed the scope of ACT's antitrust claims.
In March 1998, the Court denied the Company's motion to dismiss ACT's state law
claims. Discovery has recently commenced and is expected to continue at least
through the end of 1998. The Company believes that all of ACT's claims are
without merit but is unable to predict the outcome of the ACT litigation at this
time.
NOTE H - BUSINESS SEGMENT INFORMATION
----------------------------
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenues:
Learning Centers $11,207 $ 16,443 $ 31,193 $ 44,049
Contract Educational Services 9,917 15,911 45,817 68,180
Sylvan Prometric 50,251 77,347 124,113 183,124
------- -------- -------- --------
$71,375 $109,701 $201,123 $295,353
======= ======== ======== ========
Segment profit:
Learning Centers $ 3,458 $ 4,872 $ 4,015 $ 12,116
Contract Educational Services 2,062 1,393 6,080 8,724
Sylvan Prometric 8,731 17,687 2,942 18,229
------- -------- -------- --------
$14,251 $ 23,952 $ 13,037 $ 39,069
======= ======== ======== ========
Segment assets:
Learning Centers $ 22,576 $ 24,581
Contract Educational Services 23,411 92,813
Sylvan Prometric 183,479 321,362
-------- --------
$229,466 $438,756
======== ========
</TABLE>
There have been no changes since December 31, 1997 in the Company's method for
identification of reportable segments or for determination of segment profit or
loss. There are no significant intercompany sales or transfers. The following
table reconciles the reported information on segment profit to income before
income taxes reported in the consolidated statements of income for the three and
nine months ended September 30, 1997 and 1998:
13
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total profit(loss) for reportable segments $14,251 $23,952 $ 13,037 $ 39,069
Corporate general and administrative
expense (3,664) (3,637) (16,538) (11,321)
Other income(expense) 808 (690) 30,078 (176)
------- ------- -------- --------
Income before income taxes $11,395 $19,625 $ 26,577 $ 27,572
======= ======= ======== ========
</TABLE>
NOTE I - COMPREHENSIVE INCOME
--------------------
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income. Statement 130
established new rules for the reporting and display of comprehensive income and
its components, however, this Statement has no impact on the Company's net
income or stockholders' equity. Statement 130 requires foreign currency
translation adjustments, which prior to adoption were reported separately in
stockholders' equity, to be included in other comprehensive income. Prior period
financial statements have been reclassified to conform to the requirements of
Statement 130.
The components of comprehensive income, net of related tax, for the three
and nine month periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
------ ------- ------- -------
<S> <C> <C> <C> <C>
Net income $7,400 $12,952 $16,710 $15,744
Foreign currency translation
adjustments (420) 2,979 (793) 2,785
------ ------- ------- -------
Comprehensive income $6,980 $15,931 $15,917 $18,529
====== ======= ======= =======
</TABLE>
14
<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 DRAKE AND CANTER ACQUISITIONS, FUTURE CAPITAL
REQUIREMENTS, POTENTIAL ACQUISITIONS, THE FAILURE TO REMEDIATE OR THE COST OF
REMEDIATING YEAR 2000 ISSUES 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; AMOUNT OF REVENUES EARNED BY THE COMPANY'S TESTING AND TEACHER
TRAINING OPERATIONS; THE AVAILABILITY OF SUFFICIENT CAPITAL TO FINANCE THE
COMPANY'S BUSINESS PLAN ON TERMS SATISFACTORY TO THE COMPANY; THE FAILURE TO
REMEDIATE OR THE COST OF REMEDIATING YEAR 2000 ISSUES; GENERAL BUSINESS AND
ECONOMIC CONDITIONS; AND 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.
OVERVIEW
The Company generates revenues from three business segments: Learning
Centers, which primarily consists of franchise royalties, franchise sales fees
and Company-owned Learning Center revenues; Sylvan Prometric, which consists of
computer-based testing fees paid to the Company and the operations of the Wall
Street Institute ("WSI") and ASPECT; and Contract Educational Services, which
consists of revenues attributable to providing supplemental and remedial
education services to public and non-public schools and major corporations as
well as providing teacher training services. The following selected segment data
for the three months and nine months ended September 30, 1997 and 1998 is
derived from the Company's unaudited consolidated financial statements.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating Revenue:
Learning Centers $11,207 $ 16,443 $ 31,193 $ 44,049
Contract Educational Services 9,917 15,911 45,817 68,180
Sylvan Prometric 50,251 77,347 124,113 183,124
------- -------- -------- --------
Total revenue $71,375 $109,701 $201,123 $295,353
======= ======== ======== ========
Direct costs:
Learning Centers $ 7,749 $ 11,571 $ 27,178 $ 31,933
Contract Educational Services 7,855 14,518 39,737 59,456
Sylvan Prometric 41,520 59,660 117,171 156,165
------- -------- -------- --------
Total direct costs $57,124 $ 85,749 $184,086 $247,554
======= ======== ======== ========
</TABLE>
15
<PAGE>
RESULTS OF OPERATIONS
Comparison of results for the quarter and nine months ended September 30, 1998
to results for the quarter and nine months ended September 30, 1997.
Revenue. Total revenues increased by $38.3 million, or 54% to $109.7 million
for the quarter ended September 30, 1998 and increased by $94.2 million, or
47% to $295.4 million for the nine months ended September 30, 1998, compared to
the same periods in 1997. These increases resulted from higher revenues in all
business segments - Learning Centers, Contract Educational Services and Sylvan
Prometric.
Learning Centers revenue increased by $5.2 million, or 47% to $16.4 million
for the quarter ended September 30, 1998 and by $12.9 million, or 41% to
$44.0 million for the nine months ended September 30, 1998, compared to the same
periods in 1997. Overall, franchise royalties increased by $700,000, or 20%, for
the quarter ended September 30, 1998 and $1.6 million, or 16%, for the nine
months ended September 30, 1998, compared to the same periods in 1997. The
increase in royalties was reduced by the Company's acquisition of 22 franchised
Centers during the last twelve months. Excluding the effect of the Center
acquisitions, franchise royalties increased 27% for the quarter ended
September 30, 1998 and 23% for the nine months ended September 30, 1998,
compared to the same periods in 1997. The nine month increase in franchise
royalties was due to the net increase of 53 new Centers opened after September
30, 1997, combined with same center revenue increases of 18%.
Franchise sales fees decreased $350,000 to $644,000 for the quarter ended
September 30, 1998 and decreased $800,000 to $1.4 million for the first nine
months of 1998, compared to the same periods in 1997. The third quarter decrease
is primarily due to a significant area development agreement that was sold for
$500,000 in the third quarter of 1997. For the nine month period ended
September 30, 1997, the Company had three area development sales for
$1.1 million.
Revenue from Company-owned Learning Centers increased $4.1 million, or 70%,
to $10.0 million during the quarter ended September 30, 1998, and by $9.9
million, or 60%, to $26.2 million during the nine months ended September 30,
1998, compared to the same periods in 1997. The acquisition of 22 Centers from
several franchisees during the past twelve months accounted for $2.7 million, or
66%, of the increase for the quarter ended September 30, 1998 and $6.5 million,
or 65%, of the increase for the nine months ended September 30, 1998, compared
to the same periods in 1997. Same center revenues increased by $1.3 million, or
21%, for the quarter ended September 30, 1998 and $2.8 million, or 17%, for the
nine months ended September 30, 1998, compared to the same periods in 1997.
Contract Educational Services revenue increased by $6.0 million, or 60% to
$15.9 million for the quarter ended September 30, 1998, and by $22.4 million, or
49% to $68.2 million for the nine months ended September 30, 1998. The third
quarter revenue increase was the result of a $4.9 million increase in revenue
from Canter, a provider of teacher training services which was acquired in
January 1998, a $2.0 million increase in revenue from public and nonpublic
school
16
<PAGE>
contracts, offset by a $900,000 decrease in revenue from Pace adult training
services. The revenue increase for the nine months ended September 30, 1998 was
the result of a $17.2 million increase in revenue from Canter, a $5.0 million
increase in revenue from public and nonpublic school contracts and a $200,000
increase in revenue from Pace services. The nine months ended September 30,1997
include revenue of $2.6 million from a segment of Educational Inroads, which was
a non-related business activity that was disposed of after it was acquired in
1997.
Sylvan Prometric revenue increased by $27.1 million, or 54% to $77.3
million during the quarter ended September 30, 1998 and by $59.0 million, or
48%, to $183.1 million during the nine months ended September 30, 1998 compared
to the same periods in 1997. The fourth quarter 1997 acquisition of NAI/Block
accounted for $3.3 million of the revenue growth for the third quarter of 1998
and $9.9 million of the revenue growth for the first nine months of 1998.
Academic admissions testing revenues increased 112% compared to the third
quarter of 1997 and 125% compared to the first nine months of 1997, primarily
due to volume increases under Educational Testing Service (ETS) contracts, which
included the cost-plus international contract, the Graduate Record Examinations
(GRE), Graduate Management Admission Test (GMAT), and the Test of English as a
Foreign Language (TOEFL). Information Technology testing revenues increased 66%
and 45% for the third quarter of 1998 and the first nine months of 1998,
respectively, over the comparable 1997 periods mainly due to Microsoft and other
IT client volume increases. Revenues from the Wall Street Institute
International, B.V. and its commonly controlled affiliates (collectively,
"WSI"), Sylvan's international chain of English language centers, increased 110%
compared to the third quarter of 1997 and 39% compared to the first nine months
of 1997 as a result of the acquisitions of several franchise locations during
the third quarter of 1998. Excluding the effect of such acquisitions, WSI
revenues for the quarter ended September 30, 1998 increased 42% compared to the
1997 quarter and increased 12% for the nine months ended September 30, 1998
compared to the 1997 nine month period. Revenues from ASPECT increased $5.1
million, or 40%, and $9.2 million, or 28%, for the quarter and nine months ended
September 30, 1998, respectively, compared to the same periods in 1997.
Cost and Expenses. Total direct costs increased 50% from $57.1 million in the
third quarter of 1997 to $85.7 million in the third quarter of 1998, and
decreased as a percentage of total revenues from 80% to 78%. Direct costs
increased 34% from $184.1 million for the nine months ended September 30, 1997,
to $247.6 million for the nine months ended September 30, 1998 and decreased as
a percentage of total revenues from 92% to 84%.
Learning Centers expenses increased by $3.9 million to $11.6 million, or
70% of Learning Centers revenue for the quarter ended September 30, 1998
compared to $7.7 million, or 69% of Learning Centers revenue for the quarter
ended September 30, 1997. Learning Centers expenses increased $4.7 million to
$31.9 million, or 72%, of Learning Centers revenue for the nine months ended
September 30, 1998 compared to $27.2 million, or 87% of Learning Centers revenue
for the nine months ended September 30, 1997. Included in Learning Centers
expenses for the nine months ended September 30, 1997 is a non-recurring
$5.0 million contribution of the Company's common stock to a corporation whose
sole purpose is to develop and fund advertising programs for Sylvan Learning
Centers. Excluding this contribution, Learning Centers expenses increased by
$9.7 million during the nine months ended September 30, 1998.
17
<PAGE>
Excluding this contribution, recurring expenses as a percentage of total
Learning Centers revenue were 71% for the nine months ended September 30, 1997.
Approximately $2.3 million of the increase for the quarter and $5.5 million of
the increase for the first nine months was due to the acquisition of franchised
Learning Centers and costs associated with higher revenues at existing centers.
As a percentage of revenues, expenses for Company-owned Learning Centers
decreased from 84% for the nine months ended September 30, 1997 to 81% for the
nine months ended September 30, 1998. The Company incurred $102,000 of expenses
in the third quarter of 1998 and $710,000 of expenses in the first nine months
of 1998 for the development of certain educational programs. These expenses were
not incurred in the first nine months of 1997 and are not expected to continue
during 1998. The remaining cost increases for both the quarter and nine months
ended September 30, 1998 relate to franchise support costs.
Contract Educational Services expense increased by $6.7 million to
$14.5 million, or 91% of Contract Educational Services revenue for the quarter
ended September 30, 1998, compared to $7.8 million or 79% of Contract
Educational Services revenue for the third quarter of 1997, and increased by
$19.7 million to $59.4 million, or 87% of Contract Educational Services revenue
during the nine months ended September 30, 1998, compared to $39.7 million or
87% of Contract Educational Services revenue during the first nine months of
1997. The increase in costs as a percentage of revenues for the third quarter is
primarily the result of the revenue decreases for Pace adult training services
which could not be offset with proportionate cost decreases and due to costs for
certain new public school contracts that were a higher percentage of revenue.
Sylvan Prometric expenses increased by $18.2 million to $59.7 million, or
77% of total Sylvan Prometric revenue for the quarter ended September 30, 1998,
compared to $41.5 million, or 83% of total Sylvan Prometric revenue for the
third quarter of 1997, and increased by $39.0 million to $156.2 million, or 85%
of total Sylvan Prometric revenue during the nine months ended September 30,
1998, compared to $117.2 million, or 94% of total Sylvan Prometric revenue for
the same period in 1997. During the second quarter of 1997, Sylvan Prometric
expenses included non-recurring marketing expenditures related to contributions
of $10 million in cash and common stock to an independent marketing fund to be
used for the development of the information technology testing business. The
nine months ended September 30, 1998 contains $1.2 million of non-recurring
expenses related to the acquisition of ASPECT as further described in Note E to
the financial statements. Excluding these expenditures, expenses as a percentage
of total Sylvan Prometric revenue were 85% and 86% for the first nine months of
1998 and 1997, respectively. Sylvan Prometric expenses for the third quarter of
1998 were lower as a percentage of revenue primarily as a result of increased
volumes, sales mix effects, and test delivery cost controls offset, in part, by
sales mix effects of the growth of lower margin ETS International business and
increased sales and marketing expenditures.
In the nine months ended September 30, 1998, Sylvan incurred $5.0 million
of non-recurring transaction-related costs relating to the pooling-of-interests
with ASPECT. The transaction costs include legal, accounting and advisory fees,
as further described in Note E to the financial statements.
18
<PAGE>
In connection with the acquisition of ASPECT, Sylvan will incur certain
restructuring charges of $3.7 million, with an after-tax effect of $3.4 million.
These pre-tax charges, which have been accrued in the quarter ended June 30,
1998, include costs associated with termination benefits of certain employees of
ASPECT of $340,000 and costs associated with the consolidation and restructuring
of the combined operations of $3.4 million. Consolidation and restructuring
charges consist mainly of estimated obligations resulting from the merger. These
obligations relate to contract cancellation costs and the closing of duplicate
facilities. A pre-tax charge related to the cancellation of certain contracts of
$2.6 million is expected to result from the repurchase of certain franchise
rights previously sold in territories where existing ASPECT locations will
violate the terms of master franchise agreements previously entered into by the
Company and certain master franchisees. A pre-tax charge of $790,000 will result
from the consolidation of duplicate facilities, lease termination costs and the
sale of certain facilities which will no longer be used by the Company. Of the
$3.7 million restructuring charge, $14,000 of termination benefits were paid in
the third quarter of 1998. The remainder is included in accounts payable and
accrued expenses at September 30, 1998. The Company expects that the majority of
the remaining accrued liability balance at September 30, 1998 will be expended
in 1999, with certain termination benefit payments continuing through December
31, 2000.
The nine months ended September 30, 1997 included an asset impairment loss
of $4.0 million caused by certain strategic changes contemplated as part of the
planned National Education Corporation ("NEC") merger, and primarily related to
computer equipment and software, whose value was impaired as a result of changes
in technical requirements and specifications of such equipment and software.
In March 1997, the Company and NEC executed a definitive agreement pursuant
to which the Company was to acquire NEC. In May 1997, NEC accepted a competing
offer which resulted in the termination of NEC's agreement with the Company. As
a result, NEC paid the Company a $30 million termination fee, which was
recorded, net of $1.5 million of transaction costs, as a separate component of
non-operating income in the quarter ended June 30, 1997.
General and administrative expenses remained constant at $3.6 million
for the quarter ended September 30, 1998 and the quarter ended September 30,
1997 but decreased as a percentage of revenue from 5% to 3%. General and
administrative expenses decreased by $5.2 million to $11.3 million during the
nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997 and decreased as a percentage of revenue from 8% to 4%.
Included in general and administrative expenses for the nine months ended
September 30, 1997 are non-recurring expenses related to the contribution of the
Company's common stock valued at $6.5 million to Sylvan Learning Foundation,
Inc., a non profit foundation formed to promote various educational pursuits.
Excluding this 1997 non-recurring expense, general and administrative expenses
decreased as a percentage of revenues from 5% of total revenues for the nine
months ended September 30, 1997 to 4% of total revenues for the nine months
ended September 30, 1998. This decrease in expenses as a percentage of revenues
resulted from increased revenues in all segments without corresponding
proportional increases in overhead.
The Company's effective tax rate has increased from 37% during the first
nine months of 1997 to 43% during the first nine months of 1998. The increase in
the effective rate is due to $5.0 million of transaction costs related to the
acquisition of ASPECT for which there is no allowable income tax deduction.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $39.4 million for the nine months
ended September 30, 1998 as compared to $32.9 million provided in the comparable
period of 1997. Cash flow from operations before working capital changes
decreased by $10.1 million from $51.9 million in the 1997 period to
$41.8 million in the 1998 period, primarily as a result of the $28.5 million
termination fee, net of costs, received related to the NEC acquisition and the
$3.0 million cash contribution to the independent marketing fund included in the
1997 period and the $4.9 million of non-recurring expenses in the 1998 period
related to the acquisition of ASPECT as further described in Note E to the
financial statements. Excluding the effects of these items, recurring cash flow
from operations before working capital changes increased from $26.4 million in
the 1997 period to $46.7 million in the 1998 period due to the significant
overall growth in income from Company operations before considering non-cash
charges, which primarily consist of depreciation, amortization and equity in the
net losses of affiliates. 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.
The Company continues to incur expenditures for additions to property and
equipment, which totaled $46.8 million in the nine months ended September 30,
1998. These additions primarily consist of furniture and equipment for general
business expansion, including expenditures related to new public school
contracts, testing center expansions, equipment upgrades, internal software
development and equipment needed for overseas testing centers operated by the
Company under the ETS international testing contract. Under this 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.
In connection with the PACE acquisition, the Company recorded a liability
for additional consideration as of December 31, 1997 which was payable
$14.5 million in cash and $11.3 million in common stock. The payment, net of
amounts due from the former owners of PACE, and issuance of common stock was
made during the second quarter of 1998, and was funded by the sale of available-
for-sale securities. 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 Company has entered into a loan agreement with a bank, (hereinafter,
"the credit line") that provides an unsecured revolving line of credit allowing
the Company to borrow a maximum of $30.0 million through the expiration date of
May 31, 2001. The credit line is extendable at the Company's option through
May 31, 2003. The credit line bears interest at a floating rate equal to the
30 day London Interbank Offered Rate ("LIBOR") plus 0.55% per annum (5.86% at
September 30, 1998).
20
<PAGE>
During the first nine months of 1998, the Company received $5.0 million as
a result of the exercise of options to purchase 538,000 shares of common stock.
During the first nine months of 1998, the Company paid $25.0 million for
the purchase of Canter, and paid $14.6 million to acquire certain WSI franchise
locations, all of which were funded by the sale of available-for-sale
securities.
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 its
current business, including working capital needs and expected investments in
property and equipment.
YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs written using two
digits (rather than four) to define the applicable year. Absent corrective
actions, programs with date-sensitive logic may recognize "00" as 1900 rather
than 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, production
difficulties, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has established a corporate-wide Year 2000 task force with
representatives from all divisions. The task force has conducted a
comprehensive review of the Company's information technology and non-information
technology systems affected by the Year 2000 issue and has developed an
implementation plan to resolve them. The Company measures its progress towards
completion based on the level of efforts completed to date compared to the total
expected. The process involves five phases:
Phase I - Inventory and Data Collection. This phase involves conducting a
comprehensive inventory of the Company's information systems which includes but
is not limited to telecommunications systems, computer hardware, software and
networks as well as building infrastructure such as HVAC, elevators and security
systems. The identification of key third party vendors is also involved. During
this phase, all new systems are required to have passed Year 2000 compliance
tests before being purchased and implemented. The Company commenced this phase
in the first quarter of 1998 and the phase is 80% complete and is expected to
be completed by December 31, 1998.
Phase II - Assessment / Date Impact. In this phase, systems identified
during Phase I are reviewed to determine what impact, if any, the Year 2000
Issue has on the operation of these systems. This phase also identifies the
effects of Year 2000 being a leap year. This phase is 80% complete and is
expected to be completed by December 31, 1998.
Phase III - Remediation. This phase involves modifying, replacing or
upgrading the systems that have failed during Phase II. The remediation phase is
25% complete and is expected to be completed by the middle of the first quarter
of 1999.
Phase IV - Testing. This phase involves review of systems for compliance
and re-testing as necessary. The testing phase is 10% complete and is expected
to be completed by the end of the first quarter of 1999.
21
<PAGE>
Phase V - Implementation. This phase involves implementing the systems
after they have been successfully remediated and tested. This is the final step
in assuring that the systems are Year 2000 complaint. The phase is 10% complete
and is expected to be completed by the end of the second quarter of 1999.
The Company believes the cost to remedy all Year 2000 Issues to be
$3 million and has expended $450,000 through September 30, 1998. The Company is
not aware of any material non-compliance that would require repair or
replacement that would have a material effect on its financial position. As part
of the Year 2000 Issue process, formal communication with the Company's
suppliers, customers and other support services has been initiated and efforts
will continue until positive statements of readiness have been received from all
third parties. To date, the Company is not aware of any non-compliance by its
customers or suppliers that would have material impact on the Company's
business. Nevertheless, there can be no assurance that unanticipated non-
compliance will not occur, and such non-compliance could require material costs
to repair or could cause material disruptions if not repaired. The Company is in
the process of developing a strategy to address these potential consequences
that may result from unresolved Year 2000 Issues, which will include the
development of one or more contingency plans by mid 1999.
CONTINGENT MATTERS
The agreement with Drake provides for future contingent payments based on
achievement of certain specified revenue targets in 1998 or 1999, at election of
the Sellers which, if earned would be paid in the first quarter of 1999 or 2000.
As of October 5, 1998 one of the sellers offered to take a 50% discount on the
$15 million that would have been due him under the contingent payment in
exchange for an immediate settlement. Management accepted this based on the high
degree of certainty that the revenue targets would be reached in 1998. This
settlement was agreed to be paid with 427,400 shares of common stock. The
remaining $25 million contingent payment for the other seller will be paid, with
shares of common stock, when earned, which is expected to be in the first
quarter of 1999. The amount of any contingent payments will be recorded 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 nonpublic 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
22
<PAGE>
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.
PART II - OTHER INFORMATION
ITEM 6. REPORTS ON FORM 8-K
-------------------
(A) REPORTS ON FORM 8-K
During the third quarter of 1998, the Company filed a report on Form 8-K,
dated July 29, 1998, with respect to the filing of restated audited
financial statements for the years ended December 31, 1995, 1996 and 1997
and restated unaudited financial statements for the three months ended
March 31, 1997 and 1998 related to the ASPECT acquisition.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be on behalf by the undersigned
thereunto duly authorized.
Sylvan Learning Systems, Inc.
Date: November 13, 1998 /s/ B. Lee McGee
------------------------------------
B. Lee McGee, Executive Vice President
and Chief Financial Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUL-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 29,639 29,639
<SECURITIES> 29,020 29,020
<RECEIVABLES> 85,146 85,146
<ALLOWANCES> 3,294 3,294
<INVENTORY> 8,185 8,185
<CURRENT-ASSETS> 162,943 162,943
<PP&E> 118,775 118,775
<DEPRECIATION> 31,301 31,301
<TOTAL-ASSETS> 536,426 536,426
<CURRENT-LIABILITIES> 91,576 91,576
<BONDS> 0 0
0 0
0 0
<COMMON> 485 485
<OTHER-SE> 427,483 427,483
<TOTAL-LIABILITY-AND-EQUITY> 536,426 536,426
<SALES> 0 0
<TOTAL-REVENUES> 109,701 295,353
<CGS> 0 0
<TOTAL-COSTS> 89,386 267,605
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 351 804
<INCOME-PRETAX> 19,625 27,572
<INCOME-TAX> 6,673 11,828
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,952 15,744
<EPS-PRIMARY> 0.27 0.33
<EPS-DILUTED> 0.26 0.31
</TABLE>
