<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
July 29, 1998
SYLVAN LEARNING SYSTEMS, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Maryland 0-22844 52-1492296
---------- ------- ----------
(State of Incorporation) (Commission File Number) (IRS Employer Identification
Number)
1000 Lancaster Street
Baltimore, Maryland 21202
----------------------- -----
(Address of principal executive offices) (Zip Code)
(410) 843-8000
--------------
(Registrant's telephone number)
<PAGE>
Item 5. Other Events.
The supplemental consolidated financial statements of Sylvan Learning Systems,
Inc. ("the Company") included herein for each of the three years in the period
ended December 31, 1997 and for the quarters ended March 31, 1998 and 1997 have
been restated to give retroactive effect to the Company's merger with Aspect
International Language Schools, B.V. and subsidiaries ( "Aspect") on May 6,
1998. The merger was accounted for by the Company as a pooling-of-interests and,
accordingly, the Company's financial statements have been restated for all
periods prior to the merger to include the results of operations, financial
position and cash flows of Aspect. As of the date of this report, the Company
has not issued financial statements for a period including the merger date and,
therefore, the financial statements are considered "supplemental." Upon the
issuance of financial statements for a period that includes the date of the
merger, the supplemental consolidated financial statements will become the
historical consolidated financial statements of the Company.
Also included herein is a revised Management's Discussion and Analysis of
Financial Condition and Results of Operations based on the supplemental
consolidated financial statements described above.
2
<PAGE>
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA (1)
The selected supplemental statements of operations data for the year ended
December 31, 1993 consist of the results of Sylvan KEE Systems, a Maryland
general partnership into which Sylvan Learning Corporation contributed the
Sylvan Learning Centers business in January 1993, plus Sylvan results for the
eleven months ended December 31, 1993. The supplemental selected financial
data for the years ended December 31, 1994 through 1997 have been derived from
Sylvan's supplemental consolidated financial statements which have been
audited by Ernst & Young LLP. The selected supplemental financial data have
been adjusted for the 3-for-2 stock dividend paid on May 22, 1998, and the
restatement of the Company's financial statements as a result of accounting
for the ASPECT acquisition as a pooling-of-interests.
<TABLE>
<CAPTION>
PARTNERSHIP SYLVAN
AND SYLVAN ---------------------------------------------------------
COMBINED YEAR ENDED THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ------------------------------------- ------------------
1993 1994 1995 1996 1997(2) 1997(3) 1998(3)
------------ ------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues............... $71,091 $92,881 $137,717 $217,874 $298,671 $ 60,821 $ 86,323
Cost and expenses:
Direct costs........... 63,053 83,945 122,806 185,356 259,083 53,586 76,781
General and
administrative
expense(4)............ 6,255 4,998 6,205 8,755 22,076 2,961 3,327
Loss on impairment of
assets................ -- -- 3,316 -- 4,000 -- --
------- ------- -------- -------- -------- -------- --------
Total costs and
expenses.............. 69,308 88,943 132,327 194,111 285,159 56,547 80,108
------- ------- -------- -------- -------- -------- --------
Operating income....... 1,783 3,938 5,390 23,763 13,512 4,274 6,215
Non-operating income
(expense)............. (102) 266 1,402 2,105 31,323 653 536
Interest (expense),
net................... (1,611) (313) (2,623) (1,296) (785) (318) (169)
------- ------- -------- -------- -------- -------- --------
Income from continuing
operations before
income taxes and
extraordinary items... 70 3,891 4,169 24,572 44,050 4,609 6,582
Income taxes........... (79) (182) (356) (9,135) (16,426) (1,955) (2,315)
------- ------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations
before extraordinary
items................. (9) 3,709 3,813 15,437 27,624 2,654 4,267
------- ------- -------- -------- -------- -------- --------
Income from
discontinued
operations(5)......... 205 -- -- -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income before
extraordinary items... 196 3,709 3,813 15,437 27,624 2,654 4,267
Extraordinary
items(6).............. (177) -- -- -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income............. $ 19 $ 3,709 $ 3,813 $ 15,437 $ 27,624 $ 2,654 $ 4,267
======= ======= ======== ======== ======== ======== ========
Earnings from
continuing operations
per diluted share(7).. $ -- $ 0.14 $ 0.14 $ 0.40 $ 0.62 $ 0.06 $ 0.09
======= ======= ======== ======== ======== ======== ========
Diluted shares(7)...... 11,676 26,433 27,622 38,884 44,811 42,882 49,926
======= ======= ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents........... $12,711 $ 6,965 $ 6,488 $ 18,565 $ 29,650 $ 18,407 $ 26,517
Available-for-sale
securities............ 1,248 2,537 30,735 16,449 82,926 10,730 57,880
Net working capital.... 11,894 12,813 38,870 28,654 112,755 37,727 80,703
Intangible assets and
deferred contract
costs................. 7,002 8,098 83,192 123,373 193,109 121,387 216,048
Total assets........... 51,451 62,320 187,744 277,614 496,313 279,862 504,288
Long-term debt,
including current
portion............... 8,778 12,077 12,028 39,412 74,579 25,021 50,693
Stockholders' equity... 26,243 33,967 138,904 182,524 340,248 203,280 373,164
</TABLE>
- --------
(1) As of the date of this Offering Memorandum, the Company has not issued
financial statements for a period including the ASPECT acquisition date
and, therefore, the financial statements are considered "supplemental."
Upon the issuance of financial statements for a period that includes the
date of the ASPECT acquisition, the supplemental consolidated financial
statements will become the historical consolidated financial statements of
the Company.
Prior to February 1, 1991, the Sylvan Learning Centers business was
conducted by Sylvan Learning Corporation (the "Predecessor"). On February 1,
1991, the Predecessor contributed the Sylvan Learning
3
<PAGE>
Centers business to Sylvan KEE Systems, a Maryland general partnership (the
"Partnership") in exchange for a 50% partnership interest, and Sylvan
contributed its computer training software development business to the
Partnership in exchange for the other 50% partnership interest. On January
26, 1993, Sylvan acquired the Predecessor and dissolved the Partnership. On
September 3, 1993, Sylvan sold its computer training software development
business.
During 1994, Sylvan acquired by mergers all of the outstanding stock of LSI
and Loralex. These companies owned and operated a total of nine Sylvan
Learning Centers located in the Northeast United States and Florida. On
February 17, 1995, Sylvan acquired by merger all of the outstanding stock of
READS, a Philadelphia-based provider of remedial education and a variety of
consulting services to school districts, county-wide educational agencies
and municipalities in the Eastern United States. The READS, Loralex and LSI
acquisitions have been accounted for by Sylvan as poolings-of-interests and,
accordingly, Sylvan's financial statements have been restated for all
periods prior to the acquisitions.
Effective September 30, 1995, Sylvan acquired Drake, a leading provider of
computer-based certification, licensure and assessment testing. The
transaction was accounted for as a purchase, and Sylvan's results of
operations from October 1, 1995 include the operations of Drake.
Effective December 1, 1996, Sylvan acquired Wall Street, a European-based
franchisor and operator of learning centers that teach the English language.
This transaction was accounted for as a purchase, and Sylvan's results of
operations from December 1, 1996 include the operations of Wall Street.
Sylvan paid $4.9 million of the $21.1 million purchase price in cash and the
remainder in 1,072,326 shares of Common Stock.
On May 30, 1997, the Company acquired Educational Inroads, a provider of
contract educational services to school districts in New Jersey and several
other states. The Educational Inroads acquisition was accounted for by
Sylvan as a pooling-of-interests, and, accordingly, Sylvan's financial
statements have been restated for all periods prior to the acquisition.
On January 1, 1998, the Company acquired all of the outstanding capital
stock of Canter for $25 million plus additional consideration if Canter
achieves certain EBITDA targets. The acquisition was accounted for as a
purchase, and Sylvan's results of operations from January 1, 1998 include
the operations of Canter.
On May 6, 1998, Sylvan exchanged 2,004,030 shares of its stock (having a
market value of $65.0 million) for all of the outstanding equity interests
in ASPECT in a transaction accounted for as a pooling-of-interests, and
accordingly, Sylvan's financial statements have been restated for all
periods prior to the acquisition.
(2) Includes $5.4 million of non-recurring expenses related to accounting for
the ASPECT acquisition as a pooling-of-interests. These expenses include
shareholder compensation and related expenses and transaction costs
totaling $2.5 million and a contribution of $2.9 million to a not-for-
profit foundation. Additionally, 1997 includes the following non-recurring
items: the $28.5 million net NEC termination fee, Sylvan's impairment loss
of $4.0 million and $21.5 million of expenses related to contributions to
several not-for-profit entities. The approximate net effect of these items
was to increase income before tax by $3.0 million and net income by $1.9
million.
(3) Includes a pre-tax loss for ASPECT in the first quarter of 1997 and 1998
of $1.1 million and $1.9 million, respectively.
(4) The Company has reclassified certain operating expenses previously
included in general and administrative expense to direct costs. This
change has been reflected for all periods presented.
(5) Represents Sylvan's computer training software development business, which
was sold in September 1993.
(6) Represents the $350,000 gain on extinguishment of a $3.5 million debt and
a $527,000 loss on extinguishment of $5.0 million of notes payable to
stockholders, each recorded in 1993.
(7) All share and per share data have been restated to reflect a 3-for-2 stock
dividend paid on November 7, 1996 and a 3-for-2 stock dividend paid on
May 22, 1998.
4
<PAGE>
ITEM 7. SUPPLEMENTAL FINANCIAL STATEMENTS AND EXHIBITS
----------------------------------------------
(a) Exhibits
--- --------
23.01 Consent of Ernst & Young LLP
23.02 Consent of Deloitte & Touche LLP
23.03 Consent of Deloitte & Touche
23.04 Consent of Smith, Lange & Phillips LLP
27.00 Restated Financial Data Schedule
99.1 Management's Discussion and Analysis of Financial Condition and
Results of Operations for the Years Ended December 31, 1997,
1996, and 1995 and for the three months ended March 31, 1998
and 1997.
99.2 Supplemental Consolidated Financial Statements for each of the
three years in the period ended December 31, 1997.
99.3 Supplemental Consolidated Financial Statements for the three
months ended March 31, 1997 and March 31, 1998 (unaudited)
99.4 Opinion of Deloitte & Touche
99.5 Opinion of Smith, Lange & Phillips LLP
99.6 Opinion of Smith, Lange & Phillips LLP
99.7 Opinion of Smith, Lange & Phillips LLP
5
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 29, 1998 SYLVAN LEARNING SYSTEMS, INC.
By: /s/ B. Lee McGee
-----------------
B. Lee McGee,
Executive Vice President
and Chief Financial Officer
6
<PAGE>
Exhibit 23.01
Consent of Ernst & Young LLP, Independent Auditors
We consent to the incorporation by reference in the following Registration
Statements of our report dated July 28, 1998, with respect to the supplemental
consolidated financial statements of Sylvan Learning Systems, Inc.
included in the Current Report on Form 8-K dated July 29, 1998.
Registration Statements on Form S-3:
Registration Number Date Filed
- -------------------------------- --------------------
33-92014 May 8, 1995
33-92852 May 30, 1995
333-1674 February 26, 1996
333-16111 November 14, 1996
333-21261 February 6, 1997
333-26633 May 7, 1997
333-31273 July 15, 1997
333-39535 November 5, 1997
333-43355 December 29, 1997
333-46747 February 23, 1998
333-48997 March 31, 1998
333-50993 April 24, 1998
Registration Statements on Form S-8:
Registration
Name Number Date Filed
- ------------------------------------- ------------------ ------------------
1987-1991 Employee Stock Option Plan 33-77384 April 6, 1994
1993 Director Stock Option Plan 33-77386 April 6, 1994
1993 Employee Stock Option Plan 33-77390 April 6, 1994
1993 Management Stock Option Plan 33-77388 April 6, 1994
1997 Employee Stock Purchase Plan 333-21963 February 18, 1997
ERNST & YOUNG LLP
Baltimore, Maryland
July 28, 1998
<PAGE>
EXHIBIT 23.02
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in the following Registration
Statements of our reports dated March 14, 1997, with respect to the financial
statements of Independent Child Study Teams, Inc. and I-R, Inc. included in the
Form 8-K dated July 29, 1998.
REGISTRATION STATEMENT ON FORM S-3
<TABLE>
<CAPTION>
Registration Number Date Filed
- --------------------------------------------------------------------------------
<S> <C>
33-92014 May 8, 1995
33-92852 May 30, 1995
333-1674 February 26, 1996
333-16111 November 14, 1996
333-21261 February 6, 1997
333-26633 May 7, 1997
333-31273 July 15, 1997
333-39535 November 5, 1997
333-43355 December 29, 1997
333-46747 February 23, 1998
333-48997 March 31, 1998
333-50993 April 24, 1998
</TABLE>
Registration Statement on Form S-8
<TABLE>
<CAPTION>
Name Registration Number Date Filed
- --------------------------------------------------------------------------------
<S> <C> <C>
1987-1991 Employee Stock Option Plan 33-77384 April 6, 1994
1993 Director Stock Option Plan 33-77386 April 6, 1994
1993 Employee Stock Option Plan 33-77390 April 6, 1994
1993 Management Stock Option Plan 33-77388 April 6, 1994
1997 Employee Stock Purchase Plan 333-21963 February 18, 1997
</TABLE>
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
July 27, 1998
<PAGE>
EXHIBIT 23.03
CONSENT OF DELOITTE & TOUCHE, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements, all of Sylvan Learning Systems, Inc., of our report dated July 27,
1998, with respect to the consolidated financial statements of Anglo-World
Education (UK) Limited and Subsidiaries included in the Current Report on Form
8-K dated July 29, 1998.
REGISTRATION STATEMENT ON FORM S-3
<TABLE>
<CAPTION>
Registration Number Date Filed
- --------------------------------------------------------------------------------
<S> <C>
33-92014 May 8, 1995
33-92852 May 30, 1995
333-1674 February 26, 1996
333-16111 November 14, 1996
333-21261 February 6, 1997
333-26633 May 7, 1997
333-31273 July 15, 1997
333-39535 November 5, 1997
333-43355 December 29, 1997
333-46747 February 23, 1998
333-48997 March 31, 1998
333-50993 April 24, 1998
</TABLE>
REGISTRATION STATEMENT ON FORM S-8
<TABLE>
<CAPTION>
Name Registration Number Date Filed
- --------------------------------------------------------------------------------
<S> <C> <C>
1987-1991 Employee Stock Option Plan 33-77384 April 6, 1994
1993 Director Stock Option Plan 33-77386 April 6, 1994
1993 Employee Stock Option Plan 33-77390 April 6, 1994
1993 Management Stock Option Plan 33-77388 April 6, 1994
1997 Employee Stock Purchase Plan 333-21963 February 18, 1997
</TABLE>
DELOITTE & TOUCHE
United Kingdom
July 27, 1998
<PAGE>
EXHIBIT 23.04
CONSENT OF SMITH, LANGE & PHILLIPS LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements all of Sylvan Learning Systems, Inc., our reports listed below with
respect to the consolidated financial statements of American Study Program for
Educational and Cultural Training, Inc. included in the Current Report on
Form 8-K dated July 29, 1998.
<TABLE>
<CAPTION>
<S> <C>
September 30, 1995 dated June 11, 1998
September 30, 1996 dated December 10, 1996
September 30, 1997 dated December 7, 1997
</TABLE>
REGISTRATION STATEMENT ON FORM S-3:
<TABLE>
<CAPTION>
Registration Number Date Filed
- --------------------------------------------------------------------------------
<S> <C>
33-92014 May 8, 1995
33-92852 May 30, 1995
333-1674 February 26, 1996
333-16111 November 14, 1996
333-21261 February 6, 1997
333-26633 May 7, 1997
333-31273 July 15, 1997
333-39535 November 5, 1997
333-43355 December 29, 1997
333-46747 February 23, 1998
333-48997 March 31, 1998
333-50993 April 24, 1998
</TABLE>
REGISTRATION STATEMENT ON FORM S-8:
<TABLE>
<CAPTION>
Name Registration Number Date Filed
- --------------------------------------------------------------------------------
<S> <C> <C>
1987-1991 Employee Stock Option Plan 33-77384 April 6, 1994
1993 Director Stock Option Plan 33-77386 April 6, 1994
1993 Employee Stock Option Plan 33-77390 April 6, 1994
1993 Management Stock Option Plan 33-77388 April 6, 1994
1997 Employee Stock Purchase Plan 333-21963 February 18, 1997
</TABLE>
SMITH, LANGE & PHILLIPS, LLP
San Francisco
July 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 26,517
<SECURITIES> 57,880
<RECEIVABLES> 69,100
<ALLOWANCES> (2,724)
<INVENTORY> 7,009
<CURRENT-ASSETS> 169,000
<PP&E> 87,522
<DEPRECIATION> (23,657)
<TOTAL-ASSETS> 504,288
<CURRENT-LIABILITIES> 88,297
<BONDS> 0
0
0
<COMMON> 466
<OTHER-SE> 372,698
<TOTAL-LIABILITY-AND-EQUITY> 504,288
<SALES> 86,323
<TOTAL-REVENUES> 86,323
<CGS> 0
<TOTAL-COSTS> 80,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 169
<INCOME-PRETAX> 6,582
<INCOME-TAX> (2,315)
<INCOME-CONTINUING> 4,267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,267
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 18,407
<SECURITIES> 10,730
<RECEIVABLES> 51,438
<ALLOWANCES> (1,410)
<INVENTORY> 4,572
<CURRENT-ASSETS> 90,098
<PP&E> 53,988
<DEPRECIATION> (19,554)
<TOTAL-ASSETS> 279,862
<CURRENT-LIABILITIES> 52,371
<BONDS> 0
0
0
<COMMON> 395
<OTHER-SE> 202,885
<TOTAL-LIABILITY-AND-EQUITY> 279,862
<SALES> 60,821
<TOTAL-REVENUES> 60,821
<CGS> 0
<TOTAL-COSTS> 56,547
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 318
<INCOME-PRETAX> 4,609
<INCOME-TAX> (1,955)
<INCOME-CONTINUING> 2,654
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,654
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.06
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 29,650,074
<SECURITIES> 82,925,569
<RECEIVABLES> 76,273,581
<ALLOWANCES> (1,858,116)
<INVENTORY> 4,999,384
<CURRENT-ASSETS> 201,628,900
<PP&E> 72,404,115
<DEPRECIATION> (21,159,892)
<TOTAL-ASSETS> 496,313,084
<CURRENT-LIABILITIES> 88,873,555
<BONDS> 0
0
0
<COMMON> 454,504
<OTHER-SE> 339,793,276
<TOTAL-LIABILITY-AND-EQUITY> 496,313,084
<SALES> 298,671,286
<TOTAL-REVENUES> 298,671,286
<CGS> 0
<TOTAL-COSTS> 285,158,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 785,840
<INCOME-PRETAX> 44,050,009
<INCOME-TAX> (16,425,789)
<INCOME-CONTINUING> 27,624,220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,624,789
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.62
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,564,566
<SECURITIES> 16,448,759
<RECEIVABLES> 46,444,294
<ALLOWANCES> (1,442,951)
<INVENTORY> 4,591,893
<CURRENT-ASSETS> 89,933,711
<PP&E> 50,634,959
<DEPRECIATION> (17,581,366)
<TOTAL-ASSETS> 277,614,321
<CURRENT-LIABILITIES> 61,279,090
<BONDS> 0
0
0
<COMMON> 379,744
<OTHER-SE> 182,144,326
<TOTAL-LIABILITY-AND-EQUITY> 277,614,321
<SALES> 217,874,341
<TOTAL-REVENUES> 217,874,341
<CGS> 0
<TOTAL-COSTS> 194,111,180
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,296,451
<INCOME-PRETAX> (24,571,677)
<INCOME-TAX> 9,134,724
<INCOME-CONTINUING> 15,436,953
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,436,953
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.40
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 6,487,207
<SECURITIES> 30,734,519
<RECEIVABLES> 32,346,675
<ALLOWANCES> (1,635,043)
<INVENTORY> 3,816,432
<CURRENT-ASSETS> 77,131,062
<PP&E> 34,974,737
<DEPRECIATION> (11,384,207)
<TOTAL-ASSETS> 187,744,274
<CURRENT-LIABILITIES> 38,261,437
<BONDS> 0
0
0
<COMMON> 355,204
<OTHER-SE> 138,548,799
<TOTAL-LIABILITY-AND-EQUITY> 187,744,274
<SALES> 137,717,449
<TOTAL-REVENUES> 137,717,449
<CGS> 0
<TOTAL-COSTS> 132,327,070
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,623,269
<INCOME-PRETAX> 4,168,674
<INCOME-TAX> (355,871)
<INCOME-CONTINUING> 3,812,803
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,812,803
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.14
</TABLE>
<PAGE>
EXHIBIT 99.1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sylvan generates revenues from its three divisions: Sylvan Learning Centers,
Sylvan Prometric and Sylvan Contract Educational Services. The following data
are derived from the Company's supplemental consolidated financial statements.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ---------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Sylvan Learning Centers........... $ 26,063 $ 36,799 $ 44,289 $ 9,231 $12,136
Sylvan Prometric.................. 61,224 122,889 187,800 34,016 47,567
Sylvan Contract Educational
Services......................... 50,430 58,186 66,582 17,574 26,620
-------- -------- -------- ------- -------
Total revenues.................. $137,717 $217,874 $298,671 $60,821 $86,323
======== ======== ======== ======= =======
Direct costs:
Sylvan Learning Centers........... $ 18,675 $ 25,557 $ 36,708 $ 6,829 $ 9,429
Sylvan Prometric.................. 56,446 106,426 166,318 30,589 44,538
Sylvan Contract Educational
Services......................... 47,685 53,373 56,057 16,168 22,814
-------- -------- -------- ------- -------
Total direct costs.............. $122,806 $185,356 $259,083 $53,586 $76,781
======== ======== ======== ======= =======
</TABLE>
RESULTS OF OPERATIONS
Comparison of results for the quarter ended March 31, 1998 to results for the
quarter ended March 31, 1997.
Revenues. Total revenues increased by $25.5 million, or 42%, from $60.8
million in the first quarter of 1997 to $86.3 million in the first quarter of
1998. This increase resulted from higher revenues in all three divisions.
Sylvan Learning Centers revenues increased by $2.9 million, or 32%, from
$9.2 million in the first quarter of 1997 to $12.1 million in the first
quarter of 1998. Franchise royalties increased by $500,000, or 17%, from $3.0
million in the first quarter of 1997 to $3.5 million in the first quarter of
1998. This increase in franchise royalties was due to an overall 14% increase
in revenues at Learning Centers open for more than one year as of March 31,
1997, as well as royalties generated from a net of 29 Learning Centers opened
after March 31, 1997. Franchise sales fees decreased by $500,000, or 71%, from
$700,000 in the first quarter of 1997 to $200,000 in the first quarter of
1998. In the first quarter of 1998, the Company sold four franchise
territories but no area development agreements, compared to five franchise
territories sold and one $500,000 area development agreement sold in the first
quarter of 1997. Revenues from Company-owned Learning Centers increased by
$2.0 million, or 40%, from $5.0 million in the first quarter of 1997 to $7.0
million in the first quarter of 1998. The Company's acquisition of 13 Learning
Centers from several franchisees after March 31, 1997 generated $1.5 million
of the increase, with the remaining increase of $500,000 generated by Company-
owned Learning Centers open for more than one year as of March 31, 1998.
Product sales to franchisees increased by $400,000, or 57%, from $700,000 in
the first quarter of 1997 to $1.1 million in the first quarter of 1998. The
remaining increase in Sylvan Learning Centers revenues consisted of other
franchise service income.
Sylvan Prometric revenues increased by $13.6 million, or 40%, from $34.0
million in the first quarter of 1997 to $47.6 million in the first quarter of
1998. Block Testing Services, L.P. and related entities (collectively,
"NAI/Block"), purchased during the fourth quarter of 1997, accounted for $3.1
million of the revenue growth. Revenues at ASPECT increased by $2.1 million,
or 24%, as a result of volume growth. Excluding the NAI/Block and ASPECT
acquisitions, revenue growth would have been 25%. Academic admissions testing
revenues
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increased by $3.5 million, or 97%, due to volume increases under the ETS
contracts. The Test of English as a Foreign Language (the "TOEFL"), in its
initial pilot phase, and the Graduate Management Admission Test (the "GMAT")
were first offered through Sylvan Prometric beginning in the Fall of 1997. IT
and professional certification testing revenues increased $3.8 million and
$700,000, or 33% and 15%, respectively, primarily due to volume increases.
Revenues at Wall Street decreased because Wall Street did not record any
master franchise sales in the first quarter of 1998, compared to $1.2 million
of master franchise sales recorded in the first quarter of 1997.
Sylvan Contract Educational Services revenues increased by $9.0 million, or
51%, from $17.6 million in the first quarter of 1997 to $26.6 million in the
first quarter of 1998. The increase in revenues included $6.7 million in
revenues from Canter, which was purchased on January 1, 1998. The balance of
the increase in revenues consisted of a $1.9 million increase in revenues from
public and non-public school contracts and a $400,000 increase in revenues
from PACE services. Revenues from public and non-public school contracts
obtained after March 31, 1997 contributed $2.9 million to the increase in
revenues for the first quarter of 1998. The first quarter of 1997 included
$1.0 million of revenues from non-education related activity at Educational
Inroads which was disposed of after the Educational Inroads acquisition on May
30, 1997. Revenues from public and non-public school contracts that existed in
the first quarters of both 1997 and 1998 remained constant.
Costs and Expenses. Total direct costs increased by $23.2 million, or 43%,
from $53.6 million in the first quarter of 1997 to $76.8 million in the first
quarter of 1998. Total direct costs increased as a percentage of total
revenues from 88% to 89%.
Sylvan Learning Centers expenses increased by $2.6 million, or 38%, from
$6.8 million in the first quarter of 1997 to $9.4 million in the first quarter
of 1998. As a percentage of Sylvan Learning Centers revenues, these expenses
increased from 74% to 78%. The Company incurred $400,000 for the one-time
development of several educational programs in the first quarter of 1998.
Excluding these one-time expenses, Sylvan Learning Centers expenses would have
been 74% of Sylvan Learning Centers revenues for the first quarter of 1998.
Company-owned Learning Center expenses increased by $1.6 million, or 37%,
primarily as a result of advertising and higher labor costs associated with
increased enrollment. As a percentage of revenues, expenses at Company-owned
Learning Centers decreased from 88% to 85%.
Sylvan Prometric expenses increased by $14.0 million, or 46%, from $30.6
million in the first quarter of 1997 to $44.5 million in the first quarter of
1998. As a percentage of Sylvan Prometric revenues, Sylvan Prometric's
expenses increased from 90% to 93%. The dollar increase was consistent with
the increase in revenues from the first quarter of 1997. Excluding master
franchise sales at Wall Street in the first quarter of 1997, Sylvan Prometric
expenses would have remained constant at 93% of Sylvan Prometric revenues.
Sylvan Contract Educational Services expenses increased by $6.6 million, or
41%, from $16.2 million in the first quarter of 1997 to $22.8 million in the
first quarter of 1998. As a percentage of Sylvan Contract Educational Services
revenues, these expenses declined from 92% to 86%. The increase in Sylvan
Contract Educational Services expenses resulted from a $6.3 million increase
in costs from PACE and Canter and a $300,000 increase in costs from public and
non-public school contracts. The margin improvement at Sylvan Contract
Educational Services was the result of the Company's ability to leverage
increasing student volumes over the fixed cost infrastructure of this
division.
General and administrative expenses increased by $300,000, or 10%, from $3.0
million in the first quarter of 1997 to $3.3 million in the first quarter of
1998. As a percentage of revenues, these expenses decreased from 5% to 4% due
to increased revenues without corresponding increases in administrative staff
and overhead.
Income before income taxes increased by $2.0 million, or 43%, from $4.6
million in the first quarter of 1997 to $6.6 million in the first quarter of
1998. These amounts include pre-tax losses of $1.1 million and $1.9 million in
the first quarter of 1997 and 1998, respectively.
The effective tax rate decreased from 42% in the first quarter of 1997 to
35% in the first quarter of 1998 mainly due to the effect of higher earnings
in foreign countries with lower tax rates than the U.S.
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Comparison of results for the year ended December 31, 1997 to the year ended
December 31, 1996.
Revenues. Total revenues increased by $80.8 million, or 37%, from $217.9
million in 1996 to $298.7 million in 1997. This increase resulted from higher
revenues in all three divisions.
Sylvan Learning Centers revenues increased by $7.5 million, or 20%, from
$36.8 million in 1996 to $44.3 million in 1997. Franchise royalties increased
by $1.9 million, or 20%, from $9.3 million in 1996 to $11.2 million in 1997.
This increase in franchise royalties was due to an overall 10% increase in
revenues at Learning Centers open for more than one year as of December 31,
1996, as well as royalties generated from a net of 60 Learning Centers opened
in 1997. Franchise sales fees increased by $1.3 million, or 41%, from
$3.2 million in 1996 to $4.5 million in 1997. In 1997, the Company sold six
area development agreements for $2.9 million and 42 franchise Learning Center
licenses, compared to four area development agreements sold for $1.7 million
and 38 franchise Learning Center licenses sold in 1996. Revenues from Company-
owned Learning Centers increased by $4.2 million, or 23%, from $18.5 million
in 1996 to $22.7 million in 1997, primarily as a result of student enrollment
increases at Learning Centers open for more than one year as of December 31,
1996 and, to a lesser extent, the Company's acquisition in 1997 of 13 Learning
Centers from five franchises. Product sales to franchisees decreased by
$190,000, or 5%, from $3.9 million in 1996 to $3.7 million in 1997.
Sylvan Prometric revenues increased by $64.9 million, or 53%, from $122.9
million in 1996 to $187.8 million in 1997. Wall Street, purchased in December
1996, accounted for $19.0 million of the revenue growth. Revenues at ASPECT
increased by $16.5 million, or 46%, as a result of volume growth. The
remaining increase in Sylvan Prometric revenues resulted from increased
services under ETS contracts, which included the cost-plus international
contract, the Graduate Record Examination (the "GRE"), the GMAT and the TOEFL,
certain volume-based pricing adjustments and testing in the IT and
professional license businesses.
Sylvan Contract Educational Services revenues increased by $8.4 million, or
14%, from $58.2 million in 1996 to $66.6 million in 1997. Revenues from PACE
contracts accounted for $6.2 million of the increase for 1997, primarily as a
result of contracts with new customers. Revenues from public and non-public
school contracts increased by $2.2 million in 1997, primarily as a result of
contracts with new school districts. Revenues from public and non-public
school contracts obtained after December 31, 1996 contributed $5.3 million to
the increase in revenues in 1997, while revenues from existing public and non-
public school contracts obtained before December 31, 1996 decreased by $3.1
million in 1997, primarily due to reduced funding in some school districts and
the expiration of several contracts in 1997.
Costs and Expenses. Total direct costs increased by $73.7 million, or 40%,
from $185.4 million in 1996 to $259.1 million in 1997. Total direct costs
increased as a percentage of total revenues from 85% to 87% primarily as a
result of non-recurring expenses of $21.5 million included in direct costs in
1997, as discussed below. Total direct costs in 1997 also include $5.4 million
of non-recurring expenses related to accounting for the ASPECT acquisition as
a pooling-of-interests. Excluding these non-recurring expenses, total direct
costs as a percentage of total revenues would have been 78% in 1997.
Sylvan Learning Centers expenses increased by $11.2 million, or 44%, from
$25.6 million in 1996 to $36.7 million in 1997. As a percentage of Sylvan
Learning Centers revenues, these expenses increased from 70% to 83%.
Advertising expenses in 1997 included the Company's one-time $5.0 million
contribution of Common Stock to a not-for-profit corporation whose sole
purpose is to develop and fund advertising programs for the Sylvan Learning
Centers. Franchise services expenses increased by $8.0 million, or 84%, from
$9.5 million in 1996 to $17.5 million in 1997 and increased as a percentage of
franchise-related revenues from 52% in 1996 to 82% in 1997. The lower margin
in franchise services was primarily due to the one-time expense discussed
above, as well as costs incurred for development of new programs and
additional management staff for Sylvan Learning Centers. Company-owned
Learning Center expenses increased by $3.1 million, or 19%, from $16.1 million
in 1996 to $19.2 million in 1997 but decreased as a percentage of Company-
owned Learning Center revenues from 87% to 85%. Expenses at Learning Centers
operating for more than one year as of December 31, 1996 accounted for $2.0
million of the increase for 1997. The increase also resulted from $1.1 million
of expenses associated with the 13 Learning Centers acquired from franchisees
in 1997 and increases in advertising, labor and general overhead expenses
associated with increased Learning Center enrollment.
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Sylvan Prometric expenses increased by $59.9 million, or 56%, from $106.4
million in 1996 to $166.3 million in 1997. As a percentage of Sylvan Prometric
revenues, these expenses increased from 87% to 89%. The increase in Sylvan
Prometric expenses as a percentage of Sylvan Prometric revenues was primarily
the result of one-time marketing expenses of $10.0 million resulting from the
Company's contribution to IT Training Marketing Company, a not-for-profit
corporation whose sole purpose is to fund promotional and channel support
programs for Sylvan Prometric. The 1996 expenses included $2.4 million of non-
recurring charges related to the Drake acquisition, incurred during the first
and second quarters of 1996. Excluding these one-time charges, Sylvan
Prometric expenses as a percentage of Sylvan Prometric revenues for 1996 and
1997 would have been 85% and 83%, respectively. This decrease in recurring
Sylvan Prometric expenses as a percentage of Sylvan Prometric revenues was
primarily due to the fixed expenses of the division being spread over a higher
revenue base, as well as the effect of a full year of results of Wall Street,
which generates higher incremental margins, in 1997 compared to only one month
of results in 1996.
Sylvan Contract Educational Services expenses increased by $2.7 million, or
5%, from $53.4 million in 1996 to $56.1 million in 1997. As a percentage of
Sylvan Contract Educational Services revenues, these expenses decreased from
92% to 84%. Operating expenses for public and non-public school contracts
decreased by $1.3 million, while operating expenses for PACE increased by $3.5
million. The decrease in Sylvan Contract Educational Services expenses as a
percentage of revenues was the result of increased profit margins at PACE and
public and non-public services in 1997, as well as a higher mix of revenues
from PACE contracts which generate a higher profit margin than public and non-
public services. In March 1998, the additional contingent consideration
payable to the former shareholders of PACE was determined to be $25.8 million,
which was recorded as additional goodwill and will be amortized over the
estimated remaining useful life of 22 years. This amount will increase the
amount of amortization generated by the Sylvan Contract Educational Services
division by $1.2 million in 1998.
General and administrative expenses increased by $13.3 million, or 151%,
from $8.8 million in 1996 to $22.1 million in 1997 and increased as a
percentage of total revenues from 4% in 1996 to 7% in 1997. Included in
general and administrative expenses are one-time expenses of $9.7 million
relating to a contribution of $6.5 million of Common Stock to Sylvan Learning
Foundation, Inc., a not-for-profit foundation formed to promote various
educational projects and a $3.2 million contribution to International
Education Forum, Inc., a not-for-profit foundation formed to provide language
programs for international students in the United States. Excluding these one-
time expenses, general and administrative expenses would have been 4% of total
revenues in 1997.
In March 1997, the Company and NEC executed a definitive agreement, under
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 $30.0 million termination fee, which has
been recorded, net of $1.5 million of transaction costs (the "NEC Termination
Fee"), as a separate component of non-operating income.
In May 1997, the Company determined that certain computer hardware and
software of Sylvan Prometric were impaired as a result of certain strategic
changes in technical requirements and specifications made in connection with
the Company's pursuing the NEC acquisition. During and after the negotiations
with NEC, the Company developed plans that resulted in required changes in
software systems and hardware utilized in Sylvan Prometric's network of
testing centers. The plans continued to be valid for the Company even after
the termination of the NEC acquisition. The Company determined the amount of
the impairment loss by evaluating the likely sales proceeds from the
disposition of the assets, compared to their book value. The Company
determined that it was unlikely that the net cash proceeds from the sale of
any assets would be significant and recorded an impairment loss equal to the
$4.0 million net book value of the assets.
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Investment and other income increased by $3.1 million, or 182%, from $1.7
million in 1996 to $4.8 million in 1997, primarily due to $2.0 million of non-
cash dividend income received from the Company's investment in JLC Holdings,
Inc. and the higher cash and investment balances resulting from the NEC
Termination Fee and the net proceeds from the public sale of Common Stock
during 1997. Interest expense decreased by $500,000 due to the repayment of
all outstanding debt of Educational Inroads in the second quarter of 1997.
The Company reported net losses of $2.0 million in 1997 from its investment
in affiliates, consisting primarily of $1.4 million attributable to Caliber.
The effective tax rate remained constant at 37% in 1996 and 1997.
Comparison of results for the year ended December 31, 1996 to the year ended
December 31, 1995.
Revenues. Total revenues increased by $80.2 million, or 58%, from $137.7
million in 1995 to $217.9 million in 1996. This increase resulted from greater
revenues in all three divisions.
Sylvan Learning Centers revenues increased by $10.7 million, or 41%, from
$26.1 million in 1995 to $36.8 million in 1996. Franchise royalties increased
by $2.0 million, or 22%, from $9.2 million in 1995 to $11.2 million in 1996.
This increase in franchise royalties was due to an overall 19% increase in
revenues at Learning Centers that had been operating for more than one year as
of December 31, 1995, as well as royalties from a net of 49 Learning Centers
opened in 1996. Franchise sales fees increased by $1.1 million, or 52%, from
$2.1 million in 1995 to $3.2 million in 1996. In 1996, the Company sold four
area development agreements for $1.7 million and 38 franchise Learning Center
licenses, compared to two area development agreements sold for $550,000 and 43
franchise Learning Center licenses sold during 1995. Revenues from Company-
owned Learning Centers increased by $7.0 million, or 61%, from $11.5 million
in 1995 to $18.5 million in 1996. Revenue growth related to increased student
enrollment at Learning Centers that had been operating for more than one year
as of December 31, 1995 resulted in $3.4 million, or 49%, of the increase from
1995 to 1996. Approximately $3.2 million of the revenue increase resulted from
the acquisition of 11 Learning Centers from two franchisees during 1996, and
the opening of one new Learning Center during 1996 resulted in an additional
$350,000 of revenues. Product sales to franchisees increased by $700,000, or
22%, from $3.2 million in 1995 to $3.9 million in 1996. This increase resulted
from overall student enrollment increases at franchised Learning Centers.
Sylvan Prometric revenues increased by $61.7 million, or 101%, from $61.2
million in 1995 to $122.9 million in 1996. This significant increase in Sylvan
Prometric revenues resulted primarily from the September 1995 acquisition of
Drake, which provided increased revenues from IT clients. Increased services
under ETS contracts, including the cost-plus international contract and the
GRE, and other professional testing revenues increases, including NASD
testing, which began in February 1996, also contributed to the increase in
Sylvan Prometric revenues. In addition, revenues at ASPECT increased by $9.3
million, or 35%, as a result of volume growth.
Sylvan Contract Educational Services revenues increased by $7.8 million, or
15%, from $50.4 million in 1995 to $58.2 million in 1996. Revenues from public
and non-public school contracts accounted for $5.9 million of the increase,
and greater revenues from PACE accounted for $1.9 million of the increase. The
PACE increase primarily resulted from the fact that the acquisition, accounted
for as a purchase, was effective February 28, 1995, and, therefore, the
division's 1995 revenues only reflect ten months of PACE revenues. Revenues
from public and non-public school contracts begun during 1996 contributed $2.2
million to 1996 revenues. Revenues from public and non-public school contracts
begun during 1995 increased by $4.6 million in 1996, primarily because a full
year of revenues were generated under these contracts during 1996.
Costs and Expenses. Total direct costs increased by $62.6 million, or 51%,
from $122.9 million in 1995 to $185.3 million in 1996 but decreased as a
percentage of total revenues from 89% to 85%.
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Sylvan Learning Centers expenses increased by $6.9 million, or 37%, from
$18.7 million in 1995 to $25.6 million in 1996. Franchise services expenses
increased by $600,000, or 10%, from $5.9 million in 1995 to $6.5 million in
1996 but decreased as a percentage of franchise royalties and sales revenues
from 64% in 1995 to 58% in 1996. The higher margin in 1996 related primarily
to the effects of leveraging the fixed costs of supporting this division over
a larger revenue base. Company-owned Learning Center expenses increased by
$5.7 million, or 55%, from $10.4 million in 1995 to $16.1 million in 1996 but
decreased as a percentage of Company-owned Learning Center revenues from 90%
in 1995 to 87% in 1996. Of the increase, $3.1 million related to the
acquisition of 11 Learning Centers. The remaining increase resulted primarily
from advertising, labor and general overhead expenses associated with
increased enrollment at Company-owned Learning Centers acquired prior to 1996.
Sylvan Prometric expenses increased by $50.0 million, or 89%, from $56.4
million in 1995 to $106.4 million in 1996 but decreased as a percentage of
Sylvan Prometric revenues from 92% in 1995 to 87% in 1996. The increased
expenses resulted primarily from the acquisition of Drake and increased
registration and delivery costs associated with an increased volume of tests
delivered. Sylvan Prometric expenses in 1996 included $2.4 million of
amortization of contract rights related to the Drake acquisition. Sylvan
Prometric expenses in 1995 included $4.1 million of amortization of contract
rights, imputed interest and salary termination charges related to the Drake
acquisition. Excluding these non-recurring charges, Sylvan Prometric expenses
as a percentage of Sylvan Prometric revenues would have remained constant at
85% in 1995 and 1996.
Sylvan Contract Educational Services expenses increased by $5.7 million, or
12%, from $47.7 million in 1995 to $53.4 million in 1996 but decreased as a
percentage of Sylvan Contract Educational Services revenues from 95% in 1995
to 92% in 1996. The decline in these expenses as a percentage of Sylvan
Contract Educational Services revenues resulted from increased revenues
without corresponding increases in overhead. Operating expenses for public and
non-public school contracts increased $4.6 million during 1996, while
operating expenses for PACE increased $1.1 million. The PACE increase resulted
from the fact that the acquisition, accounted for as a purchase, was effective
February 28, 1995, and therefore, the 1995 results include only ten months of
PACE results.
General and administrative expenses increased by $2.6 million, or 41%, from
$6.2 million in 1995 to $8.8 million in 1996 but decreased as a percentage of
total revenues from 5% in 1995 to 4% in 1996. The percentage decline resulted
from increased revenues in all divisions without corresponding increases in
overhead.
The Company incurred $1.6 million of net interest expense in 1995 and
generated $400,000 of net interest income in 1996. This change resulted
primarily from $1.1 million of imputed interest expense on the purchase of
Drake in 1995 and an increase in the average invested cash amounts in 1996
compared to 1995.
The effective tax rate increased from 9% in 1995 to 37% in 1996. This
increase was primarily the result of a 1995 decrease in the amount of the
valuation allowance for deferred tax assets, consisting principally of net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $13.6 million for first quarter of
1998 compared to $500,000 in the first quarter of 1997. $9.5 million of the
increase in operating cash flow was attributable to a decrease in accounts and
notes receivable, including the collection of a $7.0 million receivable from
IT Training Marketing Company related to the purchase of Common Stock by IT
Training Marketing Company.
Cash provided by operating activities increased by $29.1 million, or 100%,
from $29.0 million in 1996 to $58.1 million in 1997. This increase was
primarily attributable to a $33.9 million increase in income before non-cash
charges and the $28.5 million net cash effect of the NEC Termination Fee. Cash
flow from operations was
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also favorably affected by $18.2 million of increases in accounts payable,
accrued expenses and income taxes payable, consistent with the Company's
higher volume of business.
Management believes that Sylvan's investment in working capital will
continue to reduce net cash flow from operations, particularly as a result of
growth in accounts and notes receivable, consistent with the Company's higher
volume of business. Increases in domestic and international testing volumes
have resulted in significant increases in accounts receivable from ETS. ETS
typically makes monthly payments for domestic activity and quarterly payments
for international services. Accounts receivable from public school-based
programs have increased due to billings under new contracts. Sylvan 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 entities with substantial financial resources.
The Company's investing activities consist primarily of acquisitions of
businesses, acquisitions of property and equipment and the temporary
investment of excess cash in available-for-sale securities. During the first
quarter of 1998, the Company acquired Canter for a net cash purchase price of
$24.3 million. During 1997, the Company's investments increased by $66.5
million to $82.9 million, primarily as a result of the investment of the net
proceeds received by the Company from the public sale of Common Stock in 1997.
These investments are readily marketable and available for use in current
operations. In 1997, the Company also made $9.7 million of additional
investments or loans to affiliates accounted for using the equity method,
primarily Caliber. In January 1997, the Company acquired Wall Street for $4.7
million in cash, including acquisition costs.
The Company continues to incur expenditures for additions to property and
equipment, which totaled $14.6 million in the first quarter of 1998 and $30.9
million in 1997. These additions consist primarily of furniture and equipment
for general business expansion, including expenditures related to new public
and non-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 international 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 had entered into a loan agreement with a bank (the "Credit
Line") that provided an unsecured revolving line of credit allowing the
Company to borrow a maximum of $15.0 million. The Credit Line expired on May
31, 1998. The Credit Line bore interest at a floating rate equal to the 30-day
London Interbank Offered Rate ("LIBOR") plus 1.15% per annum (5.69% at March
31, 1998). The Credit Line had no outstanding borrowings at December 31, 1997
or March 31, 1998. The Company is in the process of obtaining a new line of
credit which it believes will contain substantially the same terms as the
Credit Line.
The Company was required to make cash payments of $13.6 million in 1998 to
the former shareholders of PACE as contingent consideration. This amount was
classified as a current liability at December 31, 1997 and March 31, 1998, and
was paid in April 1998. Also, as of December 31, 1997, the Company was
obligated to issue Common Stock with a value of $56.4 million to shareholders
of PACE, Drake and other acquired companies. This amount was classified as a
long-term liability at March 31, 1998 and December 31, 1997, and shares valued
at $31.5 million were issued in the second quarter of 1998. The Company had
$5.1 million and $3.5 million, respectively, of long-term debt outstanding at
March 31, 1998 and December 31, 1997.
Upon the acquisition of Drake in September 1995, the Company entered into
two contingent payment obligations related to the acquisition. The first
related to 2,678,571 shares of Common Stock (the "Revenue Escrow Shares") that
were placed in escrow to be released to the sellers provided certain revenue
targets relating to portions of the computer-based testing business are
achieved from 1996 through 1998. Based on testing revenues in 1996 and 1997,
60% of the Revenue Escrow Shares had been earned through December 31, 1997. As
of December 31, 1997, an additional $28.2 million of goodwill related to the
earned shares was recorded and will be amortized over the remaining estimated
useful life. 535,715 and 1,071,429 Revenue Escrow Shares were released to the
sellers in 1997 and 1998, respectively.
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The sellers of Drake may receive up to an additional $40.0 million (payable
12.5% in cash and the balance in either cash or restricted shares of Common
Stock, at the Company's option) as a second component of contingent
consideration. This component will be earned if other revenues targets
relating to portions of the combined computer-based testing business are
achieved in 1998 or 1999 (with the measuring year selected by the sellers).
Long-term liabilities at March 31, 1998 and December 31, 1997 do not include
any amount related to this component.
Sylvan believes that its capital resources, including the net proceeds from
the sale of the Notes, will be sufficient over at least the next several years
to fund expected expansion of its business, including acquisitions, and its
working capital needs.
Sylvan continues to review other companies in the education or computer-
based testing industries for potential acquisitions. Additional capital
resources may be necessary to acquire and thereafter operate any acquired
businesses. See "Use of Proceeds."
EFFECTS OF INFLATION
Inflation has not had a material effect on the Company's revenues and income
in the past three years.
QUARTERLY FLUCTUATIONS
The Company's revenues and operating results have varied substantially from
quarter to quarter and will continue to vary, depending upon the method of
accounting for, and the costs and timing of completion and integration of,
acquisitions and the timing of implementation of new computer-based testing
contracts or new contracts funded under Title I or similar programs. Revenues
generated by Sylvan Prometric are likely to vary based on the frequency and
timing of delivery of individual tests and the speed of test administrators'
conversion of tests to computer-based versions. Revenues or income in any
period will not necessarily be indicative of results in subsequent periods.
8
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EXHIBIT 99.2
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1995, 1996, 1997
Report of Independent Auditors
Supplemental Consolidated Balance Sheets as of December 31, 1996 and
December 31, 1997
Supplemental Consolidated Statements of Income for the years ended
December 31, 1995, 1996 and 1997
Supplemental Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1996 and 1997
Supplemental Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997
Notes to Supplemental Consolidated Financial Statements
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Sylvan Learning Systems, Inc.
We have audited the supplemental consolidated balance sheets of Sylvan Learning
Systems, Inc. (formed as a result of the consolidation of Sylvan Learning
Systems, Inc. and Aspect International Language Schools, B.V. and subsidiaries)
as of December 31, 1997 and 1996, and the related supplemental consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. The supplemental consolidated
financial statements give retroactive effect to the merger of Sylvan Learning
Systems, Inc. and Aspect International Language Schools, B.V. and subsidiaries
on May 6, 1998, which has been accounted for using the pooling-of-interests
method as discussed in the notes to the supplemental consolidated financial
statements. These supplemental financial statements are the responsibility of
the management of Sylvan Learning Systems, Inc. Our responsibility is to express
an opinion on these supplemental financial statements based on our audits. We
did not audit the 1996 and 1995 combined financial statements of I-R, Inc. and
Independent Child Study Teams, Inc., or the financial statements of Aspect, Inc.
and Anglo World Education Limited and subsidiaries, each wholly owned
subsidiaries. These statements reflect total assets of $17,198,487 and
$21,071,892 as of December 31, 1997 and 1996, respectively, and total revenues
of $35,613,484, $48,152,198 and $41,808,740 for the years ended December 31,
1997, 1996, and 1995, respectively. These statements were audited by other
auditors whose reports have been furnished to us, and our opinion, insofar as it
relates to data included for these subsidiaries, is based solely on the reports
of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports on other auditors, the
supplemental financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Sylvan Learning
Systems, Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the
<PAGE>
three years in the period ended December 31, 1997, after giving retroactive
effect to the merger of Aspect International Language Schools, B.V. and
subsidiaries as described in the notes to the supplemental consolidated
financial statements, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
July 28, 1998
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Supplemental Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
--------------- ---------------
(Restated-Note 1) (Restated-Note 1)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 18,564,566 $ 29,650,074
Available-for-sale securities 16,448,759 82,925,569
Receivables:
Accounts receivable 39,250,493 60,679,361
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,565,201 3,899,760
Notes receivable 3,007,473 2,942,861
Other receivables 621,127 8,751,599
------------- -------------
46,444,294 76,273,581
Allowance for doubtful accounts (1,442,951) (2,508,116)
------------- -------------
45,001,343 73,765,465
Inventory 4,591,893 4,999,384
Deferred income taxes 619,553 3,737,831
Prepaid expenses and other current assets 4,707,597 6,550,577
------------- -------------
Total current assets 89,933,711 201,628,900
Notes receivable, less current portion 562,989 6,231,651
Costs and estimated earnings in excess of billings
on uncompleted contracts, less current portion 549,448 351,712
Property and equipment:
Land and buildings 4,518,994 5,710,227
Furniture and equipment 40,480,430 58,709,241
Leasehold improvements 5,635,535 7,984,647
------------- -------------
50,634,959 72,404,115
Accumulated depreciation (17,581,366) (21,159,892)
------------- -------------
33,053,593 51,244,223
Intangible assets:
Goodwill 104,478,407 183,004,277
Contract rights 13,881,337 13,972,800
Other 2,570,091 2,522,391
------------- -------------
120,929,835 199,499,468
Accumulated amortization (10,786,422) (16,714,130)
------------- -------------
110,143,413 182,785,338
Deferred contract costs, net of accumulated amortization
of $2,066,893 as of December 31, 1996 and $6,205,393
as of December 31, 1997 13,230,340 10,323,898
Investments in and advances to affiliates 5,895,602 12,463,729
Other investments 22,219,888 28,017,457
Other assets 2,025,337 3,266,176
------------- -------------
Total assets $ 277,614,321 $ 496,313,084
============= =============
</TABLE>
See accompanying notes.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Supplemental Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
---------------- ---------------
(Restated-Note 1) (Restated-Note 1)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 30,882,871 $ 40,706,949
Income taxes payable 309,723 5,590,358
Current portion of long-term debt 3,331,057 1,212,860
Current portion of due to shareholders of
acquired companies 4,920,565 13,794,195
Deferred revenue 19,360,961 26,288,930
Other current liabilities 2,473,913 1,280,263
------------- -------------
Total current liabilities 61,279,090 88,873,555
Long-term debt, less current portion 4,261,754 2,303,164
Deferred income taxes 2,650,515 7,619,561
Due to shareholders of acquired companies,
less current portion 26,525,855 56,365,578
Other long-term liabilities 373,037 903,446
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 1996 -- --
Common stock, par value $.01 per share--authorized
90,000,000 shares, issued and outstanding shares of
37,974,353 as of December 31, 1996 and 45,450,447
as of December 31, 1997 379,744 454,504
Additional paid-in capital 169,078,155 301,896,979
Retained earnings 13,247,697 39,057,274
Unrealized losses on available for sale securities (11,043) --
Foreign currency translation adjustments (170,483) (1,160,977)
------------- -------------
Total stockholders' equity 182,524,070 340,247,780
------------- -------------
Total liabilities and stockholders' equity $ 277,614,321 $ 496,313,084
============= =============
</TABLE>
See accompanying notes.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Supplemental Consolidated Statements of Income
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1995 1996 1997
------------------------------------------------------
(Restated-Note 1) (Restated-Note 1) (Restated-Note 1)
<S> <C> <C> <C>
Revenues $ 137,717,449 $ 217,874,341 $ 298,671,286
Cost and expenses:
Direct costs 122,806,049 185,355,774 259,082,849
General and administrative expense 6,205,480 8,755,406 22,075,863
Loss on impairment of assets 3,315,541 -- 4,000,000
------------- ------------- -------------
Total expenses 132,327,070 194,111,180 285,158,712
------------- ------------- -------------
Operating income 5,390,379 23,763,161 13,512,574
Other income (expense):
Termination fee, net of direct costs -- -- 28,500,000
Investment and other income 1,011,050 1,743,662 4,829,539
Interest expense (2,623,269) (1,296,451) (785,840)
Equity in net income (loss) of affiliates 390,514 361,305 (2,006,264)
------------- ------------- -------------
Income before income taxes 4,168,674 24,571,677 44,050,009
Income taxes (355,871) (9,134,724) (16,425,789)
------------- ------------- -------------
Net income 3,812,803 15,436,953 27,624,220
------------- ------------- -------------
Earnings per common share, basic $ 0.15 $ 0.42 $ 0.65
============= ============= =============
Earnings per common share, diluted $ 0.14 $ 0.40 $ 0.62
============= ============= =============
</TABLE>
See accompanying notes.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Paid-In (Accumulated
Stock Capital Deficit)
----------- ------------- --------------
<S> <C> <C> <C>
Balance at January 1, 1995, as restated $ 238,610 $ 39,429,754 $ (5,682,248)
Options and warrants exercised for purchase
of 1,097,807 shares of common stock 10,978 4,207,278
Issuance of 393,669 shares of common stock in
connection with the acquisition of PACE 3,937 3,156,924
Issuance of 5,892,858 shares of common stock
in connection with the acquisition of Drake 58,929 49,441,071
Issuance of 4,275,000 shares of common
stock, net of offering costs of $3,367,266 42,750 44,089,984
Foreign currency translation adjustment
Unrealized gain (loss) on available-for-sale securities
Net income for 1995 3,812,803
----------- ------------- -------------
Balance at December 31, 1995, as restated 355,204 140,325,011 (1,869,445)
Options and warrants exercised for purchase of 992,550
shares of common stock, including income tax
benefit of $1,887,006 9,925 6,988,118
Issuance of 1,236,000 shares of common stock in connection
with the investment in Jostens Learning Corporation 12,360 21,205,640
Issuance of 174,908 shares of common stock in
connection with other acquisitions 1,749 26,642 (319,811)
Exercise of underwriter's overallotment option to purchase
50,625 shares of common stock in connection with 1995
public stock offering 506 532,744
Foreign currency translation adjustment
Unrealized gain (loss) on available-for-sale securities
Net income for 1996 15,436,953
----------- ------------- -------------
Balance at December 31, 1996, as restated 379,744 169,078,155 13,247,697
Options and warrants exercised for purchase of 1,705,868
shares of common stock, including income tax
benefit of $8,155,946 17,034 13,102,441
Issuance of 535,715 shares of common stock in connection with
contingent consideration related to the acquisition of Drake 5,357 8,137,499
Issuance of 1,072,326 shares of common stock in connection
with the acquisition of WSI 10,723 15,309,408
Issuance of 403,677 shares of common stock to Sylvan
Learning Foundation as charitable contribution 4,037 6,536,963
Issuance of 308,823 shares of common stock to IT Training
Marketing Company as marketing expense 3,088 6,996,912
Issuance of 264,705 shares of common stock to SLC National
Advertising Fund, Inc. as advertising expense 2,647 4,997,353
Issuance of 3,093,438 shares of common stock for cash
- net of offering costs of $3,645,455 30,934 73,659,561
Capital contribution by former shareholders of Educational Inroads 2,810,930
Distributions to former shareholders (1,814,643)
Issuance of 93,843 shares of common stock in connection
with other acquisitions 940 717,757
Stock options to purchase 316,500 shares of common stock
granted to non-employees 550,000
Foreign currency translation adjustment
Unrealized gain (loss) on available-for-sale securities
Net income for 1997 27,624,220
----------- ------------- -------------
Balance at December 31, 1997, as restated $ 454,504 $ 301,896,979 $ 39,057,274
=========== ============= =============
<CAPTION>
Unrealized Foreign
Holding Currency Total
Gains / Translation Stockholders'
(Losses) Adjustments Equity
----------- ------------- -------------
<S> <C> <C> <C>
Balance at January 1, 1995, as restated $ (19,846) $ -- $ 33,966,270
Options and warrants exercised for purchase
of 1,097,807 shares of common stock 4,218,256
Issuance of 393,669 shares of common stock in
connection with the acquisition of PACE 3,160,861
Issuance of 5,892,858 shares of common stock
in connection with the acquisition of Drake 49,500,000
Issuance of 4,275,000 shares of common
stock, net of offering costs of $3,367,266 44,132,734
Foreign currency translation adjustment 98,670 98,670
Unrealized gain (loss) on available-for-sale securities 14,409 14,409
Net income for 1995 3,812,803
----------- ------------- -------------
Balance at December 31, 1995, as restated (5,437) 98,670 138,904,003
Options and warrants exercised for purchase of 992,550
shares of common stock, including income tax
benefit of $1,887,006 6,998,043
Issuance of 1,236,000 shares of common stock in connection
with the investment in Jostens Learning Corporation 21,218,000
Issuance of 174,908 shares of common stock in
connection with other acquisitions (291,420)
Exercise of underwriter's overallotment option to purchase
50,625 shares of common stock in connection with 1995
public stock offering 533,250
Foreign currency translation adjustment (269,153) (269,153)
Unrealized gain (loss) on available-for-sale securities (5,606) (5,606)
Net income for 1996 15,436,953
----------- ------------- -------------
Balance at December 31, 1996, as restated (11,043) (170,483) 182,524,070
Options and warrants exercised for purchase of 1,705,868
shares of common stock, including income tax
benefit of $8,155,946 13,119,475
Issuance of 535,715 shares of common stock in connection with
contingent consideration related to the acquisition of Drake 8,142,856
Issuance of 1,072,326 shares of common stock in connection
with the acquisition of WSI 15,320,131
Issuance of 403,677 shares of common stock to Sylvan
Learning Foundation as charitable contribution 6,541,000
Issuance of 308,823 shares of common stock to IT Training
Marketing Company as marketing expense 7,000,000
Issuance of 264,705 shares of common stock to SLC National
Advertising Fund, Inc. as advertising expense 5,000,000
Issuance of 3,093,438 shares of common stock for cash
- net of offering costs of $3,645,455 73,690,495
Capital contribution by former shareholders of Educational Inroads 2,810,930
Distributions to former shareholders (1,814,643)
Issuance of 93,843 shares of common stock in connection
with other acquisitions 718,697
Stock options to purchase 316,500 shares of common stock
granted to non-employees 550,000
Foreign currency translation adjustment (990,494) (990,494)
Unrealized gain (loss) on available-for-sale securities 11,043 11,043
Net income for 1997 27,624,220
----------- ------------- -------------
Balance at December 31, 1997, as restated $ -- $ (1,160,977) $ 340,247,780
=========== ============= =============
</TABLE>
See accompanying notes.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Supplemental Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------------------------------------
1995 1996 1997
---------------------------------------------------------
(Restated- Note 1) (Restated- Note 1) (Restated- Note 1)
<S> <C> <C> <C>
Operating activities
Net income $ 3,812,803 $ 15,436,953 $ 27,624,220
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 4,430,741 6,419,602 8,715,089
Amortization 4,328,244 7,484,633 10,062,521
Non-cash marketing and advertising expense - - 11,500,000
Interest imputed on purchase of Drake 1,125,000 - -
Loss on impairment of assets 3,315,541 - 4,000,000
Non-cash dividend income - - (2,000,000)
Provision for doubtful accounts (16,880) (49,181) 1,230,225
Deferred income taxes (413,254) 2,072,860 1,850,768
Equity in net (income) loss of affiliates (390,514) (361,305) 2,006,264
Non-cash issuance of options to non-employees - - 550,000
Gain on sale of property and equipment - - (651,481)
Changes in operating assets and liabilities:
Accounts and notes receivable (10,823,182) (10,237,293) (28,529,011)
Cost and estimated earnings in excess of billings
on uncompleted contracts (1,021,779) (412,910) (136,823)
Inventory (1,597,788) (183,588) (399,674)
Prepaid expenses and other current assets (1,410,053) (301,525) (1,887,041)
Other assets (109,736) (997,608) (754,990)
Accounts payable and accrued expenses (3,141,813) 5,635,694 18,224,249
Billings in excess of costs and estimated earnings
on uncompleted contracts (455,600) (233,665) 120,350
Deferred revenue and other long-term liabilities 1,631,044 4,692,566 6,532,110
------------- ------------- -------------
Net cash provided by (used in) operating activities (737,226) 28,965,233 58,056,776
------------- ------------- -------------
Investing activities
Purchase of available-for-sale securities (91,759,493) (31,261,415) (92,521,520)
Proceeds from sale of available-for-sale securities 66,595,240 45,542,061 26,044,710
Investment in and advances to affiliates 24,782 (3,444,862) (9,653,085)
Increase in other investments - (2,329,874) (4,136,250)
Purchase of property and equipment (6,560,287) (14,840,119) (30,893,484)
Proceeds from sale of property and equipment 2,411 10,964 1,915,837
Purchase of contract rights - (4,890,576) -
Purchase of Drake Prometric, L. P., including direct costs of
acquisition, net of cash received (16,979,737) - -
Purchase of Wall Street Institute, including direct costs of
acquisition, net of cash received - 2,012,565 (4,670,565)
Cash paid for other acquired businesses, net of cash received (715) 570,069 (1,850,702)
Expenditures for deferred contract costs and other assets (801,586) (6,941,769) (1,443,058)
------------- ------------- -------------
Net cash used in investing activities (49,479,385) (15,572,956) (117,208,117)
------------- ------------- -------------
Financing activities
Payments on loans from stockholders of acquired companies (630,533) (37,604) (492,887)
Proceeds from exercise of options and warrants 4,218,256 5,111,037 4,963,529
Proceeds from issuance of common stock 44,132,734 533,250 73,690,495
Proceeds from issuance of long-term debt 346,195 363,559 451,518
Payments on long-term debt and capital lease obligations (2,962,440) (2,758,726) (5,630,751)
Distributions - - (481,779)
Proceeds from bank lines of credit 4,600,000 200,000 13,575,297
Payments on bank lines of credit - (3,812,069) (14,575,297)
------------- ------------- -------------
Net cash provided by (used in) financing activities 49,704,212 (400,553) 71,500,125
------------- ------------- -------------
Effects of exchange rate changes on cash 34,465 (914,365) (1,263,276)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (477,934) 12,077,359 11,085,508
Cash and cash equivalents at beginning of period 6,965,141 6,487,207 18,564,566
------------- ------------- -------------
Cash and cash equivalents at end of period $ 6,487,207 $ 18,564,566 $ 29,650,074
============= ============= =============
</TABLE>
See accompanying notes.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
1. Basis of Presentation and Description of Business
Sylvan Learning Systems, Inc. and subsidiaries (the Company) is an international
provider of educational and testing services. The Company conducts operations in
three separate business segments - core educational services, testing services,
and contract educational services. The core educational services segment designs
and delivers individualized tutorial services to school-age children and adults
through a network of 670 franchised and Company-owned Sylvan Learning Centers in
operation in 49 states, five Canadian provinces, Hong Kong, Guam and South
Korea. The Company's testing segment ("Sylvan Prometric") administers
computer-based tests for major corporations, professional associations and
governmental agencies through a network of certification centers which are
located throughout the world. This segment also includes the operations of Wall
Street Institute, a European-based franchisor and operator of learning centers
that teach the English language through a combination of computer-based and live
instruction, as well as the operations of Aspect International Language Schools,
B.V. ("Aspect"). Aspect focuses principally on intensive English language
instruction to students and professionals worldwide through its 19 language
schools in five countries. The contract educational services segment provides
educational programs to employees of large corporations and to public and
non-public school districts through contracts funded by federal Title I and
state-based programs.
The consolidated financial statements include the accounts of Sylvan Learning
Systems, Inc. and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. Investments in affiliates
owned more than 20%, but not in excess of 50%, and corporate joint ventures are
reported using the equity method.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual results
could differ from those estimates.
As discussed in Note 3, on May 6, 1998 the Company consummated its acquisition
of all of the outstanding stock of 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. As of the date of the issuance of these financial statements, the
Company has not issued financial statements for a period including the merger
date. Therefore, the accompanying consolidated financial statements are
considered "supplemental." Upon the issuance of financial statements for a
period that includes the date of the merger, the supplemental consolidated
financial statements will become the historical consolidated financial
statements of the Company.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
1. Basis of Presentation and Description of Business (continued)
The Company's fiscal year ends on December 31. The accounts of its wholly-owned
subsidiary, Aspect, have been consolidated on the basis of a year ending on
September 30. Such fiscal period corresponds with Aspect's natural business
year.
2. Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Investments
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of stockholders'
equity. The amortized cost of debt securities in this category is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
Inventory
Inventory, consisting primarily of computer software and educational,
instructional, and marketing materials and supplies, is stated at the lower of
cost (first-in, first-out) or market value.
Property and Equipment
Property and equipment is stated at cost. Depreciation is determined using the
straight-line method over the estimated useful lives of the assets.
Intangible Assets
Goodwill consists of the cost in excess of fair value of the net assets of
entities acquired in purchase transactions, and is amortized on a straight-line
basis, over the estimated future periods to be benefited, which range from 10 to
25 years. At December 31, 1996 and 1997, accumulated
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
amortization of goodwill was $4,853,789 and $8,788,445, respectively.
2. Accounting Policies (continued)
Contract rights consist of the allocated cost of acquiring computer-based
testing contracts in business combinations accounted for as purchases. Contract
rights are being amortized on a straight-line basis, over the term of the
related contract, which range from nine months to 10 years. At December 31, 1996
and 1997, accumulated amortization of contract rights was $5,193,199 and
$6,898,966, respectively.
Deferred Contract Costs
Deferred contract costs include costs incurred to develop computer-based tests
under contractual arrangements with customers. Under these arrangements, the
Company incurs certain costs related to the development of new computer-based
tests on behalf of the customer in return for the right to deliver the
computer-based tests and collect a testing fee from either the candidate or the
sponsoring organization. These costs are capitalized and amortized over the
shorter of the estimated utility period of the test or the contractual period
for delivery of the test.
Deferred contract costs also include payments of approximately $10,400,000 made
to non-affiliated computer-based testing centers that have entered into
three-year contracts with the Company to deliver information technology
computer-based certification tests. In accordance with the terms of these
contracts, the independent testing centers have received an advance payment and
will receive no additional fees upon delivery of the computer-based
certification tests. These costs are being amortized over the contractual term
of three years.
Impairment of Long-Lived Assets
Long-lived assets, including intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be fully recoverable. If an impairment indicator is present,
the Company evaluates whether an impairment exists on the basis of undiscounted
expected future cash flows from operations for the remaining amortization
period. If an impairment exists, the asset is reduced by the estimated shortfall
of discounted cash flows.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
2. Accounting Policies (continued)
Revenue Recognition
Franchise sales fees relate to single-center and area franchise sales. Revenue
related to these sales is recognized when all material services or conditions
relating to the sales have been substantially performed or satisfied by the
Company. For single-center franchise sales, the criteria for substantial
performance include: (1) receipt of an executed franchise license agreement, (2)
receipt of full payment of the franchise fee, (3) completion of requisite
training by the franchisee or center director, and (4) completion of site
selection assistance and site approval. Area franchise sales generally transfer
to the licensee the right to develop and operate centers in a specified
territory, primarily in a foreign country, and the Company's future obligations
are insignificant. Area franchise fees are recognized upon the signing of the
license agreement and the determination that (1) all material services or
conditions relating to the sale have been satisfied and the fee is
non-refundable, (2) a minimum payment of 50% of the fee is required within 90
days of the date of the agreement, and (3) the Company has the ability to
estimate the collectability of any unpaid amounts. Franchise sales fees not
meeting the recognition criteria are recorded as deferred revenue if not
refundable, or deposits from franchisees if refundable. Commissions paid on
sales of franchises are recorded as a current asset until the corresponding
revenue is recognized.
Fixed price contracts with school districts receiving funds under the federal
Title I program and state-based programs are accounted for using the
percentage-of-completion method. Income is recognized based on the percentage of
contract completion determined by the total expenses incurred to date as a
percentage of total estimated expenses at the completion of the contract. Total
contract income is estimated as contract revenue less total estimated costs
considering the most recent cost information. Revenues from cost-plus-fee
contracts are recognized on the basis of costs incurred during the period plus
the fee earned.
Franchise royalties are reported as revenue as the royalties are earned and
become receivable, unless collection is not reasonably assured. Revenues from
educational services are recognized in the period the services are provided.
Revenue from the sale of products to franchisees is recognized when shipped.
Testing revenues are recognized upon the completion of tests. Revenue from
language instruction and other services are recognized ratably in the period the
services are rendered.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
2. Accounting Policies (continued)
Stock Options Granted to Employees and Non-Employees
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion 25, Accounting for
Stock Issued to Employees ("APB No. 25"). Under APB No. 25, if the exercise
price of the Company's employee stock options equals the estimated fair value of
the underlying stock on the date of grant, no compensation expense is generally
recognized. Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement No. 123") encourages companies to recognize
expense for stock-based awards based on their estimated fair value on the date
of grant. Statement No. 123 requires disclosure of pro forma income and earnings
per share data in the notes to the financial statements if the fair value method
is not elected. The Company accounts for its stock-based compensation plans
using the intrinsic value method, and supplementally discloses in Note 13 to
these financial statements the pro forma information as if the fair value method
has been adopted.
The Company records compensation expense for all stock options granted to
non-employees in an amount equal to the estimated fair value at the date of
grant, determined using the Black-Scholes option valuation model. The
compensation expense is recognized over the vesting period.
Foreign Currency Translation
The financial statements of certain foreign subsidiaries that are measured in
local functional currencies have been translated into U.S. dollars using the
current rate method. All balance sheet accounts have been translated using the
rates of exchange at the balance sheet date. Results of operations have been
translated using the average rates prevailing throughout the year. Translation
gains or losses resulting from the changes in exchange rates from year to year,
are accumulated as a separate component of stockholders' equity.
The financial statements of other foreign subsidiaries, primarily those
subsidiaries providing services overseas to Educational Testing Services, Inc.
("ETS") (see Note 19), prepare financial statements using the U.S. dollar as the
functional currency. The transactions of these subsidiaries that are denominated
in foreign currencies have been remeasured in U.S. dollars. Any resulting gain
or loss is recorded as an adjustment of the amount due from ETS as the contract
with ETS requires ETS to bear the risk of realized translation gains or losses.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
2. Accounting Policies (continued)
Pending Adoption of New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement No. 130"), that establishes standards for the reporting and display
of comprehensive income and its components in the Company's general-purpose
financial statements. Statement No. 130 only impacts display as opposed to
actual amounts recorded. Other comprehensive income includes all non-owner
changes in equity that are excluded from net income, such as foreign currency
translation adjustments and unrealized gains and losses on the Company's
available-for-sale securities. Statement No. 130 is effective for financial
statements issued for fiscal years beginning after December 15, 1997. The
Company will adopt this standard in its annual financial statements for 1998.
In December, 1997 the Accounting Standards Executive Committee of the AICPA
issued a proposed Statement of Position ("SOP"), "Reporting on the Costs of
Start-Up Activities." The proposal would be effective for fiscal years beginning
after December 15, 1997. The SOP as proposed would require that all costs
associated with start-up activities, including one-time activities related to
opening a new facility, introducing a new product or service and any
organizational costs, be charged to expense as incurred. The Company will record
the effect of adopting this SOP as a cumulative effect of a change in accounting
principle in the year the SOP is adopted. The Company has concluded, after a
preliminary review, that the adoption of the SOP will require a cumulative
effect charge of between $4.0 million and $5.0 million.
Reclassifications
Certain amounts in the 1995 and 1996 consolidated financial statements have been
reclassified to conform with the 1997 presentation.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
3. Acquisitions
Aspect International Language Schools, B.V. and subsidiaries
On May 6, 1998 the Company consummated its acquisition of all of the outstanding
stock of Aspect in exchange for 2,004,030 shares of common stock. 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 combined results of operations, financial position
and cash flows of Aspect (See Note 1). In May 1998, the Company expensed
approximately $5.0 million of direct costs incurred by the Company and the
combining shareholders, related to the merger.
Aspect provides intensive English language instruction to students and
professionals worldwide through its 19 language schools in five countries
I-R, Inc. and Independent Child Study Teams, Inc.
On May 30, 1997, the Company acquired by merger all of the outstanding stock of
I-R, Inc. and Independent Child Study Teams, Inc. (collectively, "Educational
Inroads") in exchange for 2,121,000 shares of common stock. I-R, Inc. and
Independent Child Study Teams, Inc. were commonly owned by two shareholders.
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 combined results of operations, financial position
and cash flows of Educational Inroads.
Educational Inroads provides remedial and special education services to public
and non-public school systems, with current contracts in New Jersey, Maryland,
Louisiana, Washington, D.C. and other school districts.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
3. Acquisitions (continued)
Combined and separate results of operations of Sylvan, Aspect and Educational
Inroads during the years prior to the mergers are as follows:
<TABLE>
<CAPTION>
Previously
Reported by the
Company Aspect Combined
-------------------- ------------------ --------------------
<S> <C> <C> <C>
Year ended
December 31, 1997
Revenues $246,211,733 $52,459,553 $298,671,286
Net income $29,433,999 $(1,809,779) $27,624,220
Earnings per common share-diluted $.69 $0.62
</TABLE>
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
3. Acquisitions (continued)
<TABLE>
<CAPTION>
Previously Independent
Reported by the Child Study
Company I-R, Inc. Teams, Inc. Aspect Combined
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended
December 31, 1996
Revenues $157,116,660 $ 9,825,299 $ 14,994,002 $ 35,938,380 $217,874,341
Net income $ 14,743,106 $ 31,664 $ 21,551 $ 640,632 $ 15,436,953
Earnings per common
share-diluted $0.43 $0.40
Year ended
December 31, 1995
Revenues $ 87,990,818 $ 9,475,103 $ 13,592,629 $ 26,658,899 $137,717,449
Net income $ 3,547,829 $ 16,882 $ 6,620 $ 241,472 $ 3,812,803
Earnings per common share-
diluted $0.15 $0.14
</TABLE>
NAI/Block Acquisition
Effective December 1, 1997, the Company purchased the assets and liabilities of
Block Testing Services L.P. and Block State Testing Services L.P. and also
acquired all of the outstanding stock of National Assessment Institute, Inc.,
(collectively "NAI/Block"), commonly controlled companies engaged in the
business of designing, marketing, selling, distributing and administering paper
and pencil tests and the licensing of individuals. The acquisition was
consummated by issuing 964,352 shares of common stock valued at $24.6 million,
was accounted for using the purchase method of accounting.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
3. Acquisitions (continued)
The results of operations of NAI/Block for the month of December 1997 are
included in the accompanying 1997 consolidated statement of income. Goodwill of
$28.9 million related to the acquisition is being amortized over its estimated
useful life of 25 years.
Wall Street Institute International, B.V. and Affiliates
Effective December 1, 1996, the Company acquired substantially all of the
operating net assets of Wall Street Institute International, B.V. and its
commonly controlled affiliates (collectively, "WSI"). The Company recorded the
acquisition using the purchase method of accounting. WSI is a European-based
franchisor and operator of learning centers that teach the English language
through a combination of computer-based and live instruction. WSI has a network
of franchised centers in operation throughout Europe and Latin America.
The total purchase price of WSI of $21,071,000 consisted of cash of $4,921,000,
758,046 shares of restricted common stock valued at $9,250,000, 314,280 shares
of unrestricted common stock valued at $5,900,000 and $1,000,000 of direct
acquisition costs. The restricted stock may not be transferred by the sellers
for a period of three years from the date of issuance, unless the Company, in
its sole discretion, removes the restriction. Of the 758,064 shares of
restricted common stock issued to the sellers, 186,438 shares are held in escrow
to indemnify the Company against any subsequent losses resulting from any
misrepresentation or breach of certain covenants. The unrestricted common stock
held in escrow will be released in varying amounts to the sellers through 2001.
Goodwill of $19.9 million is being amortized over its estimated useful life of
25 years. The cash portion of the purchase price was recorded as a current
liability at December 31, 1996, and the portion of the purchase price
represented by common stock was recorded as a non-current liability at December
31, 1996. Upon closing of the transaction in January 1997, the Company paid the
cash portion of the purchase price to the sellers and recorded the issuance of
1,072,326 shares of common stock to the sellers as a reduction in the
non-current liability (See Note 9).
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
3. Acquisitions (continued)
The Company on the closing date of the acquisition entered into option
agreements to purchase two franchisees of WSI, and granted the owners of these
same franchisees put rights that require, in certain circumstances and at the
election by the right holders, the Company to purchase the franchisees. At the
Company's option it may purchase the two franchisees at any time during the
period from September 1, 2001 through September 1, 2005 for an amount equal to
seven times the previous fiscal years' earnings before interest and taxes,
adjusted for certain defined items. The franchisees may require the Company to
purchase substantially all of their net assets during the same four-year period
if defined levels of operating results are met or exceeded at the end of the
most recently completed fiscal year. The purchase price is payable 10% in cash
and 90% in common stock, or at the Company's option, entirely in cash.
The PACE Group
Effective February 28, 1995, the Company purchased the assets and liabilities of
The PACE Group ("PACE"), a provider of educational services to corporations. The
initial consideration for the acquisition was 393,669 shares of common stock
having an aggregate market value of $3,160,861. The acquisition was accounted
for using the purchase method of accounting. Additional contingent consideration
was payable in an amount equal to 6.5 times PACE's earnings before interest and
income taxes (EBIT) in 1997 as elected by the sellers, determined in accordance
with generally accepted accounting principles. EBIT in 1997 was $3,965,758,
resulting in additional consideration of $25,777,427 payable in cash of
$14,469,000 and the remainder in 344,561 shares of common stock (See Note 9).
The Company has recorded this additional consideration as a liability and
increased goodwill, and will amortize that amount over the remaining
amortization period of 22 years.
Drake Prometric, L.P.
Effective September 30, 1995, the Company acquired Drake Prometric, L.P.
("Drake"), a Minneapolis based provider of computer-based certification,
licensure and assessment testing programs. As of that date, Drake had a network
of 820 testing centers on six continents, 472 of which were located in North
America and the remainder in 69 foreign countries.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
3. Acquisitions (continued)
The Company acquired Drake for an initial purchase price $70.6 million,
consisting of $20.0 million in cash and 8,571,429 restricted shares of common
stock (the "Initial Shares"). Of the Initial Shares, 2,678,571 shares (the
"Revenue Escrow Shares") were placed in escrow and will be released to the
sellers to the extent that certain revenue targets relating to portions of the
combined computer-based testing business are achieved from 1996 through 1998.
The sellers may receive up to an additional $40.0 million (payable 12.5% in cash
and the balance in either cash or restricted shares of common stock, at the
Company's option) to the extent other revenue targets relating to portions of
the combined computer-based testing business are achieved in 1998 or 1999 (with
the measuring year selected by the sellers). The acquisition was accounted for
using the purchase method of accounting.
Approximately $4.8 million of contract rights and $69.8 million of goodwill were
recorded. The contract rights are being amortized over their respective terms,
and no term exceeds five years. Goodwill is being amortized over 25 years, its
estimated useful life.
The Company will record the contingent consideration consisting of the 2,678,571
Revenue Escrow Shares and the additional contingent payment of up to $40.0
million when the contingencies are resolved and the additional consideration is
payable. Based on testing revenues earned by the Company in 1996 and 1997, 60%
of the Revenue Escrow Shares (1,607,144 shares) have been earned through
December 31, 1997. As of December 31, 1997, an additional $28.2 million of
goodwill which relates to the earned shares was recorded which will be amortized
over the remaining estimated useful life. The 1,071,429 Revenue Escrow Shares
earned in 1997 will be released to the sellers in 1998 (See Note 9).
Remedial Education and Diagnostic Services, Inc. and READS, Inc.
On February 17, 1995, the Company acquired by merger all of the outstanding
stock of Remedial Education and Diagnostic Services, Inc. and READS, Inc.
(collectively, "READS") in exchange for 787,662 shares of common stock. The
acquisition was accounted for as a pooling of interests and accordingly, the
Company's financial statements for periods prior to the merger have been
restated to include the results of operations, financial position and cash flows
of READS.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
3. Acquisitions (continued)
READS is based in Philadelphia, Pennsylvania and provides remedial and education
services, psychological, diagnostic and counseling services, career awareness
training, and a variety of consulting services. Services are delivered under
contracts with school districts, county-wide educational agencies and
municipalities in the eastern United States.
4. Available-For-Sale Securities
The following is a summary of available-for-sale securities (cost approximates
fair value):
December 31,
-----------------------------
1996 1997
---------- -----------
Municipal securities funds $ 3,646,361 $ 8,200,000
Cash reserve fund -- 38,221,248
U.S. Treasury bills and notes 3,002,398 --
Municipal bonds 9,800,000 36,504,321
----------- -----------
$16,448,759 $82,925,569
=========== ===========
The Company has not had any significant realized or unrealized gains or losses
on its investments during the periods presented. As of December 31, 1997, the
Company has approximately $50.5 million of investments that mature within one
year, $4.9 million of investments that mature between one and five years, $6.7
million of investments that mature between six and 20 years and $20.8 million of
investments that mature beyond 20 years. These investments are classified as
current as the Company views its available-for-sale securities as available for
use in its current operations.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
5. Acquisition of Contract Rights
In 1996, the Company acquired the rights to provide computer-based tests on
behalf of the National Association of Securities Dealers, Inc. ("the NASD") for
a period of ten years. As part of the agreement, the Company assumed certain
lease obligations and acquired the fixed assets of approximately 50 testing
centers previously operated by the NASD. The Company paid the NASD $5,114,673,
of which $4,871,832 related to contract rights and $242,841 related to fixed
assets.
In 1997, the Company incurred an additional $1,243,691 of costs related to the
acquisition of contract rights from the NASD. The contract rights are being
amortized over the contract life of ten years on a straight-line basis.
6. Investments
Investments in Affiliates
At December 31, 1997 and 1996, the Company's investments in and advances to
affiliates consists primarily of its 10% voting interest in Caliber Learning
Network, Inc. ("Caliber"), including related loans. Caliber is a corporate joint
venture with MCI Communications Corp. formed for the purpose of providing adults
throughout the United States with university-quality continuing education using
multimedia technology.
The Company's investment in and advances to Caliber consisted of the following
at December 31:
1996 1997
------------ ------------
Invested capital $ 1,300,000 $ 3,935,642
Loans and related interest 1,212,800 3,361,674
Amounts due for management fee 480,000 2,880,500
------------ ------------
2,992,800 10,177,816
Allocable share of losses from inception (141,837) (1,500,842)
------------ ------------
$ 2,850,963 $ 8,676,974
============ ============
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
6. Investments (continued)
Since its inception in 1996, Caliber relied almost entirely on the Company's
resources, systems, and personnel for administrative, management, accounting and
financial functions. In consideration for these services, the Company charged
Caliber $2,880,500, which is unpaid at December 31, 1997. This amount began to
accrue interest at the prime rate plus 1% and was repaid in May 1998. Caliber
has agreed to pay an annual management fee of $2.0 million in 1998 and 1999, due
in equal quarterly installments.
The Company has loaned to Caliber certain amounts under a line of credit that
bears interest at 1% above the prime rate as published by a defined commercial
bank. All amounts borrowed under the line of credit were repaid in May 1998.
During 1997, the Company assigned the leases for 32 testing centers to Caliber
for the use by Caliber in its operations. Upon assignment of the centers,
Caliber assumed the revenue stream from the ongoing testing operations and paid
the Company a fee of $4.0 million to manage the continuing testing operations.
The Company also maintains investments in other affiliates totaling $3,044,639
and $3,786,755 at December 31, 1996 and 1997, respectively. The Company's
allocable share of earnings (losses) related to these investments for the years
ended December 31, 1996 and 1997 was $505,233 and $(772,235), respectively.
Other Investments
Other investments consist of non-marketable investments in common and preferred
stocks of private companies in which the Company does not exercise significant
influence. These investments are carried at the lower of cost or estimated net
realizable value.
At December 31, 1996 and 1997, other investments consist primarily of a
non-voting convertible preferred stock investment in JLC Learning Corporation
("JLC"), a company that develops educational software products. The preferred
stock requires the payment of cumulative dividends in the annual amount of $2
million for two years totaling $4 million, which may be paid in additional
shares of preferred stock. At December 31, 1996 and 1997, the Company's
investment in JLC was $21.9 million and $24.0 million, respectively. During 1996
and 1997, the Company
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
recorded dividend income from this investment in the amount of $333,333 and
$2,000,000, respectively, paid in the form of additional preferred stock.
6. Investments (continued)
The Company also maintains other investments not readily marketable totaling
$0.3 million and $4.0 at December 31, 1996 and 1997, respectively.
7. Bank Lines of Credit
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 issuance. The credit
line and the term loan both bear interest at a floating rate equal to the 30 day
London Interbank Offered Rate ("LIBOR") plus 1.15% per annum (6.96% at December
31, 1997). No amounts on the line of credit were outstanding at December 31,
1996 or December 31, 1997.
8. Long-term Debt
Long-term debt consists of the following:
December 31,
-----------------------
1996 1997
---------- --------
Note payable to a bank, bearing interest at 1.10%
over the LIBOR (6.63% at December 31, 1996).
The loan was repaid in its entirety in 1997. $2,320,000 $ --
Other notes payable bearing interest
at rates ranging from 8% to 14%. 5,272,811 3,516,024
---------- ----------
Total long-term debt 7,592,811 3,516,024
Less: current portion of long-term debt 3,331,057 1,212,860
---------- ----------
Classified as non-current $4,261,754 $2,303,164
========== ==========
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
Future maturities of long term debt are as follows:
8. Long-term Debt (continued)
Year ended December 31,
1998 $1,212,860
1999 1,245,851
2000 281,651
2001 124,920
2002 96,420
thereafter 554,322
----------
$3,516,024
==========
9. Due to Shareholders of Acquired Companies
Due to shareholders of acquired companies consists of the following (see also
Note 3):
<TABLE>
<CAPTION>
December 31,
---------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Amounts payable to former owners of NAI/Block, payable
in 964,352 shares of common stock in January 1998 $ - $ 25,000,000
Amounts payable to former shareholders of Educational
Inroads 3,232,884 -
Amounts payable to former shareholders of WSI in cash 4,920,565 262,285
Amounts payable to former shareholders of WSI, payable
in 1,072,326 shares of common stock in January 1997 15,150,115 -
Amounts payable to former shareholders of PACE in cash - 13,531,910
Amounts payable to former shareholders of PACE,
payable in common stock in April 1998 - 11,308,427
Amounts payable to former shareholders of Drake in
common stock (1996 - 535,715 shares; 1997 - 1,071,429
shares) 8,142,856 20,057,151
------------ ------------
31,446,420 70,159,773
Less: current portion (4,920,565) (13,794,195)
------------ ------------
$ 26,525,855 $ 56,365,578
============ ============
</TABLE>
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
10. Leases
The Company conducts its operations principally from leased facilities. These
facilities include the Company's corporate headquarters and other office
locations, warehouse space, certain testing sites, and Company-owned learning
centers. The terms of these leases are five years or less, with the exception of
the Company's corporate headquarters, which has a lease term of ten years, and
generally contain renewal options. The Company also leases certain equipment
under operating leases of 36 months or less. Future minimum lease payments at
December 31, 1997, by year and in the aggregate, under all non-cancelable
operating leases are as follows:
Years ending December 31:
1998 $ 8,309,081
1999 7,241,315
2000 6,350,558
2001 5,346,719
2002 5,165,184
Thereafter 16,401,472
-----------
$48,814,329
===========
Rent expense for cancelable and non-cancelable leases was $4.5 million, $7.5
million and $9.5 million for the years ended December 31, 1995, 1996 and 1997,
respectively.
11. 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.
The Company is subject to other 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
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
respect to the eventuality of such actions and does not believe any settlement
would materially affect the Company's financial position.
12. Fair Value of Financial Instruments
The fair value of the Company's financial instruments, which consist primarily
of cash and cash equivalents, accounts and notes receivable, available-for-sale
investments, accounts payable, due to shareholders of acquired companies (cash
portion), and short and long-term debt, approximate their carrying amounts
reported in the consolidated balance sheets.
It was not practical to estimate the fair value of the Company's other
investments because of the lack of quoted market prices of the underlying equity
securities and the inability to determine fair value without incurring excessive
costs. Management does not believe that the value of these investments have been
impaired.
13. Stock Options and Warrants
Stock Options
The Company has an Employee Stock Option Plan ("the Employee Plan") which
provides for the granting of stock options to purchase up to 5,700,000 shares of
common stock. All options granted under the Employee Plan vest ratably over a
five-year period and expire six years after date of grant. At December 31, 1997,
options to purchase 5,629,799 shares of common stock have been granted under the
Employee Plan.
Under a Management Stock Option Plan ("Management Plan"), the Company has
outstanding stock options at December 31, 1997 to purchase 241,275 shares of
common stock for $7.50 per share. All outstanding options are fully vested, and
expire on December 1, 2001. No additional options may be granted under the
Management Plan.
In March 1996, the Company established the Senior Management Stock Option Plan
("the Senior Management Plan") to replace the Management Plan. The Senior
Management Plan provides for the granting of stock options to purchase up to
3,375,000 shares of common stock. At December 31, 1997, options to purchase
1,552,500 shares of common stock have been granted under the Senior Management
Plan. Options granted under this plan expire ten years after the date of grant.
Of this amount, options for 247,500 shares became immediately vested, with the
balance vesting ratably over three years.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
13. Stock Options and Warrants (continued)
In October 1993 the stockholders approved the establishment of the Director
Stock Option Plan ("Director Plan") for all non-employee members of the Board of
Directors. Under the Director Plan, options to purchase 258,750 shares of common
stock may be issued to certain members of the Board of Directors. No individual
is eligible to receive more than 50,625 options under this plan and options
granted under this plan expire at varying times three months after a director
ceases his term on the Board. At December 31, 1997, options to purchase 253,125
shares of common stock have been granted under the Director Plan.
During 1997, the Company established the Sylvan Technology Center Stock Option
Plan ("the STC Plan") for the franchisee owners of Sylvan Technology Centers.
The STC Plan provides for the granting of stock options to purchase up to
450,000 shares of common stock. During 1997, 316,500 options were granted that
vest ratably over a three-year period and expire 10 years after the date of
grant or on the date of cessation of operations of the center. The fair value of
these options, determined using the Black-Scholes option valuation model, was
$1,386,000, of which $550,000 of expense was recognized in 1997, with the
remainder to be recognized in expense over the next three years as the options
vest.
The following table summarizes the stock option activity of the Company.
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Options Price Options Price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding - beginning of year 3,862,097 4,852,727 $ 5.13 6,921,020 $ 8.71
Granted 1,378,625 2,771,813 14.61 1,713,603 23.73
Exercised (387,995) (576,845) 7.25 (1,620,813) 2.92
Forfeited - (126,675) 7.47 (78,723) 11.83
--------------------------------------------------------------------------------
Outstanding - end of year 4,852,727 6,921,020 $ 8.71 6,935,087 $13.75
================================================================================
Exercisable at end of year 2,243,253 2,688,468 $ 4.45 2,691,177 $ 8.51
================================================================================
</TABLE>
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------------------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Options Price Options Price
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted-average fair value of
options granted during the year $ 5.55 $ 7.15
========== ==========
</TABLE>
13. Stock Options and Warrants (continued)
Exercise prices for options outstanding as of December 31, 1997 ranged from
$3.48 to $29.25 as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Weighted Average Weighted
Weighted Average Remaining Average
Range of Exercise Prices of Contractual Life Exercise Prices
Exercise Options Options of Options Options of Options
Prices Outstanding Outstanding Outstanding Exercisable Exercisable
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.48-$6.08 1,549,125 $ 4.31 2.0 1,216,643 $ 4.27
---------------------------------------------------------------------------------------------------------------
$6.78-$11.33 966,051 8.75 3.7 553,353 8.37
---------------------------------------------------------------------------------------------------------------
$13.55-$19.77 3,237,910 15.36 6.7 921,181 14.20
---------------------------------------------------------------------------------------------------------------
$22.35-$29.25 1,182,000 25.63 5.8 -- --
---------------------------------------------------------------------------------------------------------------
</TABLE>
For the years ended December 31, 1996 and 1997, pro forma net income and
earnings per share information required by Statement 123 has been determined as
if the Company had accounted for its stock options using the fair value method.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1997: risk-free interest rate of 6.00%, dividend yield
of 0%, volatility factors of the expected market price of the Company's common
stock of .399 and .280, respectively, and an expected life of granted options
which varies from zero to five years depending upon the vesting period.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
13. Stock Options and Warrants (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The Company's pro
forma information follows:
- --------------------------------------------------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------
Pro forma net income $2,916,233 $12,579,181 $24,197,094
- --------------------------------------------------------------------------------
Pro forma earnings per share:
- --------------------------------------------------------------------------------
Basic $0.12 $0.34 $0.57
- --------------------------------------------------------------------------------
Diluted $0.11 $0.33 $0.55
- --------------------------------------------------------------------------------
The effect of compensation expense from stock options on 1995 pro forma net
income reflects only the vesting of 1995 awards. However, 1996 and 1997 pro
forma net income reflects additional years of vesting of the prior year awards
and the first year of vesting of current year awards. Because the granted stock
options vest over periods ranging from zero to five years, not until 2001 is the
full effect of recognizing compensation expense for stock options representative
of the possible effects on pro forma net income for future years.
Stock Warrants
In July 1993 warrants to purchase 359,046 of common stock for $3.48 per share
were issued in connection with a $5.0 million financing. Warrants to purchase
205,092, 81,686 and 7,185 shares of common stock were exercised in 1995, 1996
and 1997, respectively. The remaining 57,902 warrants expire in July 1998.
14. Impairment Loss
In September 1995, the Company determined that certain assets of Sylvan
Prometric were impaired as a result of the acquisition of Drake. These assets,
consisting of computer equipment, software and other assets, were impaired
because of dissimilar technical requirements for Drake
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
computer-based tests, or because their use was limited by virtue of the
acquisition of similar productive assets from Drake. The amount of the
impairment loss was determined by evaluating the likely sales proceeds from the
disposition of the assets as compared to their book value.
14. Impairment Loss (continued)
In May 1997, the Company determined that certain assets of Sylvan Prometric were
impaired as a result of certain strategic changes that were made as a result of
pursuing the National Education Corporation ("NEC") acquisition (see Note 15).
During and after the acquisition negotiations with NEC, the Company developed
certain plans that resulted in required changes in both software systems and
hardware currently utilized in Sylvan Prometric's network of centers. The plans
continued to be valid for the Company even after the NEC acquisition was
terminated. The impaired assets, consisting of computer equipment and software,
were impaired as a result of changes in the technical requirements and
specifications of certain computer hardware and software. The amount of the
impairment loss was determined by evaluating the likely sales proceeds from the
disposition of the assets compared to their book value. The Company determined
that it was unlikely that the net cash proceeds from the sale of any assets
would be significant, and therefore recorded an impairment loss equal to the net
book value of the assets of $4.0 million.
15. Termination Fee
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 the offer of
Harcourt General, Inc. to acquire all of the stock of NEC which resulted in the
termination of NEC's agreement with the Company and NEC's payment to the Company
of the $30.0 million termination fee required by that agreement. The Company
also incurred $1.5 million of expenses in connection with the NEC transaction,
and reported the net termination fee of $28.5 million in 1997.
16. Contributions
During 1997, the Company made certain cash expenditures and common stock
contributions resulting in an aggregate expense to the Company of approximately
$21.5 million. The $21.5 million, recorded as operating expenses, was
attributable to contributions of (i) $3.0 million in cash
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
and common stock valued at $7.0 million to IT Training Marketing Company, a
nonprofit corporation whose sole purpose is to fund promotional and channel
support programs for the Sylvan Prometric distribution channel, (ii) common
stock valued at $5.0 million to SLC National Advertising Fund, Inc., a nonprofit
corporation whose sole purpose is to develop and fund advertising programs for
the Sylvan Learning Centers and (iii) common stock valued at $6.5 million to
Sylvan Learning Foundation, a nonprofit foundation formed to promote various
educational pursuits.
17. Income Taxes
Significant components of the provision for income taxes are as follows:
Year ended December 31,
-------------------------------------------
1995 1996 1997
-------- ---------- -----------
Current:
Federal $257,155 $5,074,508 $ 8,962,538
Foreign 268,278 549,755 1,291,588
State 217,751 1,402,547 1,617,891
-------- ---------- -----------
Total current 743,184 7,026,810 11,872,017
Deferred (benefit):
Federal (300,168) 1,773,051 3,395,715
Foreign - - 306,446
State (87,145) 334,863 851,611
-------- ---------- -----------
Total deferred (387,313) 2,107,914 4,553,772
-------- ---------- -----------
Total provision $355,871 $9,134,724 $16,425,789
======== ========== ===========
For the years ended December 31, 1996 and 1997, foreign income before income
taxes was approximately $3.8 million and $12.9 million, respectively.
The Company uses the liability method to account for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
17. Income Taxes (continued)
Significant components of the Company's deferred tax assets and liabilities are
as follow:
Year ended December 31,
-----------------------------
1996 1997
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 2,277,600 $ 765,153
Loss on impairment of assets 71,601 779,429
Deferred revenue 443,618 629,659
Allowance for doubtful accounts 301,205 548,046
Advertising costs -- 5,304,604
Amortization of intangible assets 459,040 642,977
Equity share of losses from affiliates 53,841 827,089
Charitable contribution carryforward 23,746 2,424,881
Tax credit carryforwards 76,544 925,844
Other 168,780 538,509
------------ ------------
Total deferred tax assets 3,875,975 13,386,191
Deferred tax liabilities:
Deferred contract costs 1,746,807 2,066,448
Contract rights 316,619 169,586
Depreciation 996,869 1,755,270
Deferred income -- 11,388,000
Accrued receivables 266,432 558,646
Other 302,610 564,818
------------ ------------
Total deferred tax liabilities 3,629,337 16,502,768
------------ ------------
Net future income tax benefit (liability) 246,638 (3,116,577)
Valuation allowance for net deferred
tax assets (2,277,600) (765,153)
------------ ------------
Net deferred tax liabilities $ (2,030,962) $ (3,881,730)
============ ============
<PAGE>
Sylvan Learning System, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
17. Income Taxes (continued)
The net operating loss carryforwards at December 31, 1997 are related to a
subsidiary of the Company, and are available only to offset future taxable
income of the subsidiary. These net operating loss carryforwards will begin to
expire in 2007.
The reconciliation of the reported income tax expense to the amount that would
result by applying the U.S. federal statutory tax rates to income before income
taxes is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Tax expense at U.S. statutory rate $ 1,417,000 $ 8,354,000 $ 14,977,000
Permanent differences 828,000 813,000 2,662,000
State income tax expense, net of
federal tax effect 138,000 1,130,000 1,555,000
Tax effect of foreign income taxed at lower rate (87,000) (734,000) (3,244,000)
Change in valuation allowance affecting
tax expense (2,026,000) -- --
Utilized tax credits -- (254,000) --
Other 85,871 (174,276) 475,789
------------ ------------ ------------
$ 355,871 $ 9,134,724 $ 16,425,789
============ ============ ============
</TABLE>
<PAGE>
Sylvan Learning System, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
18. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share ("Statement No. 128"). Statement No. 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully-diluted earnings per share. Earnings per share amounts for all
periods have been presented, and where appropriate, restated, to conform to the
Statement No. 128 requirements.
The following table summarizes the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Numerator used in basic and diluted
earnings per common share:
Net income $ 3,812,803 $ 15,436,953 $ 27,624,220
============ ============ =============
Denominator:
Denominator for basic earnings per common
share - weighted average shares 24,702,041 36,547,254 42,332,820
Effect of dilutive securities:
Employee stock options 2,776,655 2,069,228 1,849,884
Common stock contingently issuable 143,540 267,264 628,317
--------- --------- ----------
Total dilutive potential common shares 2,920,194 2,336,492 2,478,201
--------- --------- ---------
</TABLE>
<PAGE>
Sylvan Learning System, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1995 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Denominator for diluted earnings per common
share - weighted average shares and
assumed conversions 27,622,236 38,883,746 44,811,021
========== ========== ==========
Earnings per common share, basic $0.15 $0.42 $0.65
Earnings per common share, diluted $0.14 $0.40 $0.62
</TABLE>
18. Earnings Per Share (continued)
The Company as of December 31, 1997 has reserved 9,028,769 shares of common
stock for future issuance upon the exercise of all outstanding stock purchase
warrants, the exercise of all outstanding stock options and the issuance of
shares of common stock in connection with purchase business combinations.
19. Major Customers and Concentration of Credit Risk
In 1997, the Company extended its agreement with Educational Testing Services
("ETS") to be the exclusive commercial provider of ETS domestic computer-based
tests through the year 2006. The contract to provide international
computer-based tests runs through the year 2004. The international testing
contract with ETS stipulates that the Company will be compensated for its
services for a fee equal to approved costs plus 10 percent, and the company
recognizes revenues accordingly. Operating costs under the contract will be paid
at cost plus 10 percent on a monthly basis by ETS. Start-up costs will be paid
ratably over a period not to exceed 10 years. Total revenues from ETS
represented approximately 13.1%, 9.0% and 14.4% of consolidated revenues for the
years ended December 31, 1995, 1996 and 1997, respectively. The testing business
acquired from Drake in September 1995 is highly concentrated with two customers.
These customers contributed approximately 20.1% and 13.2% to consolidated
revenues for the years ended December 31, 1996 and 1997, respectively. The
Company expects the contracts with these two customers to be renewed at the
expiration date of the current contracts. The failure of these contracts to be
renewed under similar terms would have a detrimental effect on future operating
results and significantly impair the Company's ability to recover the remaining
goodwill balance of approximately $91.6 million related to the acquisition of
Drake.
Financial instruments which potentially subject the Company to credit risk are
investments in available-for-sale securities, accounts receivable and notes
receivable. The Company maintains an allowance for losses on receivables based
on the collectibility of all amounts owed. The Company
<PAGE>
Sylvan Learning System, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
generally does not require collateral for trade receivables. Notes receivable
are generally collateralized by assets of the debtors. At December 31, 1997, the
Company does not have any significant concentrations of credit risk.
20. Defined Contribution Retirement Plan
The Company sponsors a defined contribution retirement plan under section 401(k)
of the Internal Revenue Code. The provisions of this plan allow for voluntary
employee contributions, subject to certain annual limitations, and discretionary
Company contributions which are allocated to eligible participants based upon
compensation. All employees are eligible after meeting certain service
requirements. The Company made a discretionary contribution to this plan in 1997
of $248,000.
21. Business and Geographic Segment Information
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 supersedes
Financial Accounting Standards Board Statement No. 14, Financial Reporting for
Segments of a Business Enterprise ("Statement 14"), and establishes new
standards for the way that public enterprises report selected information about
operating segments in annual and interim financial statements. It also
established standards for related disclosures about products and services,
geographical areas, and major customers. Statement 131 is effective for
financial statements issued for fiscal years beginning after December 15, 1997.
The Company has elected to adopt this statement in 1997, and accordingly, the
disclosures for all periods have been presented, and where appropriate, restated
to conform to the Statement 131 requirements.
<PAGE>
Sylvan Learning System, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
21. Business and Geographic Segment Information (continued)
Description of Services From Which Each Reportable Segment Derives its Revenues
The Company provides lifelong educational services through three distinct
operating segments. The Sylvan Learning Centers division provides personalized
instructional services to students of all ages and skill levels, through its
network of franchised and Company-owned learning centers located in 49 states,
five Canadian provinces, Hong Kong, Guam and South Korea. The Sylvan Contract
Educational Services division provides educational services and professional
development to children and adults through contracts with school systems and
other organizations. These services to children are delivered at over 500
schools and in the case of its professional development services for adults, at
the contracting parties' facilities. The Sylvan Prometric division delivers
computer-based testing for academic admissions and professional certification
programs through a network of computer testing centers located throughout the
world, and includes the operations of Wall Street Institute, a European-based
franchisor and operator of learning centers for English language instruction
that will administer certain computer-based testing programs throughout Europe
and Latin America and Aspect, an international provider of intensive English
language instruction to professionals worldwide through its 16 language schools
in five countries.
Measurement of Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources based on operating
income before corporate general and administrative expenses and income taxes.
The accounting policies used by the reportable segments are the same as those
used by the Company as described in Note 2 to the consolidated financial
statements. There are no significant intercompany sales or transfers.
Factors Management Uses to Identify the Company's Reportable Segments
<PAGE>
Sylvan Learning System, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
The Company's reportable segments are business units that offer distinct
services. The segments are managed separately as they have different customer
bases and delivery channels.
21. Business and Geographic Segment Information (continued)
Factors Management Uses to Identify the Company's Reportable Segments
(continued)
The following table sets forth information on the Company's reportable segments:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
----------------------------
Contract
Learning Centers Educational Services Sylvan Prometric
---------------- -------------------- ----------------
<S> <C> <C> <C>
Revenues $26,063,191 $50,429,662 $61,224,596
Depreciation and amortization 895,430 1,584,352 5,924,570
Loss on impairment of assets - - 3,315,541
Segment profit 7,387,957 2,745,082 1,462,820
Segment assets 12,863,792 26,568,393 111,874,499
<CAPTION>
Year Ended December 31, 1996
----------------------------
Contract
Learning Centers Educational Services Sylvan Prometric
---------------- -------------------- ----------------
<S> <C> <C> <C>
Revenues $36,799,287 $58,185,985 $122,889,069
Depreciation and amortization 945,968 1,939,778 10,351,287
Segment profit 11,242,406 4,812,800 16,463,361
Segment assets 13,967,337 27,495,706 171,682,695
<CAPTION>
Year Ended December 31, 1997
----------------------------
Contract
Learning Centers Educational Services Sylvan Prometric
---------------- -------------------- ----------------
<S> <C> <C> <C>
Revenues $44,289,019 $66,582,280 $187,799,987
Depreciation and amortization 672,831 1,613,686 14,673,904
Loss on impairment of assets - - 4,000,000
</TABLE>
<PAGE>
Sylvan Learning System, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
Contract
Learning Centers Educational Services Sylvan Prometric
---------------- -------------------- ----------------
<S> <C> <C> <C>
Unusual item - contribution
to marketing fund - - 10,000,000
Significant non-cash charges
(advertising) 5,000,000 - -
Segment profit 7,580,159 10,525,659 17,482,619
Segment assets 21,843,781 57,064,257 275,522,399
</TABLE>
21. Business and Geographic Segment Information (continued)
Factors Management Uses to Identify the Company's Reportable Segments
(continued)
The following tables reconcile the reported information on segment profit and
assets to income before income taxes and total assets reported in the statements
of income and balance sheets, respectively for the years ended December 31,
1995, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Operating Profit:
Total profit for
reportable segments $ 11,595,859 $ 32,518,567 $ 35,588,437
Corporate general and
administrative expense (6,205,480) (8,755,406) (22,075,863)
Other income (expense),
net of direct costs (1,221,705) 808,516 30,537,435
------------- ------------- -------------
Income before income taxes $ 4,168,674 $ 24,571,677 $ 44,050,009
============= ============= =============
Assets:
Segment assets $ 151,306,684 $ 213,145,738 $ 354,430,437
Cash and available for sale
securities - Corporate 33,637,176 27,381,251 86,630,693
Deferred tax asset 1,271,925 619,553 3,737,831
Property, plant and equipment -
Corporate 1,007,488 5,249,080 6,809,758
</TABLE>
<PAGE>
Sylvan Learning System, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Investments in and advances
to affiliates 182,320 5,895,602 12,463,729
Other investments 338,681 22,219,888 28,017,457
Other non-segment assets -- 3,103,209 4,223,179
------------- ------------- -------------
Total assets $ 187,744,274 $ 277,614,321 $ 496,313,084
============= ============= =============
</TABLE>
21. Business and Geographic Segment Information (continued)
Factors Management Uses to Identify the Company's Reportable Segments
(continued)
Included in corporate general and administrative expense for the year ended
December 31, 1997 was a contribution of the Company's common stock valued at
$6.5 million as discussed in Note 16 to these financial statements.
Depreciation expense in the amounts of .7 million, $1.1 million and $2.3 million
were charged to corporate departments during the years ended December 31, 1995,
1996 and 1997, respectively.
Enterprise-Wide Disclosures - Information on Geographic Areas
<TABLE>
<CAPTION>
Year Ended December 31, 1995
----------------------------
Revenues Long-lived Assets
-------- -----------------
<S> <C> <C>
United States $109,101,746 $99,401,709
Foreign countries - total 28,615,703 10,023,796
---------- ---------------
Consolidated total $137,717,449 $109,425,505
============ ============
<CAPTION>
Year Ended December 31, 1996
----------------------------
Revenues Long-lived Assets
-------- -----------------
<S> <C> <C>
United States $163,440,192 $128,537,140
Foreign countries - total 54,434,149 29,002,643
---------- ----------
</TABLE>
<PAGE>
Sylvan Learning System, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
<TABLE>
<CAPTION>
Year Ended December 31, 1996
----------------------------
Revenues Long-lived Assets
-------- -----------------
<S> <C> <C>
Consolidated total $217,874,341 $157,539,783
============ ============
</TABLE>
21. Business and Geographic Segment Information (continued)
Enterprise-Wide Disclosures - Information on Geographic Areas (continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
----------------------------
Revenues Long-lived Assets
-------- -----------------
<S> <C> <C>
United States $209,996,157 $215,136,765
Foreign countries - total 88,675,129 35,800,057
------------ ------------
Consolidated total $298,671,286 $250,936,822
============ ============
</TABLE>
Revenues from individual foreign countries did not exceed 10% of consolidated
revenues in any of the years presented. Long-lived assets domiciled in
individual foreign countries did not exceed 10% of consolidated long-lived
assets in any of the years presented. Note 19 to the financial statements
contains information about major customers of the Company.
22. Supplemental Cash Flow Information
Interest payments were $2.6 million, $1.3 million and $0.8 million for the years
ended December 31, 1995, 1996 and 1997, respectively. The 1995 amount includes
imputed interest payments of $1.1 million related to the acquisition of Drake.
Income tax payments were $1.9 million, $4.2 million and $2.7 million for the
years ended December 31, 1995, 1996, and 1997, respectively.
<PAGE>
Sylvan Learning System, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
23. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
Operating revenues $ 60,821 $ 68,925 $ 71,375 $ 97,550
Operating expenses 56,547 83,296 60,788 80,527
Loss on impairment of assets -- 4,000 -- --
-------- -------- -------- --------
Operating income (loss) 4,274 (18,371) 10,587 17,023
Non-operating items, net 335 28,935 807 460
-------- -------- -------- --------
Income before income taxes 4,609 10,564 11,394 17,483
Income taxes (1,955) (3,917) (3,995) (6,559)
-------- -------- -------- --------
Net income $ 2,654 $ 6,647 $ 7,399 $ 10,924
======== ======== ======== ========
Net income per common share:
Basic $ 0.07 $ 0.17 $ 0.17 $ 0.24
======== ======== ======== ========
Diluted $ 0.06 $ 0.16 $ 0.16 $ 0.22
======== ======== ======== ========
Weighted average shares
outstanding:
Basic 40,073 40,253 43,623 45,438
======== ======== ======== ========
Diluted 42,881 42,668 45,887 49,022
======== ======== ======== ========
</TABLE>
<PAGE>
Sylvan Learning System, Inc. and Subsidiaries
Notes to Supplemental Consolidated Financial Statements
During the second quarter of 1997, the Company recognized an impairment loss of
$4.0 million, income from a termination fee of $28.5 million and recorded
expense related to contributions which totaled $21.5 million. These transactions
are described in Notes 14, 15 and 16, respectively.
The net effect of the above non-recurring items was an increase in pre-tax
income of $3.0 million and net income of $1.9 million, or $0.04 per diluted
share.
23. Quarterly Financial Data (Unaudited) (continued)
Diluted earnings per common share for the year ended December 31, 1997 is $0.62.
The total diluted earnings per common share derived from the addition of the
quarterly amounts in 1997 is $0.60. This difference is caused by differences in
the estimated effect of contingently issuable shares related to the acquisition
of PACE in the quarterly periods as compared to the annual period.
24. Subsequent Event
In May 1998, the Company increased the number of authorized shares of common
stock from 40,000,000 shares to 90,000,000 shares and declared a 3-for-2 stock
split of its common stock for stockholders of record on April 8, 1998.
Accordingly, all share and per share data including stock option, warrant and
earnings per share information has been restated in the supplemental
consolidated financial statements to retroactively reflect the stock split.
<PAGE>
Exhibit 99.3
Supplemental Consolidated Financial Statements
For the Three Months Ended March 31, 1997
and March 31, 1998
(Unaudited)
INDEX
-----
<TABLE>
<CAPTION> Page No.
--------
<S> <C>
Supplemental Consolidated Financial Statements (Unaudited)
Supplemental Consolidated Balance Sheets - December 31,
1997 and March 31, 1998............................................ 2
Supplemental Consolidated Statements of Income - Three months
ended March 31, 1997, three months ended March 31, 1998............ 4
Supplemental Consolidated Statements of Cash Flows - Three months
ended March 31, 1997, three months ended March 31, 1998............ 5
Notes to Unaudited Supplemental Consolidated Financial Statements -
March 31, 1998..................................................... 6
</TABLE>
1
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Supplemental Consolidated Balance Sheets
($ and shares in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
----------------- -----------------
(Restated-Note A) (Restated-Note A)
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 29,650 $ 26,517
Available-for-sale securities 82,926 57,880
Receivables:
Accounts receivable 60,679 58,360
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,900 6,463
Notes receivable 2,943 3,201
Other receivables 8,752 1,076
------------ -------------
76,274 69,100
Allowance for doubtful accounts (2,508) (2,724)
------------ -------------
73,766 66,376
Inventory 4,999 7,009
Deferred income taxes 3,738 3,719
Prepaid expenses and other current assets 6,550 7,499
------------ -------------
Total current assets 201,629 169,000
Notes receivable, less current portion 6,232 6,176
Costs and estimated earnings in excess of billings
on uncompleted contracts, less current portion 352 161
Property and equipment:
Land and buildings 5,710 8,238
Furniture and equipment 58,709 70,717
Leasehold improvements 7,985 8,567
------------ -------------
72,404 87,522
Accumulated depreciation (21,160) (23,657)
------------ -------------
51,244 63,865
Intangible assets:
Goodwill 183,004 206,586
Contract rights 13,973 13,973
Other 2,522 2,777
------------ -------------
199,499 223,336
Accumulated amortization (16,714) (19,055)
------------ -------------
182,785 204,281
Deferred contract costs, net of accumulated amortization
of $6,205 as of December 31, 1997 and $7,500
as of March 31, 1998 10,324 11,767
Investments in and advances to affiliates 12,464 16,024
Other investments 28,017 28,524
Other assets 3,266 4,490
------------ -------------
Total assets $ 496,313 $ 504,288
============ =============
</TABLE>
2
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Supplemental Consolidated Balance Sheets
($ and shares in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------------- -----------------
(Restated-Note A) (Restated-Note A)
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 40,707 $ 42,404
Income taxes payable 5,590 4,734
Current portion of long-term debt 1,213 1,608
Current portion of due to shareholders of
acquired companies 13,794 13,870
Deferred revenue 26,289 24,276
Other current liabilities 1,281 1,405
------------ -----------
Total current liabilities 88,874 88,297
Long-term debt, less current portion 2,303 3,481
Deferred income taxes 7,620 7,612
Due to shareholders of acquired companies,
less current portion 56,366 31,365
Other long-term liabilities 902 369
Commitments and contingent liabilities - -
------------ -----------
Total liabilities 156,065 131,124
------------ -----------
Stockholders' equity:
Preferred stock, par value $.01 per share--authorized
10,000 shares, no shares issued and
outstanding as of December 31, 1997 and 1996 - -
Common stock, par value $.01 per share--authorized
90,000 shares, issued and outstanding shares of
45,450 as of December 31, 1996 and 46,642
as of March 31, 1998 455 466
Additional paid-in capital 301,897 330,020
Retained earnings 39,057 43,603
Foreign currency translation adjustments (1,161) (925)
------------ -----------
Total stockholders' equity 340,248 373,164
------------ -----------
Total liabilities and stockholders' equity $ 496,313 $ 504,288
============ ===========
</TABLE>
See accompanying notes.
3
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Supplemental Consolidated Statements of Income (Unaudited)
($ in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------------------
1997 1998
----------------------------------------
(Restated-Note A) (Restated-Note A)
<S> <C> <C>
Revenues $ 60,821 $ 86,323
Cost and expenses
Direct costs 53,586 76,781
General and administrative expense 2,961 3,327
------------ -----------
Total expenses 56,547 80,108
------------ -----------
Operating income 4,274 6,215
Other income (expense)
Investment and other income 763 1,713
Interest expense (318) (169)
Equity in net loss of affiliates (110) (1,177)
------------ -----------
Income before income taxes 4,609 6,582
Income taxes (1,955) (2,315)
------------ -----------
Net income $ 2,654 $ 4,267
============ ===========
Earnings per common share, basic $0.07 $0.09
============ ===========
Earnings per common share, diluted $0.06 $0.09
============ ===========
</TABLE>
See accompanying notes.
4
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Supplemental Consolidated Statements of Cash Flows (Unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------
1997 1998
----------------------------------------
<S> <C> <C>
Operating activities
Net income $ 2,654 $ 4,267
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,986 2,972
Amortization 2,109 3,399
Non-cash dividend income (500) (500)
Provision for doubtful accounts 47 176
Equity in net loss of affiliates 110 1,177
Deferred taxes (7) (7)
Changes in operating assets and liabilities:
Accounts and notes receivable (4,292) 9,545
Cost and estimated earnings in excess of billings
on uncompleted contracts 953 (2,372)
Inventory 20 (730)
Prepaid expenses and other current assets 658 (840)
Other assets (902) (1,224)
Accounts and notes payable and accrued expenses (5,620) 486
Billings in excess of costs and estimated earnings
on uncompleted contracts 553 392
Other current liabilities (87) 207
Deferred revenue and other long-term liabilities 2,847 (3,321)
---------- -----------
Net cash provided by operating activities 529 13,627
---------- -----------
Investing activities
Purchase of available-for-sale securities (4,827) (4,354)
Proceeds from sale of available-for-sale securities 11,045 29,400
Investment in and advances to affiliates (2,416) (4,086)
Increase in other investments (742) -
Purchase of property and equipment (3,373) (14,587)
Proceeds from sale of property and equipment 43 -
Cash paid for Canter, net of cash received - (24,262)
Cash paid for other acquired businesses, net of cash received - (24)
Increase in other intangible assets - (255)
Expenditures for deferred contract costs and other assets (11) (193)
---------- -----------
Net cash used in investing activities (281) (18,361)
---------- -----------
Financing activities
Payments on loans from stockholders of acquired companies (4,671) (15)
Proceeds from exercise of options and warrants 922 1,403
Distributions to (repayments from) shareholders of pooled entity (550) 238
Payments on long-term debt and capital lease obligations (2,932) (789)
Proceeds from issuance of long-term debt 56 1,117
Payments on bank lines of credit - (544)
Proceeds from bank lines of credit 7,164 -
---------- -----------
Net cash provided by (used in) financing activities (11) 1,410
---------- -----------
Effects of exchange rate changes on cash (394) 191
---------- -----------
Net decrease in cash and cash equivalents (157) (3,133)
Cash and cash equivalents at beginning of period 18,564 29,650
---------- -----------
Cash and cash equivalents at end of period $ 18,407 $ 26,517
========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Notes to Unaudited Supplemental Consolidated Financial Statements
(Amounts in thousands, except per share amounts)
March 31, 1998
Note A - Basis of Presentation
---------------------
The accompanying unaudited supplemental 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
ended March 31, 1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998. For further information, refer
to the annual financial statements and footnotes thereto included in this report
on Form 8-K.
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. As of
the date of the issuance of these financial statements, the Company has not
issued financial statements for a period including the merger date. Therefore,
the accompanying unaudited consolidated financial statements are considered
"supplemental". Upon the issuance of financial statements for a period that
includes the date of the merger, the unaudited supplemental consolidated
financial statements will become the historical unaudited consolidated financial
statements of the Company.
Note B - Income Taxes
------------
The tax provisions for the three month periods ended March 31, 1998 and
1997 are based on the estimated effective tax rates applicable for the full
years. The Company's income tax provision of $2.3 million for the three month
period ended March 31, 1998 consists of federal, state, and foreign income
taxes. The Company's effective tax rate decreased from 42% during the first
quarter of 1997 to 35% during the first quarter of 1998 mainly due to the effect
of higher earning levels in certain lower tax jurisdictions.
6
<PAGE>
Note C - Earnings Per Share
------------------
Aspect International Language Schools, B.V. and subsidiaries
On May 6, 1998 the Company consummated its acquisition of all the
outstanding stock of Aspect in exchange for 2,004,030 shares of common stock.
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 combined results of operations, financial position
and cash flows of Aspect (See Note A). In May 1998, the Company expensed
approximately $5.0 million of direct costs incurred by the Company and the
combining shareholders related to the merger.
Aspect provides intensive English language instruction to students and
professionals worldwide through its 19 language schools in five countries.
Combined and separate results of operations of Sylvan and Aspect during the
periods presented are as follows:
<TABLE>
<CAPTION>
Previously
Reported by
the Company Aspect Combined
-------------- --------- ------------
<S> <C> <C> <C>
Three months ended March
31, 1998
Revenues $ 75,356 $ 10,967 $ 86,323
Net income (loss) $ 5,647 $ (1,380) $ 4,267
Earnings per common share
- - diluted $ 0.12 - $ 0.09
Three months ended March
31, 1997
Revenues $ 51,944 $ 8,877 $ 60,821
Net income (loss) $ 3,447 $ (793) $ 2,654
Earnings per common share
- diluted $ 0.08 - $ 0.06
</TABLE>
7
<PAGE>
Note C - Earnings Per Share
------------------
The following table summarizes the computations of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three Months ended March 31,
----------------------------
1997 1998
------- -------
<S> <C> <C>
Numerator used in basic and diluted
earnings per common share:
Net income $ 2,654 $ 4,267
======= =======
Denominator:
Denominator for basic earnings per common
share - weighted average shares 40,073 47,760
Effect of dilutive securities:
Employee stock options 2,519 2,166
Common stock contingently issuable 290 -
------- -------
Total dilutive potential common shares 2,809 2,166
------- -------
Denominator for diluted earnings per common
share - weighted average shares and
assumed conversions 42,882 49,926
======= =======
Earnings per common share, basic $ 0.07 $ 0.09
Earnings per common share, diluted $ 0.06 $ 0.09
</TABLE>
Note D - Reclassifications
-----------------
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
8
<PAGE>
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 $23.6
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 college
and universities nationwide.
Note F - Subsequent Events
-----------------
In May 1998, the Company increased the number of authorized shares of
common stock from 40,000,000 shares to 90,000,000 shares and declared a 3-for-2
stock split of its common stock for stockholders of record on April 8, 1998.
Accordingly, all share and per share data including stock options, warrants and
earnings per share information has been restated in the unaudited supplemental
consolidated financial statements to retroactively reflect the stock split.
9
<PAGE>
Note G - 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 104 shares of common stock,
including income tax benefit
of $458 1 1,860 - - 1,861
Issuance of 965 shares of
common stock in connection
with the acquisition of
NAI/Block 10 25,706 - - 25,716
Issuance of 80 shares of common
stock in connection with other
acquisitions - 119 41 - 160
Issuance of 23 shares of common
stock in connection with the
Employee Stock Purchase Plan - 438 - - 438
Foreign currency translation
adjustment - - - 236 236
Net income for the three months
ended March 31, 1998 - - 4,267 - 4,267
Repayment of distributions - - 238 - 238
--------- ------------ ------------- ------------ ---------------------
Balance at March 31, 1998 $466 $330,020 $43,603 $ (925) $373,164
========= ============ ============= ============ =====================
</TABLE>
Note H - Contingencies
-------------
From time to time, the Company may be a party to routine litigation
incidental to its business. At this time, 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 purchase
of contract 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, caused ACT to suffer the loss of its 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
<PAGE>
injunctive relief. The Company believes that all of ACT's claims are without
merit.
Note I - Business Segment Information
----------------------------
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1998
---- ----
<S> <C> <C>
Operating revenues:
Learning Centers $ 9,231 $ 12,136
Contract Educational Services 17,574 26,620
Sylvan Prometric 34,016 47,567
-------- --------
$ 60,821 $ 86,323
======== ========
Segment profit:
Learning Centers $ 2,402 $ 2,707
Contract Educational Services 1,406 3,806
Sylvan Prometric 3,427 3,029
-------- --------
$ 7,235 $ 9,542
======== ========
Segment assets:
Learning Centers $ 21,694 $ 27,840
Contract Educational Services 28,820 82,382
Sylvan Prometric 167,376 273,758
-------- --------
$217,890 $383,980
======== ========
</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
months ended March 31, 1997 and 1998, respectively:
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1997 1998
-------- ---------
<S> <C> <C>
Total profit for reportable segments $ 7,235 $ 9,542
Corporate general and administrative expense (2,961) ( 3,327)
Other income (expense) 335 367
------- --------
Income before income taxes $ 4,609 $ 6,582
======= ========
</TABLE>
11
<PAGE>
EXHIBIT 99.4
ANGLO-WORLD EDUCATION (UK) LIMITED
AUDITOR'S REPORT TO THE MEMBERS
We have audited the financial statements of Anglo-World Education (UK) Limited
on pages 5 to 18 which have been prepared under the accounting policies set out
on page 9 and 10.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 3 the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board which are substantially the same as United States
Generally Accepted Auditing Standards. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements,
and of whether the accounting policies are appropriate to the company's
circumstances, consistently applied and adequately disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatements, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINIONS
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 31 December 1995, 1996 and 1997 and of its profit
for each of the three years then ended.
DELOITTE & TOUCHE
Chartered Accountants
Date: 27 July 1998
<PAGE>
EXHIBIT 99.5
SMITH, LANGE & PHILLIPS LLP
CERTIFIED PUBLIC ACCOUNTANTS
33 NEW MONTGOMERY STREET, SUITE 1530
SAN FRANCISCO, CA 94105-4510
Tel. (415) 243-8833 Fax (415) 243-8840
June 11, 1998
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors of
American Study Program for Educational and Cultural Training,
Inc. (ASPECT)
We have audited the accompanying balance sheet of American Study Program for
Educational and Cultural Training, Inc. (ASPECT) as of September 30, 1995 and
the related statements of income and retained earnings, cash flows and
supplementary schedules for the year then ended. The financial statements are
the responsibility of ASPECT. Our responsibility is to express an opinion on the
financial statements taken as a whole.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ASPECT as of September 30,
1995, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Smith, Lange & Phillips
<PAGE>
EXHIBIT 99.6
SMITH, LANGE & PHILLIPS LLP
CERTIFIED PUBLIC ACCOUNTANTS
33 NEW MONTGOMERY STREET, SUITE 1530
SAN FRANCISCO, CA 94105-4510
Tel. (415) 243-8833 Fax (415) 243-8840
December 10, 1996
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors of
American Study Program for Educational and Cultural Training,
Inc. (ASPECT)
We have audited the accompanying balance sheet of American Study Program
for Educational and Cultural Training, Inc. (ASPECT) as of September 30, 1996,
and the related statements of income and retained earnings, cash flows and
supplementary schedules for the year then ended. The financial statements are
the responsibility of ASPECT. Our responsibility is to express an opinion on the
financial statements taken as a whole.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles use and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of ASPECT as of
September 30, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ Smith, Lange & Phillips
<PAGE>
EXHIBIT 99.7
SMITH, LANGE & PHILLIPS LLP
CERTIFIED PUBLIC ACCOUNTANTS
33 NEW MONTGOMERY STREET, SUITE 1530
SAN FRANCISCO, CA 94105-4510
Tel. (415) 243-8833 Fax (415) 243-8840
December 7, 1997
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors of
American Study Program for Educational and Cultural Training, Inc. (ASPECT)
We have audited the accompanying consolidated balance sheet of American
Study Program for Educational and Cultural Training, Inc. (ASPECT) and
subsidiary as of September 30, 1997, and the related consolidated statements of
income and retained deficit, cash flows and supplementary schedules for the year
then ended. The financial statements are the responsibility of ASPECT. Our
responsibility is to express an opinion on the financial statements taken as a
whole.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ASPECT
as of September 30, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ SMITH, LANGE & PHILLIPS
