<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarter ended September 30, 2000 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.
Commission File Number 0-22844
SYLVAN LEARNING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1492296
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Lancaster Street, Baltimore, Maryland 21202
(Address, including zip code, of principal executive offices)
(410) 843-8000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ].
The registrant had 37,281,388 shares of Common Stock outstanding as of November
8, 2000.
<PAGE>
SYLVAN LEARNING SYSTEMS, INC.
-----------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999.........................................................3
Consolidated Statements of Operations- Three months ended
September 30, 2000 and September 30, 1999.................................5
Consolidated Statements of Operations - Nine months ended
September 30, 2000 and September 30, 1999.................................6
Consolidated Statements of Cash Flows - Nine months ended
September 30, 2000 and September 30, 1999..................................7
Notes to Consolidated Financial Statements - September 30, 2000................8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................18
Item 3. Quantitative and Qualitative Disclosure of Market Risk........................28
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................................30
SIGNATURES............................................................................30
</TABLE>
2
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited) (Restated)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $192,243 $ 18,995
Marketable securities 185,923 10,890
Receivables:
Accounts receivable 57,043 45,537
Costs and estimated earnings in excess of billings on
uncompleted contracts 3,655 3,061
Notes receivable from tuition financing 6,628 4,647
Other notes receivable 20,924 16,783
Other receivables 2,703 1,265
-------- --------
90,953 71,293
Allowance for doubtful accounts (2,746) (2,138)
-------- --------
88,207 69,155
Inventory 5,451 6,098
Deferred income taxes 6,963 6,963
Prepaid expenses and other current assets 17,187 9,073
Net current assets of discontinued operations -- 280,287
-------- --------
Total current assets 495,974 401,461
Notes receivable from tuition financing, less current portion 7,612 5,330
Other notes receivable, less current portion 2,908 1,879
Costs and estimated earnings in excess of billings on
uncompleted contracts, less current portion 37 289
Property and equipment:
Land and buildings 77,873 63,319
Furniture, computer equipment and software 78,592 69,770
Leasehold improvements 13,064 10,818
-------- --------
169,529 143,907
Accumulated depreciation (39,200) (28,089)
-------- --------
130,329 115,818
Intangible assets:
Goodwill 222,727 200,382
Other 2,594 2,574
-------- --------
225,321 202,956
Accumulated amortization (18,205) (11,952)
-------- --------
207,116 191,004
Deferred costs, net of accumulated amortization of $1,649
and $984 at September 30, 2000 and December 31, 1999 6,117 3,641
Investments in and advances to affiliates 44,835 13,317
Other investments 29,207 25,933
Other assets 7,173 5,953
-------- --------
Total assets $931,308 $764,625
======== ========
</TABLE>
3
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited) (Restated)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 39,534 $ 44,690
Income taxes payable 130,661 9,711
Current portion of long-term debt 17,920 14,315
Due to shareholders of acquired companies 16,194 22,474
Deferred revenue 28,234 23,234
Net current liabilities of discontinued operations 1,480 2,726
-------- --------
Total current liabilities 234,023 117,150
Long-term debt, less current portion 126,400 146,095
Deferred income taxes 11,729 12,152
Other long-term liabilities 3,214 3,050
-------- --------
Total liabilities 375,366 278,447
Minority interest 25,030 12,085
Stockholders' equity:
Preferred stock, par value $0.01 per share -- authorized 10,000
shares, no shares issued and outstanding as of
September 30, 2000 and December 31, 1999 -- --
Common stock, par value $0.01 per share -- authorized
90,000 shares, issued and outstanding shares of
37,273 as of September 30, 2000 and 50,904 as of
December 31, 1999 373 509
Additional paid-in capital 205,926 414,567
Retained earnings 346,241 60,762
Accumulated other comprehensive loss (21,628) (1,745)
-------- --------
Total stockholders' equity 530,912 474,093
-------- --------
Total liabilities and stockholders' equity $931,308 $764,625
======== ========
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended September 30,
2000 1999
(Restated)
---------------------------------
(Unaudited)
<S> <C> <C>
Revenues $59,969 $ 66,749
Cost and expenses
Direct costs 53,227 43,571
General and administrative expenses 4,620 5,518
Sylvan Ventures development costs 5,912 --
------- --------
Total expenses 63,759 49,089
------- --------
Operating income (loss) (3,790) 17,660
Other income (expense)
Investment and other income 4,680 75
Interest expense (2,097) (1,188)
Sylvan Ventures realized investment losses (3,051) --
Equity in net loss of affiliates:
Sylvan Ventures investments (1,229) --
Other (105) (888)
------- --------
(1,334) (888)
------- --------
Minority interest in consolidated subsidiaries:
Sylvan Ventures 2,930 --
Other 932 523
------- --------
3,862 523
------- --------
Income (loss) from continuing operations before income taxes (1,730) 16,182
Income tax expense 1,607 3,537
------- --------
Income (loss) from continuing operations (3,337) 12,645
Income from discontinued operations, net of income
Tax expense of $163 in 2000 and $4,526 in 1999 1,903 3,287
Loss on disposal of discontinued operations, including
Income tax expense of $2,400 -- (25,082)
------- --------
Net loss $(1,434) $ (9,150)
======= ========
Earnings (loss) per common share, basic:
Income (loss) from continuing operations per share $(0.08) $0.24
Loss per common share $(0.03) $(0.18)
Earnings (loss) per common share, diluted:
Income (loss) from continuing operations per share $(0.08) $0.24
Loss per common share $(0.03) $(0.17)
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
(Restated)
--------------------------------
(Unaudited)
<S> <C> <C>
Revenues $217,737 $200,806
Cost and expenses
Direct costs 187,048 150,254
General and administrative expenses 13,987 15,284
Sylvan Ventures development costs 10,501 --
-------- --------
Total expenses 211,536 165,538
-------- --------
Operating income 6,201 35,268
Other income (expense)
Investment and other income 14,282 262
Interest expense (4,727) (2,592)
Sylvan Ventures realized investment losses (3,051) --
Equity in net loss of affiliates:
Sylvan Ventures investments (2,338) --
Other (984) (2,276)
-------- --------
(3,322) (2,276)
-------- --------
Minority interest in consolidated subsidiaries:
Sylvan Ventures 2,930 --
Other (134) (651)
-------- --------
2,796 (651)
-------- --------
Income from continuing operations before income taxes and cumulative 12,179 30,011
effect of change in accounting principle
Income tax expense 5,480 4,511
-------- --------
Income from continuing operations before cumulative effect of change in
accounting principle 6,699 25,500
Income (loss) from discontinued operations, net of income tax expense
of $163 in 2000 and $12,918 in 1999 (3,922) 8,622
Gain (loss) on disposal of discontinued operations, net of income tax
expense of $136,762 in 2000 and $2,400 in 1999 288,454 (25,082)
-------- --------
Income before cumulative effect of change in accounting principle 291,231 9,040
Cumulative effect of change in accounting principle, net of income tax
benefit of $682 in 1999 -- (1,323)
-------- --------
Net income $291,231 $ 7,717
======== ========
Earnings per common share, basic:
Income from continuing operations before cumulative effect of change
in accounting principle per share $0.15 $0.49
Earnings per common share $6.38 $0.15
Earnings per common share, diluted:
Income from continuing operations before cumulative effect of change
in accounting principle per share $0.15 $0.48
Earnings per common share $6.02 $.14
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
2000 1999
-------------------------------
(Unaudited)
<S> <C>
Operating activities
Net income $ 291,231 $ 7,717
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation 13,929 17,506
Amortization 7,759 12,591
(Gain) loss on disposal of discontinued operations (288,454) 25,082
Cumulative effect of change in accounting principle -- 1,323
Deferred income taxes 335 (80)
Realized loss on sale of investments 3,051 --
Equity in net loss of affiliates 3,809 815
Minority interest in income of consolidated subsidiary (2,796) 651
Other non-cash items 1,617 162
Changes in operating assets and liabilities:
Receivables (21,822) (19,360)
Inventory, prepaid and other current assets 2,067 (6,770)
Payables and accrued expenses (16,280) 867
Deferred revenue and other current liabilities (4,703) 17,700
--------- ---------
Net cash (used in) provided by operating activities (10,257) 58,204
--------- ---------
Investing activities
Purchase of marketable securities (183,337) (1,097)
Proceeds from sale of marketable securities 2,033 2,855
Investment in and advances to affiliates (36,309) (1,339)
Proceeds from sale of investment in JLC Learning Corporation -- 15,211
Increase in other investments (6,970) (1,245)
Purchase of property and equipment (18,699) (41,140)
Purchase of WSI franchises, net of cash received -- (34,503)
Proceeds from sale of Prometric, net of closing costs 710,312 --
Purchase of Ivy West, including direct costs of acquisition, net of cash
received (7,288) --
Purchase of Les Roches, net of cash received (5,075) --
Purchase of Universidad Europea de Madrid, including direct costs of
acquisition, net of cash received -- (26,377)
Cash paid for other acquired businesses, net of cash received (18,710) (1,003)
Payment of contingent consideration for prior period acquisitions (19,323) (16,660)
Expenditures for deferred costs (2,603) (5,815)
Other investing activities (4,211) (956)
--------- ---------
Net cash provided by (used in) investing activities 409,820 (112,069)
--------- ---------
Financing activities
Proceeds from exercise of options and warrants 458 2,885
Proceeds from issuance of common stock 785 962
Repurchases of common stock (211,014) (36,213)
Proceeds from issuance of long-term debt 135,478 115,401
Payments on long-term debt and capital lease obligations (163,149) (32,460)
Cash received from minority interest members in Sylvan Ventures 15,741 --
--------- ---------
Net cash (used in) provided by financing activities (221,701) 50,575
--------- ---------
Effect of subsidiary year-end change on cash and cash equivalents (2,565) --
Effects of exchange rate changes on cash (2,049) (2,020)
--------- ---------
Net increase (decrease) in cash and cash equivalents 173,248 (5,310)
Cash and cash equivalents at beginning of period 18,995 33,170
--------- ---------
Cash and cash equivalents at end of period $ 192,243 $ 27,860
========= =========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
Sylvan Learning Systems, Inc.
Notes to Consolidated Financial Statements
Unaudited
(Amounts in thousands, except share and per share amounts)
September 30, 2000
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and nine month periods
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2000. The traditional semester
programs in the education industry, with a summer break, result in unusually
large seasonality in the operating results of the Company. The consolidated
balance sheet at December 31, 1999 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Sylvan Learning
Systems, Inc. and Subsidiaries (the "Company") annual report on Form 10-K for
the year ended December 31, 1999.
Certain amounts previously reported for 1999 have been reclassified to conform
with the 2000 presentation.
Note 2 - Discontinued Operations
On July 1, 2000, the Company adopted a formal plan to dispose of Aspect Language
Schools, Inc. ("Aspect") its English language immersion business. On October 7,
2000 the Company sold Aspect for $22,000 in cash. The estimated gain on sale
including income tax benefits was $22,399. The gain will be recorded in October
2000. The final gain may differ from this preliminary amount due to adjustments
to closing costs and employee severance amounts.
On March 3, 2000, the Company sold its computer-based testing division, Sylvan
Prometric ("Prometric") for approximately $775,000 in cash. The estimated gain
on the sale was $288,000, net of income taxes of approximately $137,000, subject
to a future adjustment for final working capital. The Company has estimated the
domestic and foreign income taxes resulting from the sale based on the expected
allocation of proceeds to subsidiaries that are a party to the transaction and
the tax laws of the jurisdictions in which these subsidiaries operate.
On December 31, 1999, the Company closed a sale transaction for the Pace
corporate training business.
8
<PAGE>
Note 2 - Discontinued Operations (continued)
Summarized operating information of the Company's discontinued operations,
including Aspect for 1999 and 2000, Prometric for 1999 and the period owned in
2000, and Pace for 1999, are as follows for the nine months ended September 30:
2000 1999
---- ----
Revenues $75,898 $210,979
------- --------
Income (loss) before income taxes (3,759) 21,540
Income tax expense 163 12,918
------- --------
Net income (loss) $(3,922) $ 8,622
======= ========
Included in income from discontinued operations for the nine month periods ended
September 30, 2000 and 1999 is an allocation of corporate interest expense of
$106 and $1,425, respectively, primarily based upon a percentage of the net
equity investment in discontinued operations to the net equity of the Company
including the discontinued operations.
The accompanying consolidated balance sheets have been restated to reflect the
net liabilities of Aspect and the net assets of Prometric as net liabilities and
net assets of discontinued operations. Net long-lived liabilities of Aspect as
of September 30, 2000 and December 31, 1999 have been included in the net
current liability amount because the sale transaction closed on October 7, 2000.
Net long-lived assets of Prometric are included in the net current asset amount
at December 31, 1999 because the sale transaction closed March 3, 2000. The net
liabilities and net assets of discontinued operations include the following for
Aspect as of September 30, 2000 and for Prometric and Aspect as of December 31,
1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Accounts and notes receivable, net $ -- $50,598
Accounts payable and accrued expenses -- (41,332)
Other, net -- 1,621
Net long-lived assets -- 269,400
------- --------
Net current assets of Prometric discontinued operations $ -- $280,287
======= ========
Cash and marketable securities $ 3,227 $ 1,415
Accounts and notes receivable, net 3,051 6,312
Accounts payable and accrued expenses (4,367) (7,226)
Other current liabilities, net (9,868) (10,948)
Net long-lived assets 10,998 13,070
Long-term debt (4,409) (5,109)
Other non-current liabilities, net (112) (240)
------- --------
Net current liabilities of Aspect discontinued operations $(1,480) $ (2,726)
======= ========
</TABLE>
Note 3 - Acquisitions
Effective July 25, 2000, the Company obtained control of the Board of Directors'
control of Les Roches, a private, for-profit university in Switzerland. The
transaction is subject to Swiss government approval and final approval is
considered likely. The purchase price totalled approximately $26,103 including
estimated net cash payments of $6,275 and the assumption of $10,806 in
outstanding debt and $9,022 of liabilities. The final purchase price may differ
from this preliminary amount due to adjustments to acquisition related costs.
The transaction was accounted for using the purchase method of accounting. The
results of operations of Les Roches are included in the accompanying 2000
consolidated statements of operations from July 25, 2000 through September 30,
2000. In connection with the Company's acquisition of Les Roches, variable
amounts of contingent consideration are also payable to the seller if specified
levels of earnings are achieved in 2000, 2001 and 2002. The Company will record
the contingent consideration when the contingencies are resolved and the
additional consideration is payable.
9
<PAGE>
Note 4 - Commencement of New Segment
The Company's newest segment, Sylvan Ventures, began operations during the first
quarter of 2000. Sylvan Ventures invests in and incubates companies to bring
emerging technology solutions to the education and training marketplace. During
the nine month period ended September 30, 2000, Sylvan included its investments
in Caliber Learning Network, Inc., OnLine Learning.net, ZapMe! Corporation,
Chancery, Inc., LeapIt.com, Inc., Classwell Learning Group Inc., Kawama.com,
Inc., ClubMom, Inc., and Sylvan's on-line tutoring venture, eSylvan, Inc., as
part of the Sylvan Ventures segment.
During the nine month period ended September 30, 2000, the Sylvan Ventures
segment incurred development costs related to its efforts to develop the
investments, identify potential additional investments and operate eSylvan.
These costs were comprised primarily of Internet development, technology
infrastructure, start-up costs, professional fees, consulting fees, salaries and
other related operational costs.
The Company has committed to fund $285,000 to Sylvan Ventures, including
contributions of specified investments. On June 30, 2000, an agreement was
finalized with affiliates of Apollo Management L.P. to provide $100,000 in
funding for Sylvan Ventures. Additionally, certain members of the Company's
management and other investors will invest $15,000 in Sylvan Ventures. The
Company, however, will maintain a majority-ownership position in Sylvan Ventures
and account for Sylvan Ventures as a consolidated subsidiary with a minority
interest balance representing the minority owners' net investment.
Note 5 - Change in Year-end of Subsidiary
Effective January 1, 2000, the Company changed the year-end of Aspect, from
September 30 to December 31 to produce a consistent reporting period for the
consolidated entity. As a result of this change in year-end, Aspect's net
results of operations for the three month period ended December 31, 1999 are
reflected as an adjustment to retained earnings on the consolidated balance
sheet as of January 1, 2000. The impact of this change resulted in a decrease in
retained earnings of approximately $5,752. The results of Aspect's operations,
which are included in discontinued operations (see Note 2), for the period
October 1, 1999 to December 31, 1999 are summarized as follows:
Three months ended
December 31, 1999
------------------
Revenues $ 10,709
Direct costs (16,350)
--------
Operating loss (5,641)
Other expense (111)
--------
Loss before income taxes (5,752)
Income tax benefit --
--------
Net loss $ (5,752)
========
Direct costs for the three months ended December 31, 1999 included $1,300 of
advertising costs, which had been treated as prepaid prior to the October 1
start of the program term, $1,500 of salaries, travel and other costs for the
relocation of the corporate management offices, which occurred in the three
months ended December 31, 1999, and $400 of goodwill impairment write-offs
related to the closing of two schools, which were announced in the three months
ended December 31, 1999.
10
<PAGE>
Note 6 - Marketable Securities
The following is a summary of marketable securities:
September 30, December 31,
2000 1999
------------- ------------
Equity securities $ 2,196 $ 8,281
Debt securities 183,340 --
Cash reserve fund 387 2,609
-------- -------
$185,923 $10,890
======== =======
The Company's investment in debt securities mature within one year of the
balance sheet date.
Note 7 - Investments in and Advances to Affiliates
The Company's investments in and advances to affiliates accounted for under the
equity method includes a 10% voting interest in Caliber Learning Network, Inc.
("Caliber"), and related loans. Caliber is a publicly traded company formed for
the purpose of providing learning services to corporations and universities
using the Internet, telecommunications and multimedia technology.
The Company's investment in and advances to Caliber consist of the following:
September 30, December 31,
2000 1999
------------- ------------
Invested capital $14,491 $14,491
Allocable share of losses
from inception (8,999) (6,740)
------- -------
5,492 7,751
Advances to affiliates 6,084 3,024
------- -------
Total investment and
advances to Caliber $11,576 $10,775
======= =======
Summarized financial data of Caliber is as follows:
September 30, December 31,
2000 1999
------------- ------------
Balance sheet data:
Current assets $11,404 $31,765
Non-current assets 18,775 21,519
Current liabilities 14,637 12,570
Non-current liabilities 7,587 10,250
Redeemable preferred stock 16,032 15,153
11
<PAGE>
Note 7 - Investments in and Advances to Affiliates (continues)
Three months ended September 30,
2000 1999
------------- ------------
Statement of operations data:
Revenues $ 5,982 $ 6,570
Operating loss (8,314) (6,052)
Net loss (8,440) (6,094)
Nine months ended September 30,
2000 1999
------------- ------------
Statement of operations data:
Revenues $ 17,133 $ 18,492
Operating loss (22,995) (16,834)
Net loss (22,582) (16,941)
Investments in and advances to affiliates include other investments totaling
$33,259 and $2,542 at September 30, 2000 and December 31, 1999, respectively.
The Company's allocable shares of losses related to these investments for the
nine month periods ended September 30, 2000 and 1999 were $3,322 and $2,276,
respectively.
Note 8 - Long Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------------------------------
<S> <C> <C>
Long-term revolving credit facility with banks $ 3,529 $122,991
Convertible debentures 100,000 --
Mortgages and notes payable bearing interest
at rates ranging from 4.25% to 8.00% 3,521 249
Mortgages, notes payable, and lines of credit
related to International Universities 37,270 37,170
-------- --------
144,320 160,410
Less: current portion of long-term debt (17,920) (14,315)
-------- --------
Total long-term debt $126,400 $146,095
======== ========
</TABLE>
At September 30, 2000, the Company had a revolving credit facility (the
"Facility") with a group of five banks, which allows the Company to borrow up to
an aggregate of $100,000 at variable rates. Outstanding borrowings under the
Facility are unconditionally guaranteed by a pledge of the capital stock of the
Company's subsidiaries, and are due on December 23, 2003. As of December 31,
1999, the Company had $122,991 of borrowings outstanding under the facility,
which were repaid in the first quarter of 2000 with a portion of the proceeds
from the sale of Prometric. Debt covenants of the Facility require the Company
to maintain certain debt-to-earnings and interest coverage ratios. Other
provisions require maintenance of minimum net worth levels and restrict
advances, investments, loans, capital expenditures and dividends.
12
<PAGE>
Note 8 - Long Term Debt (continued)
The outstanding borrowings assumed as part of the Universidad Europea de Madrid
("UEM") and Les Roches acquisitions are secured by the underlying property and
fixed assets of the respective universities. These borrowings bear interest at a
blended variable rate of approximately 4.81% as of September 30, 2000, and 4.75%
as of December 31, 1999.
On June 30, 2000, the Company issued $100,000 of ten year convertible
subordinated debentures. The debentures bear interest at a fixed rate of 5.00%,
payable semi-annually, and are convertible at any time into the Company's common
stock at $15.735 per share. The debentures mature on June 30, 2010.
Note 9 - Due to Shareholders of Acquired Companies
Due to shareholders of acquired companies consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Amounts payable to former shareholders of Schulerhilfe in cash $ -- $10,424
Amounts payable to former shareholders of Canter in cash 13,144 9,000
Amounts payable to former shareholders of Prometric in cash 3,050 3,050
------- -------
$16,194 $22,474
======= =======
</TABLE>
In connection with the Company's acquisition of Canter and based on Canter's
earnings in 1999, additional cash consideration of $9,000 was paid to the seller
in the second quarter of 2000. The liability and additional goodwill was
recorded at December 31, 1999. Additional consideration of $13,144 was accrued
as of September 30, 2000, and additional goodwill was recorded, for a final
settlement with the former shareholders of Canter.
In connection with the Company's 1998 acquisition of Schulerhilfe, the Company
paid the sellers a final cash payment of an additional $10,424 during the first
quarter of 2000. This amount was based on the amount of 1999 franchise fees,
which were collected by Schulerhilfe on or before January 31, 2000.
Note 10 - Investment and Other Income
The Company's investment and other income consists of the following:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest and other income $ 7,179 $64 $16,363 $ 534
Gain (loss) on foreign exchange (2,499) 11 (2,081) (272)
------- --- ------- -----
$ 4,680 $75 $14,282 $ 262
======= === ======= =====
</TABLE>
The three and nine months ended September 30, 2000 gain (loss) on foreign
exchange include a $3,149 loss related to the settlement of a foreign exchange
contract that settled in August 2000. The foreign exchange contract was entered
into to protect against the impact of fluctuations in the exchange rate between
the U.S. dollar and a foreign currency on the amount of U.S. dollars required
for a potential foreign university acquisition.
13
<PAGE>
Note 11 - Income Taxes
The tax provisions for the three month and nine month periods ended September
30, 2000 and 1999 are based on the estimated effective tax rates applicable for
the full years, after giving effect to significant events related specifically
to the interim periods. The Company's income tax provisions for all periods
consist of federal, state, and foreign income taxes. The impact of the
discontinued operations of Aspect and the inability to recognize tax benefits
from Sylvan Ventures investment losses has resulted in an increase in the
effective tax rate to 45% for the nine month period ended September 30, 2000.
Sylvan Ventures is organized as a limited liability company ("LLC"), and its
equity losses attributable to investments in corporations are not included in
the Company's consolidated income tax returns. As a result of the revision in
the effective income tax rate, income tax expense from continuing operations of
$1,607 was recognized in the third quarter, of which expense of $2,307 related
to a change in estimate from the first six months of 2000.
The Company estimates that its effective income tax rate from continuing
operations for the year ended, December 31, 2000 will be 45%. The effective tax
rate for 2000 is based upon available information. However, uncertainties exist
that could cause the effective tax rate on an annual basis to vary from this
estimated effective rate. These uncertainties include the Company's share of
losses relating to the investments of Sylvan Ventures, and the level of profits
generated in the United States versus foreign countries.
The Company's effective tax rate on continuing operations in 1999 was
significantly impacted by utilized tax credits, foreign tax benefits and state
income taxes, offset by permanent differences that arose due to the significant
amount of restructuring and non-recurring charges. Because of these factors,
comparison of the 2000 and 1999 effective tax rates is not meaningful.
Note 12 - Stockholders' Equity
On May 5, 2000, upon conclusion of a Company sponsored tender offer, the Company
purchased approximately 8.5 million shares of common stock at $15.25 per share.
The value of the shares purchased was approximately $130,097, including
transaction costs.
On September 13, 2000, upon conclusion of a second Company sponsored tender
offer, the Company purchased approximately 4.7 million shares of common stock at
$15.00 per share. The value of the shares purchased was approximately $71,057,
including transaction costs.
14
<PAGE>
Note 12 - Stockholders' Equity (continued)
The components of stockholders' equity are as follows:
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Stockholders'
Stock Capital Earnings Loss Equity
------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 2000 $ 509 $ 414,567 $ 60,762 $ (1,745) $ 474,093
Repurchase of 13,166 shares of
Common stock in connection
with self tender offers (132) (201,022) (201,154)
Repurchase of 639 shares of (6) (9,854) (9,860)
Common stock
Options exercised for purchase
of 66 shares of common stock,
including income tax benefit of
$178 1 562 563
Stock options granted to non-
employees 82 82
Issuance of 62 shares of
common stock in connection
with the Employee Stock
purchase Plan 1 784 785
Effect of subsidiary's year-end (5,752) (5,752)
change (See Note 5)
Effect of stock option vesting
acceleration for employees of
discontinued operations 171 171
Issuance of 45 shares of common
stock in connection with other
acquisitions 636 636
Comprehensive income:
Net income for the nine
months ended September 30, 2000 291,231 291,231
Other comprehensive income (loss):
Unrealized loss on
marketable securities (3,033) (3,033)
Foreign currency translation
adjustment (16,850) (16,850)
---------
Total comprehensive income 271,348
----- --------- -------- -------- ---------
Balance at September 30, 2000 $ 373 $ 205,926 $346,241 $(21,628) $ 530,912
===== ========= ======== ======== =========
</TABLE>
15
<PAGE>
Note 13 - Earnings Per Share
The following table summarizes the computations of basic and diluted earnings
per common share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator used in basic earnings per common share:
Income (loss) from continuing operations, before
cumulative effect of change in accounting principle $(3,337) $ 12,645 $ 6,699 $ 25,500
Income (loss) from discontinued operations, net of tax 1,903 3,287 (3,922) 8,622
Gain (loss) on disposal of discontinued operations,
net of tax - (25,082) 288,454 (25,082)
Cumulative effect of change in accounting principle,
net of tax - - - (1,323)
------- -------- -------- --------
Net income (loss) $(1,434) $ (9,150) $291,231 $ 7,717
======= ======== ======== ========
Numerator used in diluted earnings per common share:
Income (loss) from continuing operations, before cumulative
effect of change in accounting principle $(3,337) $ 12,645 $ 6,699 $ 25,500
Add: Interest expense from assumed conversion of
convertible debentures, net of tax - - 688 -
------- -------- -------- --------
Income (loss) from continuing operations, before cumulative (3,337) 12,645 7,387 25,500
effect of change in accounting principle, after assumed
conversion of convertible debentures
Income (loss) from discontinued operations, net of tax 1,903 3,287 (3,922) 8,622
Gain (loss) on disposal of discontinued operations, net of tax - (25,082) 288,454 (25,082)
Cumulative effect of change in accounting principle,
Net of tax - - - (1,323)
------- -------- -------- --------
$(1,434) $(9,150) $291,919 $ 7,717
======= ======== ======== ========
Denominator:
Denominator for basic earnings per share - weighted-average
common shares outstanding 41,084 51,897 45,667 51,642
Net effect of dilutive stock options based on treasury
Stock method - 1,387 689 1,800
Effect of dilutive convertible debentures - - 2,142 -
------- -------- -------- --------
Denominator for diluted earnings per share - weighted average
common shares outstanding and assumed conversions 41,084 53,284 48,498 53,442
======= ======== ======== ========
Earnings (loss) per common share, basic:
Income (loss) from continuing operations, before
Cumulative effect of change in accounting principle $(0.08) $0.24 $0.15 $0.49
Income (loss) from discontinued operations, net of tax 0.05 0.06 (0.09) 0.17
Gain (loss) on disposal of discontinued operations,
net of tax - (0.48) 6.32 (0.48)
Cumulative effect of change in accounting principle, net of
tax - - - (0.03)
------- -------- -------- --------
Earnings (loss) per common share, basic $(0.03) $ (0.18) $ 6.38 $ 0.15
------- -------- -------- --------
Earnings per common share, diluted:
Income(loss) from continuing operations, before
cumulative effect of change in accounting principle $ (0.08) $ 0.24 $ 0.15 $ 0.48
Income (loss) from discontinued operations, net of tax 0.05 0.06 (0.08) 0.16
Gain (loss) on disposal of discontinued operations, net of
tax - (0.47) 5.95 (0.47)
Cumulative effect of change in accounting principle, net of
tax - - - (0.03)
------- -------- -------- --------
Earnings (loss) per common share $ (0.03) $ (0.17) $ 6.02 $ 0.14
======= ======== ======== ========
</TABLE>
16
<PAGE>
Note 14 - Contingencies
The Company is the defendant in a legal proceeding filed on November 18, 1996 by
ACT, Inc., an Iowa nonprofit corporation formerly known as American College
Testing Program, Inc. ("ACT"). ACT's claim arises out of the Company's
acquisition of rights to administer testing services for the National
Association of Securities Dealers, Inc. ("NASD"). ACT has asserted that the
Company tortuously interfered with ACT's relations, contractual and
quasi-contractual, with the NASD, that the Company caused ACT to suffer the loss
of its advantageous economic prospects with the NASD and other ACT clients and
that the Company has monopolized and attempted to monopolize the computer-based
testing services market. ACT has claimed unspecified amounts of compensatory,
treble and punitive damages, as well as injunctive relief. If ACT were awarded
significant compensatory or punitive damages, it could materially adversely
affect the Company's results of operations and financial condition. In a May 8,
2000 ruling on the Company's motions in limine, the court ruled that ACT is
precluded from offering evidence of any damages it incurred from the loss of the
NASD business. No trial date is currently set and the court is reviewing a
series of motions, which could conclude the trial. The Company believes that all
of ACT's claims are without merit but is unable to predict the outcome of the
ACT litigation at this time.
The Company is the defendant in arbitration proceeding pending in Los Angeles,
California initiated on or about March 22, 1999 by James Jinsoo Choi and
Christine Choi. The Chois' claim arose out of the previous relationship Mr. Choi
had as a licensee of Sylvan. Mr. Choi was licensed to operate Sylvan Learning
Centers in Korea pursuant to a license agreement. In June 1998, Sylvan
terminated the license agreement for non-curable defaults. In their complaint,
the Chois allege fraud, negligent misrepresentation, breach of fiduciary duty,
and breach of contract. The Chois have claimed unspecified compensatory and
punitive damages. The arbitration hearing has been completed; however, the
arbitrators' ruling is not expected until the first quarter of 2001. The Company
believes that all of the Chois' claims are without merit but is unable to
predict the outcome of the Choi arbitration at this time.
Note 15 - Business Segment Information
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Operating revenues:
Sylvan Learning Centers:
Franchise $10,458 $13,425 $28,913 $29,680
Company-owned 15,500 13,589 45,788 40,702
Sylvan Education Solutions 18,262 18,415 74,315 69,994
Sylvan English Language Instruction:
Franchise 4,045 9,328 12,125 20,572
Company-owned 7,504 10,551 23,988 23,679
Sylvan International Universities 4,200 1,441 32,608 16,179
Sylvan Ventures - - - -
-------- ------- -------- --------
$ 59,969 $66,749 $217,737 $200,806
======== ======= ======== ========
Segment profit (loss):
Sylvan Learning Centers $6,554 $11,010 $ 17,985 $22,423
Sylvan Education Solutions 3,417 6,500 11,197 13,385
Sylvan English Language Instruction 346 8,958 2,289 14,983
Sylvan International Universities (3,575) (3,290) (782) (239)
Sylvan Ventures (10,192) - (15,890) -
-------- ------- -------- --------
$ (3,450) $23,178 $ 14,799 $ 50,552
======== ======= ======== ========
</TABLE>
17
<PAGE>
Note 15 - Business Segment Information (continued)
<TABLE>
<CAPTION>
September 30, December 31,
Segment assets: 2000 1999
------------- ------------
<S> <C> <C>
Sylvan Learning Centers $ 87,966 $ 71,097
Sylvan Education Solutions 111,796 105,273
Sylvan English Language Instruction 114,950 121,408
Sylvan International Universities 137,429 97,344
Sylvan Ventures 81,606 -
-------- --------
Segment assets 533,747 395,122
Corporate assets 397,561 89,216
Net assets of discontinued operations - 280,287
-------- --------
Total assets $931,308 $764,625
======== ========
</TABLE>
As discussed in Note 4, during the first quarter of 2000, the Company commenced
operations of its newest segment, Sylvan Ventures. Segment profit is calculated
as net operating profit (loss) for operating segments. Segment profit for Sylvan
Ventures is calculated as the net development and operating profit (loss), plus
the net investment income (loss). There have been no other changes since
December 31, 1999 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 (loss) to continuing income (loss) before
income taxes reported in the consolidated statements of operations:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total profit (loss) for reportable segments $ (3,450) $23,178 $ 14,799 $ 50,552
Corporate general and administrative expense (4,620) (5,518) (13,987) (15,284)
Other income (expense), net 6,340 (1,478) 11,367 (5,257)
-------- ------- -------- --------
Income (loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle $ (1,730) $16,182 $ 12,179 $ 30,011
======== ======= ======== ========
</TABLE>
Note 16 - Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ (1,434) $(9,150) $291,231 $ 7,717
Foreign currency translation adjustment (10,784) 2,037 (16,850) (2,275)
Unrealized gain (loss) on marketable securities 2,696 - (3,033) -
-------- ------- -------- --------
Comprehensive income (loss) $ (9,522) $(7,113) $271,348 $ 5,442
======== ======= ======== ========
</TABLE>
18
<PAGE>
Note 16 - Restructuring
During the fourth quarter of 1999, the Company completed an analysis of its
operating structure to improve operating efficiency and to enhance shareholder
value. As a result of this analysis, management approved a formal restructuring
plan in 1999, and the Company recorded a restructuring charge to operations of
approximately $5,100 at December 31, 1999. The restructuring plan was comprised
of employee termination and facility exit costs resulting primarily from the
Company's plan to exit certain activities outside the core business of providing
educational instruction. The Company eliminated 58 professional and
administrative positions as a result of the plan. Facility exit costs include
approximately $3,500 of costs to close schools and school-based facilities. The
Company expects to complete implementation of the plan by the end of fiscal
2000. The accrued restructuring costs and the amounts charged against the
provision were as follows:
<TABLE>
<CAPTION>
Payments in the
Balance at nine months ended Balance at
December 31, 1999 September 30, 2000 September 30, 2000
----------------- ------------------ ------------------
<S> <C> <C> <C>
Employee termination costs $1,118 $1,072 $46
School closing costs 1,042 1,042 -
------ ------ ---
Total $2,160 $2,114 $46
====== ====== ===
</TABLE>
The remaining costs at September 30, 2000 represent the Company's best estimate
of the remaining employee termination costs to be paid.
Note 17- Subsequent Events
On October 26, 2000, the Company reached a definitive agreement to acquire a
controlling interest in Universidad deValle de Mexico (UVM) for a cash purchase
price in the range of $40,000 to $48,000. The final purchase price may differ
from the preliminary amount due to adjustments to acquisition related costs. The
agreement is subject to government and regulatory approval.
19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Overview
The Company generates revenues from four business segments: Sylvan Learning
Centers, which earns primarily franchise royalties, franchise sales fees and
Company-owned Learning Center revenues; Sylvan Education Solutions, which earns
revenues from providing supplemental remedial education services to public and
non-public schools as well as providing teacher training services; Sylvan
English Language Instruction, which earns fees from the operations of Wall
Street Institute; and Sylvan International Universities, which earns tuition and
fees from students of UEM, which was acquired in April 1999 and Les Roches,
where Board control was obtained in July 2000. Additionally, during the first
quarter of 2000, the Company initiated a new segment, Sylvan Ventures. Minority
interest owners invested in Sylvan Ventures on June 30, 2000, however, Sylvan
maintains a majority-ownership position in Sylvan Ventures and accounts for
Sylvan Ventures as a consolidated subsidiary. Sylvan Ventures is focused on
bringing emerging technology solutions to the education and training
marketplace. For the nine months ended September 30, 2000, the Sylvan Ventures
segment incurred development costs and recorded its share of equity losses from
affiliates but did not generate revenues.
The following table sets forth the percentage relationships of operating
revenues and direct costs for each segment, as well as certain income statement
line items expressed as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
--------------------- -------------------
<S> <C> <C> <C> <C>
Revenues:
Sylvan Learning Centers 43% 40% 34% 35%
Sylvan Education Solutions 31% 28% 34% 35%
Sylvan English Language Instruction 19% 30% 17% 22%
Sylvan International Universities 7% 2% 15% 8%
--- --- --- ---
Total revenues 100% 100% 100% 100%
Direct costs:
Sylvan Learning Centers 32% 24% 26% 24%
Sylvan Education Solutions 25% 18% 29% 28%
Sylvan English Language Instruction 19% 17% 16% 14%
Sylvan International Universities 13% 7% 15% 8%
--- --- --- ---
Total direct costs 89% 66% 86% 74%
General and administrative expenses 8% 8% 6% 8%
Sylvan Ventures development costs 10% 0% 5% 0%
--- --- --- ---
Operating income (loss) (7%) 26% 3% 18%
Non-operating income (expense) 4% (2%) 3% (3%)
--- --- --- ---
Income (loss) from continuing operations before taxes and
cumulative effect of change in accounting principle (3%) 24% 6% 15%
Income tax expense (2%) (5%) (3%) (2%)
--- --- --- ---
Income (loss) from continuing operations (5%) 19% 3% 13%
Discontinued operations:
Income (loss) from discontinued operations, net of tax 3% 5% (2%) 4%
Gain (loss) on disposal of discontinued operations, net of tax 0% (38%) 133% (12%)
--- --- --- ---
Income (loss) before cumulative effect of change in accounting principle (2%) (14%) 134% 5%
Cumulative effect of change in accounting principle, net of tax 0% 0% 0% (1%)
--- --- --- ---
Net income (loss) (2%) (14%) 134% 4%
=== === === ===
</TABLE>
20
<PAGE>
Results of Operations
The core businesses of Sylvan Learning Centers, Sylvan Education Solutions
(formerly Contract Services) and Sylvan English Language Instruction were
supplemented with the addition of Sylvan International Universities in April
1999. The Company has also moved to address the increasing importance of
technology in learning by focusing efforts on development and funding of
technology applications in the education and instruction marketplaces. In order
to fund expansion of technology applications in educational and training
services and to ensure that management remains focused on core business
strengths, the Company consummated the sale of the PACE corporate training
business, the Prometric computer-based testing business and Aspect, an English
language immersion business in December 1999, March 2000 and October 2000,
respectively. The operating results of the discontinued businesses have been
reported in the discontinued operations section of the consolidated statements
of operations. The following comparison of operating results focuses on the
continuing operations of the Company.
Comparison of results for the three months ended September 30, 2000 to results
for the three months ended September 30, 1999.
Revenues. Total revenues from continuing operations decreased by $6.7 million,
or 10%, to $60.0 million in 2000 from $66.7 million in 1999. This revenue
decrease was driven primarily by a $13.6 million decrease in fees associated
with sales of territory rights related to the Learning Centers, Canter and Wall
Street Institute businesses. This decline in territory fees resulted from a
change in the Company's international expansion strategy to one of retaining
ownership of franchise territories in high potential markets. Although this
strategy change results in declining current period revenue comparisons and
deterioration of the current period operating margins, the strategy will result
in the retention of a greater share of the system revenues in future periods.
Excluding these territory fee reductions, total revenues from continuing
operations increased by $6.5 million or 12% for the three month period ended
September 30, 2000 over the same period in 1999.
Sylvan Learning Centers revenue decreased by $1.1 million, or 4%, to $26.0
million for the quarter ended September 30, 2000 compared to the same period in
1999. Franchise sales decreased by $5.4 million primarily due to an
international area development agreement for $5.0 million during the quarter
ended September 30, 1999. Franchise royalties increased by $0.8 million, or 16%,
in 2000 as a result of a net increase of 65 new Centers opened after September
30, 1999, and a 10% increase in same center revenue. Revenues from Company-owned
learning centers increased $1.9 million, or 16%, to $13.4 million during 2000.
Same center revenues increased 9%, or $1.1 million, with the remaining revenue
increase of $0.8 million generated from five Company-owned centers acquired from
franchise owners and a net of one new center opened during the past year.
International revenues, primarily Schulerhilfe, declined to $2.8 million in 2000
from $3.0 million in 1999 primarily as a result of foreign exchange declines. On
May 19, 2000, the Company acquired Sylvan Ivy Prep, formerly Ivy West, an SAT
preparation company based in California. This acquisition resulted in additional
revenue of $1.5 million for the three months ended September 30, 2000. Operating
revenue for Learning Centers represents 43% of total revenues from continuing
operations of the Company for the three month period ended September 30, 2000.
Sylvan Education Solutions revenue decreased by $0.1 or 1% to $18.3 million
for the quarter ended September 30, 2000 compared to $18.4 million for the same
period in 1999. Sylvan At School revenue for the quarter ended September 30,
2000 increased by $0.5 million in comparison with the same period in 1999.
Canter teacher-training revenue decreased $0.6 million to $10.0 million in the
third quarter 2000 from $10.6 million in the same period of 1999. The quarter
ended September 30, 1999 included $3.5 million in non-recurring revenue related
to the sale of an international Canter license agreement to provide Canter's
masters degree program. This decrease in international license fee revenue for
the quarter ended September 30, 2000 was offset by a $2.8 million increase in
recurring Canter revenue due to a strong demand for Canter's products,
particularly Canter's distance learning masters program. Operating revenue for
Sylvan Education Solutions represents 31% of total revenues from continuing
operations of the Company for the quarter ended September 30, 2000.
21
<PAGE>
English Language Instruction revenue decreased $8.3 million to $11.6
million in the third quarter of 2000 from $19.9 million in the third quarter of
1999. The primary reason for the revenue decrease in the third quarter of 2000
is that sales of territory fees decreased by $5.2 million to $0.2 million for
the three months ended September 30, 2000 from $5.4 million for the same period
of 1999. This decline in territory fees resulted from the aforementioned change
in the Company's expansion strategy to one of retaining ownership of franchise
territories in high potential markets. The remaining $3.1 million decrease in
revenue was a result of lower franchise sales, maturing of the Spain market and
foreign exchange differences for the three month period in comparison to the
same period in 1999. Operating revenue for English Language Instruction
represents 19% of the total revenues from continuing operations of the Company
for the quarter ended September 30, 2000.
Sylvan International Universities revenue increased $2.8 million to $4.2
million for the quarter ended September 30, 2000 compared to $1.4 million for
the same period in 1999. The acquisition of control of Les Roches in July 2000
contributed $2.9 million in additional revenues which was offset by a $0.1
million decline in revenues at UEM primarily due to currency exchange changes
and the effect of a program that was phased out later in 1999. The three month
period ended September 30, 2000 is traditionally a low revenue period for UEM
since classes are not in session for most of the period. Operating revenue for
the Sylvan International Universities segment represents 7% of total revenues
from continuing operations of the Company for the three month period ended
September 30, 2000.
Direct Costs. Total direct costs from continuing operations, excluding Sylvan
Ventures, increased 22% to $53.2 million for the three month period ended
September 30, 2000 from $43.6 million in 1999. Direct costs as a percentage of
total revenues increased to 89% in 2000 from 65% in 1999. This increase in
direct costs as a percentage of revenues is primarily due to the effects of the
change in the Company's expansion strategy to reduce high-margin territory sales
revenues as well as the seasonality of the semester-based education industry.
Timing of semester-based revenues, primarily at Education Solutions and UEM,
also contributed to reducing revenues in the period and increased the percentage
of direct costs to those revenues. Excluding the territory fee revenue, direct
costs as a percentage of revenue declined to 89% in 2000 from 92% in the three
month period ended September 30, 1999.
Sylvan Learning Centers expenses increased $3.4 million to $19.4 million,
or 75% of Learning Centers revenue for 2000, compared to $16.0 million, or 59%
of Learning Centers revenue for the same period in 1999. Approximately $1.5
million of the increase in 2000 relates to expenses incurred in Company-owned
learning centers due to the acquisition of franchised learning centers and costs
associated with higher revenues at existing Company-owned centers. Expenses as a
percentage of revenues in Company-owned learning centers remained consistent
with those of the same period last year. The acquisition of Sylvan Ivy Prep
resulted in $1.2 million of increased costs during the three months ended
September 30, 2000. The remaining cost increase for the quarter relates to
franchise support costs, which remain consistent as a percentage of franchise
royalty revenue. The growth of expenses as a percentage of revenue is attributed
to the high-margin international territory sale during the quarter ended
September 30, 1999. Excluding the impact of this sale, expenses as a percentage
of revenue have remained consistent between periods.
Sylvan Education Solutions expenses increased by $2.9 million to $14.8
million, or 81% of Sylvan Education Solutions revenue for the quarter ended
September 30, 2000, compared to $11.9 million or 65% of Sylvan Education
Solutions revenue for the third quarter of 1999. The increase in expenses as a
percentage of revenue for the quarter ended September 30, 2000 is primarily due
to $3.5 million of high-margin revenue related to the sale of a license fee to
provide Canter's masters degree program in Mexico during the quarter ended
September 30, 1999. Excluding the impact of this sale, expenses as a percentage
of revenue have remained consistent between the periods.
22
<PAGE>
English Language Instruction expenses increased $0.3 million to $11.2
million or 97% of revenues for the quarter ended September 30, 2000, compared to
$10.9 million or 55% of revenues for the same period in 1999. The increase in
expenses as a percentage of revenue for the three months ended September 30,
2000 is primarily a result of the business decision to reduce the amount of high
margin territory sales further compounded by cost increases in staffing
administrative efforts for the internally supported international expansion
program.
Sylvan International Universities expenses were $7.8 million, for the three
month period ended September 30, 2000 compared to $4.7 million for the same
period in 1999. This $3.1 million increase was primarily due to $2.2 million of
direct costs generated from Les Roches. An additional $1.4 million of the
increase in direct costs is due to the headquarters personnel costs for Sylvan
International Universities during 2000, which included approximately $0.3
million of unsuccessful acquisition due diligence expenses during the period.
These cost increases were partially offset by the favorable effect of currency
rate changes.
Sylvan Ventures costs and losses were $7.3 million, net of minority
interest allocation, for the three months ended September 30, 2000. These costs
primarily relate to efforts to identify potential technology driven investments
in the educational services market, the development and incubation of the
investments it currently holds and losses from investments held by Ventures.
Costs associated with development of eSylvan, the Internet based instruction
solution, totaled $3.8 million for the three months ended September 30, 2000.
These costs are primarily comprised of professional and consulting fees,
infrastructure development costs, as well as salaries and other related
operational expenses. Ventures losses related to equity losses in affiliates
were primarily impacted by the losses generated at Caliber. These losses are
greater than the comparable period in the prior year due to changes that are
occurring within the Caliber business model which will result in improved future
operating performance.
Other Expenses. General and administrative expenses decreased by $0.9 million
during the three month period ended September 30, 2000, compared to the same
period in 1999. These costs remained constant at 8% of total revenues for the
three month period ended September 30, 2000, compared to same period in 1999.
The decrease in general and administrative expenses is primarily due to the
Company's efforts to control overhead costs despite market expansion.
Other non-operating items increased $4.9 million in the third quarter of
2000 as compared to the same period in 1999. This increase is largely
attributable to an increase of $7.1 million in net interest and other income
related to investing the net proceeds the Company received from the March 2000
sale of Prometric. The increase in net interest income was offset by an increase
in foreign currency exchange loss of $2.5 million. The primary reason for the
exchange loss was a loss of $3.1 million that was incurred on the settlement of
a forward exchange contract that the Company had entered to protect against
fluctuations in local currency related to a pending International University
transaction.
The Company's effective tax rate for continuing operations is not
representative of the expected annual rate due to changes in estimates made in
the quarter to adjust income taxes recorded in prior quarters for the three
month period ended September 30, 2000. The reported effective income tax rate
for continuing operations exceeds the U.S. federal statutory tax rates due to
the impact of state income taxes, the impact of minority interest, and the
Company's inability to utilize tax benefits related to certain investments of
Sylvan Ventures. The Company anticipates that its effective income tax rate for
continuing operations for the year ending December 31, 2000 will be 45%. The
effect on the third quarter of the adjustment in the full year rate resulted in
the creation of a tax expense on a loss from continuing operations.
The Company's effective tax rate for continuing operations in 1999 was
significantly impacted by utilized tax credits, foreign tax benefits and state
income taxes offset by permanent differences that arose due to the significant
amount of restructuring and non-recurring charges. Because of these factors,
comparison of the 2000 and 1999 effective tax rates is not meaningful. Please
refer to the Company's annual report on Form 10-K for the year ended December
31, 1999 for the 1999 tax rate reconciliation.
23
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Pretax Income (Loss) from Continuing Operations. Pretax results from continuing
operations decreased by $17.9 million to a loss of $1.7 million for the three
months ended September 30, 2000 compared to income of $16.2 million in the same
period in 1999. The decrease is primarily a result of the announced change in
the Company's strategy regarding territory fees combined with costs required to
begin Sylvan Ventures, offset by increases in interest income.
Income from Discontinued Operations. Income from discontinued operations
includes the operating results of Aspect for the quarter ended September 30,
2000 and 1999. The comparable period in 1999 also includes the operating results
of PACE which was sold in December 1999 and Prometric, which was sold in March
2000.
Loss or Gain on Disposal of Discontinued Operations. At September 30, 1999 the
Company approved a formal plan to dispose of the Pace Group. The loss on
disposal of Pace was anticipated to be approximately $25.0 million, and was
recorded in the period ended September 30, 1999. The disposal of Aspect in
October 2000 resulted in an estimated $22.4 million gain, which will be
recognized in the fourth quarter of 2000.
Comparison of results for the nine months ended September 30, 2000 to results
for the nine months ended September 30, 1999.
Revenues. Total revenues from continuing operations increased by $16.9 million,
or 8%, to $217.7 million in 2000 from $200.8 million in 1999. This revenue
increase has been primarily driven by expansion of the International
Universities segment through university acquisitions in 1999 and 2000, solid
revenue growth in the Learning Centers and Education Solutions segments, offset
by the impact of the change in the Company's international expansion strategy to
retaining ownership of franchise territories in high potential markets and
thereby reducing territory revenues. The $15.0 million decline in territory fees
for the nine month period ended September 30, 2000 in comparison to the same
period in 1999 resulted from a change in the Company's international expansion
strategy. Although this strategy change results in declining current period
revenue comparisons and deterioration in the current period operating margins,
the strategy will result in the retention of a greater share of the system
revenues in future periods. Excluding these territory fee reductions, total
revenues from continuing operations increased by $31.9 million or 17%, for the
nine month period ended September 30, 2000 over the same period in 1999.
Sylvan Learning Centers revenue increased by $4.3 million, or 6%, to
$74.7 million for the nine months ended September 30, 2000 compared to the same
period in 1999. Franchise sales decreased by $5.6 million primarily due to an
international area development agreement sold to France for $5.0 million during
the nine months September 30,1999. Franchise royalties increased by $2.3
million, or 17%, in 2000 as a result of the net increase of 65 new Centers
opened after September 30, 1999, and a 12% increase in same center revenue.
Revenues from Company-owned learning centers increased $4.9 million, or 15%, to
$37.3 million during 2000. Same center revenues increased 7%, or $1.8 million,
with the remaining revenue increase of $3.1 million was generated from five
Company-owned centers acquired from franchise owners and a net of one new
Company-owned center opened during the past year. International revenues,
primarily Schulerhilfe, declined to $10.7 million in 2000 from $10.9 million in
1999 primarily as a result of foreign currency exchange rate changes. On May 19,
2000 the Company acquired Sylvan Ivy Prep, formerly Ivy West, an SAT preparation
company based in California. This acquisition resulted in additional revenue of
$1.7 million for the nine months ended September 30, 2000. The remaining $1.0
million growth in revenue relates to increased volume in Tuition Finance and
product sales. Operating revenue for Learning Centers represents 34% of total
revenues from continuing operations of the Company for the nine month period
ended September 30, 2000.
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Sylvan Education Solutions revenue increased by $4.3 million or 6% to $74.3
million for the nine months ended September 30, 2000 compared to the same period
in 1999. Sylvan At School revenue increased $0.6 million or 1% over the same
period in 1999. Canter teacher training revenue increased $3.7 million to $26.6
million for the nine months ended September 30, 2000, from $22.9 million in the
same period of 1999. The $3.7 million increase in 2000 resulted from a $7.2
million increase in Canter's program sales revenue, offset by a $3.5 million
decrease in license fee revenues. Operating revenue for Sylvan Education
Solutions represents 34% of total revenues from continuing operations of the
Company for the nine month period ended September 30, 2000.
English Language Instruction revenue decreased $8.2 million to $36.1
million in the nine months ended September 30, 2000 from $44.3 million in the
same period of 1999. The primary reason for the revenue decrease in the nine
month period ended September 30, 2000 is that territory sales fees decreased by
$7.6 million to $0.3 million in 2000 from $7.9 million in the same period in
1999. Area development agreement sales also declined in 2000 by $1.0 million
from $1.5 million in 1999 to $0.5 million in 2000. The decline in territory fees
and area development fees resulted from the Company's change in international
expansion strategy to one of retaining ownership of franchise rights in high
potential markets. The impact of these revenue decreases was partially offset by
higher revenues from franchise operations and Company-owned centers during the
nine months ended September 30, 2000. Operating revenues from English language
instruction represents 17% of total revenues from continuing operations of the
Company for the nine month period ended September 30, 2000.
Sylvan International Universities revenue increased $16.4 million to $32.6
million for the nine month period ended September 30, 2000 compared to $16.2
million for the same period in 1999. This increase is primarily due to $14.5
million from the full year 2000 revenue impact of UEM which was acquired in
April 1999 and the $2.9 million impact of the acquisition of control of Les
Roches in the third quarter of 2000. These acquisition related revenue increases
were partially offset by declines in UEM revenues primarily due to currency
exchange rate changes and the effect of a program that was phased out in the
fourth quarter of 1999.
Direct Costs. Total direct costs from continuing operations, excluding Sylvan
Ventures, increased 24% to $187.0 million for the nine month period ended
September 30, 2000 from $150.3 million in 1999. Direct costs as a percentage of
total revenues increased to 86% in 2000 from 75% in 1999. This increase in
direct costs as a percentage of revenue is primarily due to a change in the
Company's expansion strategy to reduce the sales of franchise territories in
order to retain the long-term benefits of owning franchise centers in high
growth potential markets. The territory sales in prior comparable periods were
at high margins, which reduce the percentage of direct costs to revenues in the
1999 period.
Sylvan Learning Centers expenses increased $8.7 million to $56.7 million,
or 76% of Learning Centers revenue for the nine month period ended September 30,
2000, compared to $48.0 million, or 68% of Learning Centers revenue for the same
period in 1999. Approximately $4.2 million of the increase in 2000 relates to
expenses incurred in Company-owned centers due to costs associated with higher
revenues at existing Company-owned centers. Expenses as a percentage of revenues
in Company-owned learning centers remained consistent with those of the same
period last year. The acquisition of Sylvan Ivy Prep resulted in $1.6 million of
increased costs during the nine months ended September 30, 2000. The remaining
cost increase for the period relates to international development costs,
franchise support costs, including Tuition Finance, and legal expenses. The
growth of expenses as a percentage of revenue is attributed to the International
area development sale during the nine month period ended September 30, 1999. The
costs associated with this sale were minimal resulting in lower expense as a
percentage of revenue. Excluding the impact of this sale, expenses as a
percentage of revenue remain consistent.
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Sylvan Education Solutions expenses increased by $6.6 million to $63.1
million, or 85% of Sylvan Education Solutions revenue for the nine months ended
September 30, 2000, compared to $56.6 million or 81% of Sylvan Education
Solutions revenue for the same period of 1999. The increase in expenses as a
percentage of revenue for the nine months ended September 30, 2000 is primarily
due to the $3.5 million of high-margin revenue related to the 1999 sale of a
license fee to provide Canter's masters degree program in Mexico. Excluding the
impact of this sale, expenses as a percentage of revenues have decreased from
the comparable period in 1999 due to the implementation of a new model, which
reduces labor costs.
English Language Instruction expenses increased $4.6 million to $33.8
million or 94% of revenues for the nine months ended September 30, 2000,
compared to $29.2 million or 66% of revenues for the same period in 1999. The
increase in expenses as a percentage of revenue for the nine months ended
September 30, 2000 is primarily a result of the business decision to reduce the
amount of high margin territory sales further compounded by cost increases of
administrative efforts for the internally supported international expansion
program.
Sylvan International Universities expenses were $33.4 million for the
nine month period ended September 30, 2000, as compared to $16.4 million for the
same period in 1999. This increase in expenses is primarily related to
acquisitions made to expand the International Universities segment. Sylvan
acquired a 54% interest in UEM in the second quarter of 1999; therefore, no
direct costs were reported for the first quarter of 1999. Direct costs reported
for the first quarter of 2000 were $11.1 million. An additional $2.2 million of
the direct costs in the nine month period ended September 30, 2000 were
generated from Les Roches. Another $3.1 million of the increase in direct costs
is due to headquarters personnel costs for Sylvan International Universities
during 2000, and approximately $0.4 million of unsuccessful acquisition due
diligence expenses during the period. Excluding the effects of acquisitions and
headquarters direct costs, direct costs of UEM over the nine month periods ended
September 30, 2000 decreased by $0.6 million primarily due to currency exchange
rate changes offset by program enhancement costs.
Sylvan Ventures costs and losses were $13.0 million, net of minority
interest allocations, for the nine months ended September 30, 2000. These costs
primarily relate to efforts to identify potential investments in the educational
services market, the development and incubation of technology driven investments
it currently holds, and losses from investments held by Ventures. Costs
associated with development of eSylvan, the Company's Internet based tutoring
solution, totaled $7.2 million for the nine months ended September 30, 2000.
These costs are primarily comprised of professional and consulting fees,
Internet development costs, as well as salaries and other related operational
expenses. Ventures losses related to equity losses in affiliates were primarily
impacted by the losses generated at Caliber. These losses are greater than the
comparable period in the prior year due to changes that are occurring within the
Caliber business model which will result in improved future operating
performance.
Other Expenses. General and administrative expenses decreased by $1.3 million
during the nine month period ended September 30, 2000, compared to the same
period in 1999. These costs decreased to 6% of total revenues for the nine month
period ended September 30, 2000, compared to 8% of revenues for the same period
in 1999. This decrease in general and administrative expense as a percentage of
total revenues is primarily due to the Company's efforts to control overhead
costs despite market expansion.
Income from non-operating items increased $13.7 million in the nine months
ended September 30, 2000 as compared to the same period in 1999. This
improvement is largely attributable to an increase of $15.8 million in net
interest and other income related to investing the net proceeds the Company
received from the March 2000 sale of Prometric. The increase in interest income
was partially offset by an increase in interest expense of $2.1 million and
foreign exchange losses of $3.1 million generated from the settlement of forward
exchange contract that the Company entered to protect against future
fluctuations in local currencies related to a pending International University
transaction.
26
<PAGE>
The Company's effective tax rate for continuing operations was 45% for the
nine month period ended September 30, 2000. The reported effective income tax
rate exceeds the U.S. federal statutory tax rates due to the impact of state
income taxes, the impact of minority interests, and the inability to utilize tax
benefits from certain investment losses of Sylvan Ventures. The Company
anticipates that its effective income tax rate for the year ending December 31,
2000 will be 45%.
The Company's effective tax rate for continuing operations in 1999 was
significantly impacted by utilized tax credits, foreign tax benefits and state
income taxes offset by permanent differences that arose due to the significant
amount of restructuring and non-recurring charges. Because of these factors,
comparison of the 2000 and 1999 effective tax rates is not meaningful. Please
refer to the Company's annual report on Form 10-K for the year ended December
31, 1999 for the 1999 tax rate reconciliation.
Pretax Income from Continuing Operations. Pretax income from continuing
operations decreased by $17.8 million, or 59%, to $12.2 million for the nine
months ended September 30, 2000 compared to the same period in 1999. The
decrease is primarily a result of the Company's announced change in strategy
regarding territory fees in order to allow the Company to retain increased
future benefit, and increased costs required to begin Sylvan Ventures offset by
the additional interest income earned on the investment of the Prometric sale
proceeds.
Income (Loss) from Discontinued Operations. Income (loss) from discontinued
operations includes the operating results of Aspect for the nine month period
ended September 30, 2000 and the operating results of Prometric for the period
January 1, 2000 through the sale date of March 3, 2000. The comparable period in
1999 includes the operating results of Aspect and Prometric as well as the
operating results of Pace which was sold in December 1999.
Gain or Loss on Discontinued Operations. On March 3, 2000, the Company sold
Prometric for approximately $775 million in cash and recorded an estimated gain
on the sale of approximately $288.4 million net of income taxes of approximately
$136.8 million, subject to a future adjustment for final working capital. The
Company has estimated the domestic and foreign income taxes resulting from the
sale based on the expected allocation of proceeds to subsidiaries that are a
party to the transaction and the tax laws of the jurisdictions in which these
subsidiaries operate. The disposal of Aspect in October 2000 resulted in an
estimated gain of $22.4 million, which will be recognized in the fourth quarter
of 2000.
During the period ended September 30, 1999, the Company approved a formal
plan to dispose of the Pace Group. The loss on disposal of Pace was estimated to
be approximately $25.0 million, and was recorded in the period ended September
30, 1999.
Liquidity and Capital Resources
The Company used $10.3 million of cash flow to fund operations for the
nine month period ended September 30, 2000, compared to cash provided by
operations of $58.2 million in 1999. The cash flow from operations consists
primarily of income from continuing operations for the period excluding the gain
on the sale of Prometric and non-cash charges (principally depreciation and
amortization). Cash flow from continuing operations before working capital
changes was $30.5 million for the nine month period ended September 30, 2000.
The reduction of net operating assets, primarily as a result of receivable
increases and payables and other current liability decreases, decreased cash
generated by operations by $40.8 million.
27
<PAGE>
Cash provided by investing activities was $409.8 million for the nine month
period ended September 30, 2000 compared to cash used in investing activities of
$112.1 million in 1999. The 2000 investment activity was primarily a result of
proceeds from the sale of Prometric ($710.3 million), partially offset by Sylvan
Venture's investment in Chancery ($17.1 million), LeapIt ($7.5 million), Club
Mom ($7.0 million) and Classwell ($5.2 million), other investments in and
advances to affiliates ($6.5 million), payment of contingent consideration and
other accrued liabilities for current and prior period acquisitions ($50.4
million), purchase of investment securities ($183.3 million) and the purchase of
property and equipment ($18.7 million). The 1999 investment activity was
primarily related to investments made to commence operations of the new
International Universities segment, to acquire existing successful Sylvan
Learning and English Language Instruction Franchise Centers and to invest in
furniture, computer equipment and software development for the Company's general
business expansion.
Cash used in financing activities of $221.7 million in 2000, relates
primarily to the net repayment of the Company's borrowings under it's existing
credit agreements ($163.0 million) and the payment to repurchase common shares
($211.0 million) offset by issuance of convertible debentures and borrowings
under bank lines of credit ($135.4 million) and cash received from Sylvan
Ventures investors ($15.7 million). The Company used a portion of the funds from
the sale of Prometric to fund these financing activities. Cash provided by
financing activities in 1999 was primarily a result of $115.4 million received
from net borrowings offset by stock repurchases of $36.2 million and repayment
of debt of $32.4 million, which was used along with operating cash flows to fund
investing activities.
The Company anticipates that future cash flows from operations, available
cash and existing credit facilities will be sufficient to meet its operating
requirements, including the expansion of its existing business, funding
International University acquisitions, payment of contingent consideration and
funding of Sylvan Ventures' investments and development costs. The Company
continues to examine opportunities in the educational services industry for
potential synergistic acquisitions and investments.
Euro Conversion
On January 1, 1999, certain countries of the European Union established
fixed conversion rates between their existing currencies and one common
currency, the euro. The euro is now traded on currency exchanges and may be used
in business transactions. Beginning in January 2002, new euro-denominated
currencies will be issued and the existing currencies will be withdrawn from
circulation. The Company is currently evaluating the systems and business issues
raised by the euro conversion. These issues include the need to adapt computer
and other business systems and equipment and the competitive impact of cross-
border transparency. The Company has not yet completed its estimate of the
potential impact likely to be caused by the euro conversion; however, at present
the Company has no reason to believe the euro conversion will have a material
impact on the Company's financial condition or results of operations.
Restructuring
During the fourth quarter of 1999, the Company completed an analysis of
its operating structure to improve operating efficiency and to enhance
shareholder value. This analysis of the Company's operating structure revealed
that the significant growth the Company had achieved had come at a cost of
increased business complexity, added costs, slowed decision making, and diffused
responsibility and accountability within the Company. As a result of this
analysis, management approved a formal restructuring plan, and the Company
recorded a restructuring charge to operations of approximately $5.1 million. The
restructuring plan was comprised of employee termination and facility exit costs
resulting primarily from the Company's plan to exit certain activities outside
the core business of providing educational services. Facility exit costs include
approximately $3.5 million of costs to close schools and school-based
facilities. $5.0 million of the restructuring costs were paid through September
30, 2000. The remaining closing costs at September 30, 2000 represent the
Company's best estimate of the remaining employee termination costs to be paid.
The Company expects to complete implementation of the plan by the end of fiscal
2000.
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<PAGE>
The restructuring plan adopted by management is consistent with the
Company's strategy of simplifying the Company by focusing on its core
educational services business and discontinuing involvement in the corporate
training and computerized testing businesses. The restructuring will also
streamline the Company's operations to allow management to focus on core
business competencies and expansion into educational opportunities on the
Internet. Direct cost savings from the restructuring plan will be primarily in
the form of reduced employee expense across all segments and in general and
administrative expenses. Other changes in the business model through entrance
into Internet educational services opportunities and the dynamics of the
education marketplace prevent quantification of the impact of future cost
savings, if any, from this restructuring plan.
Impact of Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The Company will be required to adopt SAB 101 in the fourth quarter
of 2000, and based upon a preliminary review of the SAB management believes that
the adoption of SAB 101 will not have a material effect on the Company's
reported operating results.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Statement, which the Company will be required to adopt in
January 2001, provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. Management
believes that the adoption of Statement No. 133 will not have a material effect
on the Company's financial statements.
Effects of Inflation
Inflation has not had a material effect on Sylvan's revenues and income
from continuing operations in the past three years. Inflation is not expected to
have a material future effect.
Quarterly Fluctuations
The Company's revenues and operating results have varied substantially from
quarter to quarter and may continue to vary, depending upon a number of factors
including the timing of contracts funded under Title I or similar programs and
the timing of Sylvan Ventures' development costs. The International Universities
segment experiences seasonality in operating results as a result of the school
term which extends from September through May with limited summer classes. The
Company's English language instruction businesses experience seasonal
fluctuations based on the timing of delivery of instruction to individuals.
Additionally, franchise license fees earned by the Company in its Sylvan
Learning Centers segment may vary significantly from quarter to quarter.
Revenues or profits in any period will not necessarily be indicative of results
in subsequent periods.
All statements contained herein that are not historical facts, including but not
limited to, statements regarding the anticipated impact of uncollectible
accounts receivable on future liquidity, the Company's contingent payment
obligations relating to acquisitions, future capital requirements, potential
acquisitions, Sylvan Ventures transactions and the Company's future development
plans are based on current expectations. These statements are forward looking in
nature and involve a number of risks and uncertainties. Actual results may
differ materially. Among the factors that could cause actual results to differ
materially are the following: amount of revenues earned by the Company's
tutorial and teacher training operations; the availability of sufficient capital
to finance the Company's business plan on terms satisfactory to the Company;
foreign currency risk; general business and economic conditions; and other risk
factors described in the Company's reports filed from time to time with the
Securities and Exchange Commission. The Company wishes to caution readers not to
place undue reliance on any such forward looking statements, which statements
are made pursuant to the Private Securities Litigation Reform Act of 1995 and,
as such, speak only as of the date made.
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<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
------------------------------------------------------
Market risk is the risk of loss to future earnings, to fair values or to
future cash flows that may result from the changes in the price of financial
instruments. The Company is exposed to financial market risks, including changes
in foreign currency exchange rates, interest rates and investment values. The
Company uses derivative financial instruments to protect against adverse
currency movements related to significant foreign acquisitions. Exposure to
market risks related to operating activities is managed through its regular
operating and financing activities.
Foreign Currency Risk
The Company derives approximately 36% of its revenues from continuing
operations from customers outside of the United States. This business is
transacted through a network of international subsidiaries, generally in the
local currency that is considered the functional currency of that foreign
subsidiary. Expenses are also incurred in the foreign currencies to match
revenues earned and minimize the Company's exchange rate exposure to operating
margins. A hypothetical weakening of 10% of the U.S. dollar relative to all
other currencies should not materially adversely affect expected 2000 earnings
or cash flows. The Company generally views its investment in the majority of its
foreign subsidiaries as long-term. The functional currencies of these foreign
subsidiaries are principally denominated in Euro-based currencies. The effects
of a change in foreign currency exchange rates on the Company's net investment
in foreign subsidiaries are reflected in other comprehensive income. A 10%
depreciation in functional currencies relative to the U.S. dollar would result
in a decrease in consolidated stockholders' equity at September 30, 2000 of
approximately $7.4 million.
The Company enters into forward foreign exchange contracts principally to
manage the currency fluctuations in significant foreign transactions, thereby
limiting the Company's risk that would otherwise result from changes in exchange
rates. Gains and losses on forward foreign exchange contracts for purposes of
business acquisitions are reflected in the income statement.
Interest Rate Risk
The fair value of the Company's cash and cash equivalents would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due to the short-term nature of the Company's portfolio. The
Company's long-term revolving credit facility bears interest at variable rates,
and the fair value of this instrument is not significantly affected by changes
in market interest rates. The Company's convertible debentures bear interest at
5% which presently approximates the market rate and therefore the fair value
approximates the recorded value of this liability. A 100 basis point decrease in
interest rates would impact net interest income and interest expense by reducing
pretax income for the nine months ended September 30, 2000 by $2.8 million and
increasing the pretax income for the same period in 1999 by $0.7 million.
Investment Risk
The Company's investment portfolio is primarily exposed to risks arising
from changes in equity prices. The Company is exposed to equity price risks on
equity securities included in the portfolio of investments entered into for the
promotion of business and strategic objectives. These investments are generally
small capitalization stocks in the Internet segment of the educational services
industry. The Company typically does not attempt to reduce or eliminate its
market exposure on these securities. A 10% adverse change in equity prices would
not materially impact the fair value of the Company's marketable securities and
comprehensive income. The Company's investment portfolio also contains debt
securities that mature within one year. A hypothetical 10% adverse change in the
fair value of the debt securities should not materially adversely effect
earnings or cash flows because of the Company's ability to hold the debt
securities until maturity.
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The Company's investment portfolio includes a number of holdings of
non-publicly traded companies in the educational services industry. The Company
values these investments at either cost less impairment (if any) or under the
equity method of accounting. Equity method investors are specifically excluded
from the scope of this disclosure. Non-public investments where the Company owns
less than a 20% stake are subject to fluctuations in market value, but their
current illiquidity reduces the exposure to pure market risk while resulting in
risk that the Company may not be able to liquidate these investments in a timely
manner.
All the potential impacts noted above are based on sensitivity analysis
performed on the Company's financial position at September 30, 2000. Actual
results may differ materially.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Reference is made to the Exhibit Index.
(b) Reports on Form 8-K
The Company filed three reports on Form 8-K during the nine month period
ended September 30, 2000. The 8-K dated January 31, 2000 related to the sale
of Prometric. The 8-K dated March 21, 2000 related to the filing of
unaudited pro forma financial statements for the year ended December 31,
1999 relating to the sale of Prometric. The 8-K dated September 7, 2000
related to the formation of the Classwell Learning Group joint venture and
the sale of Aspect. In addition, the Company filed Form 8-K dated
November 11, 2000 related to the sale of Aspect.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
Sylvan Learning Systems, Inc.
Date: November 14, 2000 _______________________________________
Neal S. Cohen, Executive Vice President
and Chief Financial Officer
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Exhibit Index
Index
Number Description
-------------------------------------------------------------------------------
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
33
