<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarter ended March 31, 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 of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410)843-8000
-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ].
The registrant had 41,846,461 shares of Common Stock outstanding as of May 5,
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 - March 31, 2000 and
December 31, 1999............................................. 3
Consolidated Statements of Operations - Three months ended
March 31, 2000 and March 31, 1999............................. 5
Consolidated Statements of Cash Flows - Three months ended
March 31, 2000 and March 31, 1999............................. 6
Notes to Consolidated Financial Statements - March 31, 2000..... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...........................16
Item 3. Quantitative and Qualitative Disclosure of Market Risk..........23
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................24
SIGNATURES...................................................................24
</TABLE>
2
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 554,928 $ 20,410
Available-for-sale securities 8,434 10,890
Receivables:
Accounts receivable 48,011 53,118
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,329 3,061
Notes receivable from tuition financing 5,353 4,647
Other notes receivable 14,633 16,783
Other receivables 1,320 1,265
---------- --------
70,646 78,874
Allowance for doubtful accounts (4,005) (3,407)
---------- --------
66,641 75,467
Inventory 7,253 6,261
Deferred income taxes 6,963 6,963
Prepaid expenses and other current assets 13,844 11,459
Net current assets of discontinued operations - 280,287
---------- --------
Total current assets 658,063 411,737
Notes receivable from tuition financing, less current portion 6,154 5,330
Other notes receivable, less current portion 2,120 1,879
Costs and estimated earnings in excess of billings on
uncompleted contracts, less current portion 169 289
Property and equipment:
Land and buildings 69,276 73,167
Furniture, computer equipment and software 75,793 74,774
Leasehold improvements 11,812 11,736
---------- --------
156,881 159,677
Accumulated depreciation (33,811) (31,957)
---------- --------
123,070 127,720
Intangible assets:
Goodwill 201,541 201,716
Other 2,595 2,574
---------- --------
204,136 204,290
Accumulated amortization (14,165) (12,118)
---------- --------
189,971 192,172
Deferred costs, net of accumulated amortization of $1,121
and $984 at March 31, 2000 and December 31, 1999,
respectively 4,984 3,641
Investments in and advances to affiliates 30,615 13,317
Other investments 22,212 25,933
Other assets 5,914 6,108
---------- --------
Total assets $1,043,272 $788,126
========== ========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 41,823 $ 51,917
Income taxes payable 144,493 9,465
Current potion of long-term debt 14,438 14,436
Current portion of due to shareholders of acquired
companies 12,050 22,474
Deferred revenue 34,760 36,855
---------- --------
Total current liabilities 247,564 135,147
Long-term debt, less current portion 25,448 151,204
Deferred income taxes 12,237 12,547
Other long-term liabilities 3,185 3,050
---------- --------
Total liabilities 288,434 301,948
Minority interest 12,232 12,085
Stockholders' equity:
Preferred stock, par value $0.01 per share -- authorized
10,000 shares, no shares issued and outstanding as of
March 31, 2000 and December 31, 1999 - -
Common stock, par value $0.01 per share -- authorized
90,000 shares, issued and outstanding shares of
50,336 as of March 31, 2000 and 50,904 as of
December 31, 1999 503 509
Additional paid-in capital 405,755 414,567
Retained earnings 343,006 60,762
Accumulated other comprehensive loss (6,658) (1,745)
---------- --------
Total stockholders' equity 742,606 474,093
---------- --------
Total liabilities and stockholders' equity $1,043,272 $788,126
========== ========
</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 March 31,
2000 1999
(Restated)
----------------------------
(Unaudited)
<S> <C> <C>
Revenues $85,283 $69,344
Cost and expenses
Direct costs 75,917 60,550
General and administrative expenses 4,801 4,724
Sylvan Ventures development costs 1,382 -
-------- -------
Total expenses 82,100 65,274
-------- -------
Operating income 3,183 4,070
Other income (expense)
Investment and other income (expense) 2,531 (59)
Interest expense (2,105) (636)
Equity in net loss of affiliates (876) (763)
Minority interest in income of consolidated subsidiary (751) -
-------- -------
Income from continuing operations before income taxes
and cumulative effect of change in accounting principle 1,982 2,612
Income tax benefit (expense) (793) 220
-------- -------
Income from continuing operations before cumulative
effect of change in accounting principle 1,189 2,832
Income (loss) from discontinued operations, net of income
tax expense of $163 in 2000 and $3,724 in 1999 (1,647) 3,975
Gain on disposal of discontinued operations, net of income
tax expense of $136,762 288,454 -
-------- -------
Income before cumulative effect of change in accounting
principle 287,996 6,807
Cumulative effect of change in accounting principle, net of
income tax expense of $682 in 1999 - (1,323)
-------- -------
Net income $287,996 $ 5,484
======== =======
Earnings per common share, basic:
Income from continuing operations before cumulative
effect of change in accounting principle $0.02 $0.06
Earnings per common share, basic $5.67 $0.11
Earnings per common share, diluted:
Income from continuing operations before cumulative
effect of change in accounting principle $0.02 $0.05
Earnings per common share, diluted $5.58 $0.10
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
-------------------------------
(Unaudited)
<S> <C> <C>
Operating activities
Net income $ 287,996 $ 5,484
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 6,296 5,420
Amortization 3,909 4,848
Gain on disposal of discontinued operations (288,454) -
Cumulative effect of change of accounting change - 1,323
Deferred income taxes 365 -
Equity in net loss of affiliates 1,363 84
Minority interest in income of consolidated subsidiary 751 -
Other non-cash items 166 60
Changes in operating assets and liabilities:
Receivables 8,143 10,901
Inventory, prepaid and other current assets 1,743 (2,761)
Payables and accrued expenses (5,210) (3,983)
Deferred revenue and other current liabilities (987) 5,727
--------- --------
Net cash provided by operating activities 16,081 27,103
--------- --------
Investing activities
Purchase of available-for-sale securities - (512)
Proceeds from sale of available-for-sale securities 965 -
Investment in and advances to affiliates (19,699) (3,216)
Increase in other investments (10) (1,797)
Purchase of property and equipment (9,402) (11,036)
Proceeds from sale of Prometric, net of closing costs 712,151 -
Cash paid for other acquired businesses, net of cash received (12,806) (14,972)
Payment of contingent consideration for prior period
acquisitions (10,323) -
Expenditures for deferred contract costs (1,682) (276)
Decrease (increase) in other assets 59 (2,829)
--------- --------
Net cash provided by (used in) investing activities 659,253 (34,638)
--------- --------
Financing activities
Proceeds from exercise of options and warrants 50 1,573
Proceeds from issuance of common stock 722 674
Repurchases of common stock (9,860) -
Proceeds from issuance of long-term debt 19,315 12,373
Payments on long-term debt and capital lease obligations (146,894) (9,558)
--------- --------
Net cash provided by (used in) financing activities (136,667) 5,062
--------- --------
Effect of subsidiary year-end change on cash and cash
equivalents (2,565) -
Effects of exchange rate changes on cash (1,584) (1,265)
--------- --------
Net increase (decrease) in cash and cash equivalents 534,518 (3,738)
Cash and cash equivalents at beginning of period 20,410 33,170
--------- --------
Cash and cash equivalents at end of period $ 554,928 $ 29,432
========= ========
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
Notes to Consolidated Financial Statements
Unaudited
(Amounts in thousands, except per share amounts)
March 31, 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 period ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000. 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 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 reduction from the
initial estimate of the gain on sale is a result of additional transaction costs
and employee participation payments. 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.
Summarized operating information of the Company's discontinued operations,
including both Prometric for 1999 and the period owned in 2000 and PACE for
1999, are as follows for the three months ended March 31:
2000 1999
------- -------
Revenues $37,912 $54,434
------- -------
Income (loss) before income taxes (1,484) 7,699
Income tax expense 163 3,724
------- -------
Net income (loss) $(1,647) $ 3,975
======= =======
Included in income from discontinued operations for the three month periods
ended March 31, 2000 and 1999 is an allocation of corporate interest expense of
$678 and $265, respectively, based upon a percentage of the net equity
investment in discontinued operations to the net equity of the Company including
the discontinued operations.
7
<PAGE>
Note 3 - Commencement of New Segment
The Company's newest segment, Sylvan Ventures, began operations in the three
month period ended March 31, 2000. Sylvan Ventures will invest in and incubate
companies to bring emerging Internet technology solutions to the education and
training marketplace. During the three month period ended March 31, 2000,
Sylvan monitored its prior Internet investments in Caliber Learning Network,
Inc., OnLine Learning.net, ZapMe! Corp., and Sylvan's on-line tutoring venture -
eSylvan as part of the Sylvan Ventures segment.
During the three month period ended March 31, 2000, the Sylvan Ventures segment
incurred development costs related to its efforts to develop the investments and
to identify potential additional investments. These costs were comprised
primarily of Internet development, technology infrastructure, start-up costs,
professional fees, consulting fees, salaries and other related operational
costs.
Note 4 - Change in Year-end of Subsidiary
Effective January 1, 2000 the Company changed the year-end of its wholly owned
subsidiary, Aspect Language Schools, Inc. (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 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 from continuing operations 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 goodwill impairment write-offs related
to the closing of two schools, which was announced in the three months ended
December 31, 1999.
Note 5 - Investments in and Advances to Affiliates
The Company's investments in and Advances to Affiliates includes a 10% voting
interest in Caliber Learning Network, Inc. ("Caliber"), including related loans.
Caliber is a publicly-traded company formed for the purpose of providing adults
throughout the United States with university-quality continuing education using
multimedia technology.
8
<PAGE>
Note 5 - Investments in and Advances to Affiliates (continued)
The Company's investment in and advances to Caliber consist of the following:
March 31, December 31,
2000 1999
--------- ------------
Invested capital $17,901 $17,348
Amounts due from management fee 628 167
------- -------
18,529 17,515
Allocable share of losses from inception (7,480) (6,740)
------- -------
$11,049 $10,775
======= =======
Summarized financial data of Caliber is as follows:
March 31, December 31,
2000 1999
--------- ------------
Balance sheet data:
Current assets $24,263 $31,765
Non-current assets 20,693 21,519
Current liabilities 12,686 12,570
Non-current liabilities 9,104 10,250
Redeemable preferred stock 15,440 15,153
Three months ended March 31,
----------------------------
2000 1999
-------- ---------
Statement of operations data:
Revenues $ 5,070 $ 4,558
Net operating loss (7,282) (6,157)
Net loss (7,298) (6,142)
Investments in and advances to affiliates include other investments totaling
$19,566 and $2,542 at March 31, 2000 and December 31, 1999, respectively. The
Company's allocable share of losses related to these investments for the three
month period ended March 31, 2000 and 1999 was $(876) and $(763), respectively.
In March 2000, the Company through its newest segment Sylvan Ventures, invested
$17,097 in Chancery Software Ltd., a publisher of information management systems
and learning communities for schools and homes.
9
<PAGE>
Note 6 - Long-Term Debt
Long-term debt consists of the following at March 31, 2000 and December 31,
1999:
March 31, December 31,
2000 1999
-------------------------
Long-term revolving credit facility with banks $ - $122,991
Mortgages and notes payable bearing interest
at rates ranging from 4.25% to 8.00% 8,125 5,479
Mortgages, notes payable, and lines of credit
related to UEM 31,761 37,170
-------- --------
39,886 165,640
Less: current portion of long-term debt (14,438) (14,436)
-------- --------
Total long-term debt $ 25,448 $151,204
======== ========
At March 31, 2000, the Company had a revolving credit facility (the "Facility")
with a group of five banks, which allowed 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.
The outstanding borrowings acquired as part of the UEM acquisition are secured
by the underlying property and fixed assets of the university. These borrowings
bear interest at a blended variable rate of approximately 4.62% as of March 31,
2000, and 4.75% as of December 31, 1999.
10
<PAGE>
Note 7 - Earnings Per Share
The following table summarizes the computations of basic and diluted per common
share:
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
--------- ------
<S> <C> <C>
Numerator used in basic and diluted
earnings per common share:
Income from continuing operations, before cumulative effect of
change in accounting principle $ 1,189 $ 2,832
Income (loss) from discontinued operations, net of tax (1,647) 3,975
Gain on disposal of discontinued operations, net of tax 288,454 -
Cumulative effect of change in accounting principle, net of tax - (1,323)
-------- -------
Net income $287,996 $ 5,484
======== =======
Denominator:
Weighted average common shares outstanding 50,802 51,666
Net effect of dilutive stock options based on treasury stock method
using average market price 768 2,279
-------- -------
Weighted average common shares outstanding and common stock
equivalents 51,570 53,945
======== =======
Earnings per common share, basic:
Income from continuing operations, before cumulative effect of
change in accounting principle $0.02 $0.06
Income (loss) from discontinued operations, net of tax (0.03) 0.08
Gain on disposal of discontinued operations, net of tax 5.68 -
Cumulative effect of change in accounting principle, net of tax - (0.03)
-------- -------
Earnings per common share, basic $5.67 $0.11
======== =======
Earnings per common share, diluted:
Income from continuing operations, before cumulative effect of
change in accounting principle $0.02 $0.05
Income (loss) from discontinued operations, net of tax (0.03) 0.07
Gain on disposal of discontinued operations, net of tax 5.59 -
Cumulative effect of change in accounting principle, net of tax - (0.02)
-------- -------
Earnings per common share, diluted $5.58 $0.10
======== =======
</TABLE>
Note 8 - Income Taxes
The tax provisions for the three month periods ended March 31, 2000 and 1999 are
based on the estimated effective tax rates applicable for the full years, after
giving effect to significant unusual items related specifically to the interim
periods. The Company's income tax provisions for all periods consist of
federal, state, and foreign income taxes. The Company's effective tax rate from
continuing operations was 40% for the three months ended March 31, 2000. The
Company estimates that its effective income tax rate from continuing operations
for the year ended December 31, 2000 will be 40%.
11
<PAGE>
Note 8 - Income Taxes (continued)
The Company's effective tax position 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 9 - Stockholders' Equity
The components of stockholders' equity are as follows:
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Stockholders'
Stock Capital Earnings Income (Loss) Equity
-------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1999 $509 $414,567 $ 60,762 $(1,745) $474,093
Options exercised for purchase
of 14 shares of common stock,
including income tax benefit of
$69 119 119
Stock options granted to non-
employees 30 30
Repurchase of 639 shares of
common stock (6) (9,854) (9,860)
Issuance of 57 shares of
common stock in connection
with the Employee Stock
Purchase Plan 722 722
Effect of subsidiary's year-end
change (5,752) (5,752)
Effect of stock option vesting
acceleration for employees of
discontinued operations 171 171
Comprehensive income (loss):
Net income for the three
months ended March 31, 2000 287,996 287,996
Other comprehensive
income:
Unrealized loss on available
for sale securities (1,424) (1,424)
Foreign currency
translation
Adjustment (3,489) (3,489)
--------
Total comprehensive income 283,083
---- -------- -------- -------- --------
Balance at March 31, 2000 $503 $405,755 $343,006 $ (6,658) $742,606
==== ======== ======== ======== ========
</TABLE>
12
<PAGE>
Note 10 - 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. A trial date of June 26, 2000 has been set with trial expected
to last three weeks. 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 not yet been scheduled, but the
Company anticipates it will occur during 2000. 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 11 - Business Segment Information
Three months ended March 31,
2000 1999
--------- ---------
Operating revenues:
Sylvan Learning Centers $22,659 $19,824
Sylvan Education Solutions 25,945 27,168
Sylvan English Language Instruction 22,178 22,352
Sylvan International Universities 14,501 -
Sylvan Ventures - -
------- -------
$85,283 $69,344
======= =======
Segment profit (loss):
Sylvan Learning Centers $ 5,002 $ 4,524
Sylvan Education Solutions 1,867 3,650
Sylvan English Language Instruction (188) 620
Sylvan International Universities 2,685 -
Sylvan Ventures (1,382) -
------- -------
$ 7,984 $ 8,794
======= =======
13
<PAGE>
Note 11 - Business Segment Information (continued)
March 31, December 31,
Segment assets: 2000 1999
--------- ------------
Sylvan Learning Centers $ 68,873 $ 71,097
Sylvan Education Solutions 96,798 105,273
Sylvan English Language Instruction 143,855 144,909
Sylvan International Universities 93,968 97,344
Sylvan Ventures 38,199 -
-------- --------
$441,693 $418,623
======== ========
As discussed in Note 3, during the first quarter of 2000, the Company commenced
operations of its newest segment, Sylvan Ventures. 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 to continuing income before income
taxes reported in the consolidated statements of income:
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
-------- -------
<S> <C> <C>
Total profit for reportable segments $ 7,984 $ 8,794
Corporate general and administrative expense (4,801) (4,724)
Other income (expense), net (1,201) (1,458)
------- -------
Income from continuing operations before income taxes and
cumulative effect of change in accounting principle $ 1,982 $ 2,612
======= =======
</TABLE>
Note 12 - Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
Three months ended March 31,
2000 1999
-------- -------
<S> <C> <C>
Net income $287,996 $ 5,484
Foreign currency translation adjustment (3,489) (588)
Unrealized loss on available-for-sale securities (1,424) -
-------- -------
Comprehensive income $283,083 $ 4,896
======== =======
</TABLE>
Note 13 - 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 the second
quarter of fiscal 2000. The accrued restructuring costs and the amounts charged
against the provision were as follows:
14
<PAGE>
Note 13 - Restructuring (continued)
<TABLE>
<CAPTION>
Payments in the
Balance at Three Months Ended Balance at
December 31, 1999 March 31, 2000 March 31, 2000
----------------- ------------------ --------------
<S> <C> <C> <C>
Employee termination costs $1,118 $743 $ 375
School closing costs 1,042 186 856
-------- ------ --------
Total $2,160 $929 $1,231
======== ====== ========
</TABLE>
The unpaid school closing costs at March 31, 2000 represent the Company's best
estimate of the remaining facility exit costs to be paid. The amount, although
not finalized, is not expected to differ materially from the accrued balance at
March 31, 2000.
Note 14 - Subsequent Events
On March 21, 2000, later amended on April 18, 2000, the Company announced the
commencement of a tender offer to purchase up to 8.5 million shares, or
approximately 17% of the outstanding common stock at a single modified "Dutch
Auction" per share price within a price range of $15.25 to $17.50 per share.
Based upon the results of the auction, the Company has purchased approximately
8.5 million shares at $15.25 per share for at total of approximately $131
million, including transaction costs.
15
<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 Aspect; and Sylvan International Universities, which earns
tuition and fees paid by the students of UEM, which was acquired in April 1999.
Additionally, during the first quarter of 2000, the Company initiated a new
segment, Sylvan Ventures. Sylvan Ventures is an Internet incubator focused on
bringing emerging Internet technology solutions to the education and training
marketplace. For the three months ended March 31, 2000, the Sylvan Ventures
segment incurred development costs but did not generate revenues.
The following table sets forth the percentage relationships of operating
revenues and direct costs for each division, as well as certain income statement
line items expressed as a percentage of total revenues for the periods
indicated:
<TABLE>
<CAPTION>
Three months ended March, 31
2000 1999
------ ------
<S> <C> <C>
Revenues:
Sylvan Learning Centers 27% 29%
Sylvan Education Solutions 30% 39%
Sylvan English Language Instruction 26% 32%
Sylvan International Universities 17% 0%
------ ------
Total revenues 100% 100%
Direct costs:
Sylvan Learning Centers 21% 22%
Sylvan Education Solutions 28% 34%
Sylvan English Language Instruction 26% 31%
Sylvan International Universities 14% 0%
------ ------
Total direct costs 89% 87%
General and administrative expenses 6% 7%
Sylvan Ventures costs 2% 0%
------ ------
Operating income 3% 6%
Non-operating expense 1% 2%
------ ------
Income from continuing operations before taxes and cumulative effect
of change in accounting principle 2% 4%
Tax benefit (expense) (1%) 0%
------ ------
Income from continuing operations 1% 4%
Discontinued operations:
Income (loss) from discontinued operations, net of tax (2%) 6%
Gain on disposal of discontinued operations, net of tax 339% 0%
------ ------
Income before cumulative effect of change in accounting principle 338% 10%
Cumulative effect of change in accounting principle, net of tax 0% (2%)
------ ------
Net income 338% 8%
====== ======
</TABLE>
16
<PAGE>
Results of Operations
The Company has continued to grow during 2000 in response to the increasing
opportunities in the dynamic educational service industry. 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 applications of Internet technology in the education and
instruction marketplaces. In order to fund expansion into Internet applications
in educational and training services and to ensure that management remains
focused on core business strengths, the Company opted to sell the PACE corporate
training business and the Prometric computer-based testing business in December
1999 and March 2000, respectively. The operating results of the discontinued
businesses have been reported in the discontinued operations section of the
consolidated statement of operations. The following comparison of operating
results focuses on the continuing operations of the Company.
Comparison of results for the three months ended March 31, 2000 to results from
the three months ended March 31, 1999.
Revenues. Total revenues from continuing operations increased by $16.0 million,
or 23%, to $85.3 million in 2000 from $69.3 million in 1999. Included in the
total revenues from continuing operations in 2000 were $14.5 million of revenues
from the Universidad Europea de Madrid (UEM), which was acquired in the second
quarter of 1999. Total revenues from continuing operations increased 2%
excluding the increase caused by the UEM acquisition.
Sylvan Learning Centers revenue increased by $2.8 million, or 14%, to $22.7
million for the quarter ended March 31, 2000 compared to the same period in
1999. Franchise royalties increased by $0.8 million, or 19%, in 2000 as a
result of the net increase of 66 new Centers opened after March 31, 1999, and a
13% increase in same center revenue. Revenues from Company-owned learning
centers increased $1.8 million, or 19%, to $11.1 million during 2000. Same
center revenues increased 6%, or $0.6 million, with the remaining revenue
increase of $1.2 million generated from 14 new Company-owned centers acquired
from franchise owners during the past year. International revenues, primarily
Schulerhilfe remained consistent at $4.0 million in 2000 and 1999. Operating
revenue for Learning Centers represents 27% of total revenues from continuing
operations of the Company for the three month period ended March 31, 2000.
Sylvan Education Solutions revenue decreased by $1.2 million, or 5% to
$26.0 million for the quarter ended March 31, 2000 compared to the same period
in 1999. Sylvan At School revenue increased $0.2 million or 1% over the same
period in 1999. The limited revenue growth for Sylvan At School is a result of
a change in the contract model. The new model has lower revenue per school with
the school having the responsibility for supplying and paying teachers. This
new model results in greater operating margins for the Company. Canter teacher-
training revenue decreased $1.5 million to $5.3 million in the first quarter
2000 from $6.8 million in the same period of 1999. The revenue decrease was a
result of a change in the timing of recording revenues from Canter's distance
learning masters program due to better information regarding collectibility and
program cancellation. Operating revenue for Sylvan Education Solutions
represents 30% of total revenues from continuing operations of the Company for
the three month period ended March 31, 2000.
Sylvan English Language Instruction revenue decreased $0.2 million or 1%, to
$22.2 million for the quarter ended March 31, 2000 compared to the same period
in 1999. Wall Street Institute revenue increased $2.2 million to $12.4 million
in the first quarter of 2000 from $10.2 million in the first quarter of 1999.
New center acquisitions during 1999 resulted in an increase of $1.5 million.
Excluding the impact of the new center acquisitions, revenue for Wall Street
Institute increased 7% over the first quarter of 1999. The increase is
primarily a result of increased educational product sales and increased revenues
from the sale of new franchises. Revenue for Aspect decreased $2.4 million to
$9.7 million in the first quarter of 2000 from $12.1 million in the same period
in 1999. The disposal of a low margin line of business in 1999 accounted for
$1.0 million of the decrease in the quarter. The remaining decrease reflects
lower sales volume for the
17
<PAGE>
Language Schools and International Sales Offices in the first quarter of 2000 as
compared to the same period in 1999. Operating revenue for Sylvan English
Language Instruction segment represents 26% of total revenues from continuing
operations of the Company for the three month period ended March 21, 2000.
Sylvan International Universities revenues were $14.5 million for the first
quarter of 2000. These revenues were generated from the Universidad Europea de
Madrid (UEM). Sylvan acquired a 54% interest in UEM in the second quarter of
1999; therefore, no revenue was reported for the first quarter of 1999.
Operating revenue for the Sylvan International Universities segment represents
17% of total revenues from continuing operations of the Company for the three
month period ended March 31, 2000.
Direct Costs. Total direct costs from continuing operations excluding Sylvan
Ventures increased 25% to $75.9 million in 2000 from $60.6 million in 1999.
Included in direct costs from continuing operations in the first quarter of 2000
were $11.8 million of costs of UEM, which was acquired in the second quarter of
1999. Total direct costs from continuing operations increased $3.5 million, or
5% excluding the costs related to UEM. Direct costs as a percentage of total
revenues increased to 89% in 2000 from 87% in 1999. This increase in direct
costs as a percentage of revenues is primarily due to the effects of the change
in timing of revenue recognition for Canter's distance learning masters program
and a reduction in revenues for Aspect without a corresponding decrease in
operating expenses.
Sylvan Learning Centers expenses increased $2.4 million to $17.7 million,
or 78% of Learning Centers revenue for 2000, compared to $15.3 million, or 77%
of Learning Centers revenue for the same period in 1999. Approximately $1.6
million of the increase in 2000 relates to expenses incurred in Company-owned
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.
Sylvan Education Solutions expenses increased by $0.6 million to $24.1
million, or 93% of Sylvan Education Solutions revenue for the quarter ended
March 31, 2000, compared to $23.5 million or 87% of Sylvan Education Solutions
revenue for the first quarter of 1999. The increase in expenses as a percentage
of revenue for the three months ended March 31, 2000 is primarily a result of
the change in timing of revenue from Canter's distance learning masters program,
due to better information regarding collectibility and program cancellation.
This increase was partially offset by the effect of the new Sylvan At School
contract model, which has lower revenue per school with the school having the
responsibility for supplying and paying teachers. This model results in greater
operating margins for the Company.
Sylvan English Language Instruction expenses increased by $0.6 million to
$22.4 million, or 101% of Sylvan English Language Instruction revenue for the
three month period ended March 31, 2000, compared to $21.7 million or 97% of
Sylvan English Language revenue for the same period in 1999. Expenses for Wall
Street Institute increased $2.4 million to $10.9 million or 87% of Wall Street
Institute revenues for the quarter ended March 31, 2000 compared to $8.5 million
or 83% of Wall Street Institute revenues for the same period in 1999. The
increase in expenses as a percentage of revenue for the three months ended March
31, 2000 is primarily a result of increasing overhead costs related to the
expanding revenue base. Expenses for Aspect decreased $1.7 million to $11.5
million or 118% of Aspect revenues for the quarter ended March 31, 2000,
compared to $13.2 million or 109% of Aspect revenues for the same period in
1999. Expenses decreased $1.0 million as a result of the disposal of a low
margin line of business in 1999. The increase in expenses as a percentage of
revenue for the three month period ended March 31, 2000 is primarily a result of
a reduction of revenues without a corresponding decrease in overhead costs.
Sylvan International Universities expenses were $11.8 million, or 81% of
International Universities revenue for the three month period ended March 31,
2000. These direct expenses consist primarily of personnel, marketing and
advertising, and facility-related costs of UEM. Sylvan acquired a 54% interest
in UEM in the second quarter 1999 therefore; no expenses were reported in the
first quarter 1999.
18
<PAGE>
Other Expenses. General and administrative expenses increased by $0.1 million
during the three month period ended March 31, 2000, compared to the same period
in 1999. These costs decreased to 6% of total revenues for the three month
period ended March 31, 2000, compared to 7% 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 expanding revenues.
Sylvan Ventures development costs were $1.4 million for the three months
ended March 31, 2000. The costs for the Company's newest segment primarily
relate to efforts to identify potential investments in the educational services
market and to develop and incubate the investments it currently holds. These
costs are primarily comprised of professional and consulting fees, Internet
development costs, as well as salaries and other related operational expenses.
Other expense decreased $0.2 million in the first quarter 2000 as compared
to the same period in 1999. This decrease is largely attributable to an increase
of $2.7 million in interest 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 a $1.5 million increase in interest
expense as a result of borrowings made subsequent to the first quarter of 1999.
Additionally, during the first quarter 2000, the Company recorded a $0.8 million
minority interest in income of consolidated subsidiary related to UEM.
The Company's effective tax rate for continuing operations was 40% for the
three month period ended March 31, 2000. The reported effective income tax rate
exceeds the U.S. federal statutory tax rates due to the impact of state income
taxes and the impact of minority interest, partially offset by the effect of
income earned in foreign jurisdictions with tax rates lower than the domestic
statutory rate. The Company anticipates that its effective income tax rate for
the year ending December 31, 2000 will be 40%.
The Company's effective tax position 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. 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.
Income from Continuing Operations. Income from continuing operations decreased
by $1.6 million, or 58%, to $1.2 million for the three months ended March 31,
2000 compared to the same period in 1999. The decrease is a result of the
factors discussed in the segment operating results.
Income (loss) from Discontinued Operations. Income (loss) from discontinued
operations includes the results of Prometric, the Company's computer-based
testing business, which was sold on March 3, 2000, and PACE, the Company's
corporate training business that was sold December 31, 1999.
Gain on Discontinued Operations. On March 3, 2000, the Company sold Prometric
for approximately $775 million in cash. For the three months ended March 31,
2000, the Company 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 reduction from the initial estimate
of the gain on sale is a result of additional transaction costs and employee
participation payments. 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.
Liquidity and Capital Resources
The Company generated $16.1 million of cash flow from operations for the three
month period ended March 31, 2000, a decrease of $11.0 million as compared to
the three months ended March 31, 1999. The cash flow from operations consists
primarily of income from continuing operations for the period adjusted to
19
<PAGE>
exclude non-cash charges (principally depreciation and amortization) resulting
in cash from continuing operations of $12.4 million for the three month period
ended March 31, 2000. The reduction of net operating assets, primarily as a
result of receivable collections of $3.7 million during the period further
increased the cash generated by operations. The combination of operating
activities and operating asset decreases resulted in the $16.1 million cash flow
from operations for the three month period ended March 31, 2000.
Cash provided by investing activities, was $659.3 million in the three month
period ended March 31, 2000 compared to cash used in investing activities of
$34.6 million in 1999. The 2000 investment activity was primarily a result of
the sale of Prometric ($712.2 million) partially offset by an investment in
Chancery Software, Ltd. ($17.1 million) and other advances to affiliates ($2.6
million), the payment of contingent consideration and other accrued liabilities
for current and prior period acquisitions ($23.1 million) and the purchase of
property and equipment ($10.0 million). The 1999 investment activity was
primarily related to investments made to commence operations of the new
International Universities division, to acquire existing successful Sylvan
Learning and WSI Centers and to invest in furniture, computer equipment and
software development for the Company's general business expansion.
At March 31, 2000, the Company has accrued obligations payable in cash of
$12.5 million related to contingent consideration for the Drake and Canter
acquisitions. The amounts are expected to be paid later in 2000.
Cash used in financing activities of $136.7 million in 2000, relates
primarily to the repayment of the Company's borrowings under it's revolving
credit facility ($127.6 million). The Company used a portion of the funds from
the sale of Prometric to fund the repayment. Additionally, a portion of the
proceeds were used to repurchase shares of common stock ($9.9 million). Cash
provided by financing activities in 1999 was primarily a result of $2.8 million
received from net borrowings which was used along with operating cash flows to
fund investing activities.
The Company anticipates that cash flow from operations, available cash and
existing credit facilities, will be sufficient to meet it's operating
requirements, including the expansion of it's existing business over the near
term. The proceeds from the sale of Prometric are expected to be used to fund
International University acquisitions (approximately $100 million), to fund
Sylvan Ventures development costs (approximately $220 million), and to
repurchase shares of common stock (approximately $131 million). The Company
continues to examine opportunities in the educational services industry for
potential synergistic acquisitions.
On February 24, Management announced a $100 million investment in the Company
led by Apollo Management L.P., a private investment firm. Joining Apollo in the
investment will be an affiliate of Investor AB, DB (Deutsche Bank) Capital and
SKT, LLC. The investment will be in the form of ten-year subordinated
debentures. The debentures will have a 5% cash coupon, paid semi-annually, and
will be convertible into common stock at $15.735 per share. The transaction is
expected to close in the second quarter of 2000.
On March 21, 2000, later amended on April 18, 2000, the Company announced
the commencement of a tender offer to purchase up to 8.5 million shares, or
approximately 17% of the outstanding common stock at a single modified "Dutch
Auction" per share price within a price range of $15.25 to $17.50 per share.
Based upon the results of the auction, the Company has purchased approximately
8.5 million shares at $15.25 per share for at total of approximately $131
million including transaction costs.
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
20
<PAGE>
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 reveled 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. $3.9 million of the restructuring costs were paid through
March 31, 2000. The unpaid school closing costs at March 31, 2000 ($0.9
million) represent the Company's best estimate of the remaining facility exit
costs to be paid. The amount, although not finalized, is not expected to differ
materially from the balance at March 31, 2000. The Company expects to complete
implementation of the plan by the end of the second quarter of fiscal 2000.
The restructuring plan adopted by management is consistent with the Company's
strategy of simplifying the Company by focusing on core educational services
business and discontinuing involvement in the corporate training and
computerized testing businesses. The restructuring will also streamline the
Company 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 divisions and in general and administrative
expenses, began in the first quarter of 2000. 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.
Contingent Matters
In connection with the Company's acquisition of Canter and based on
Canter's earnings in 1999, additional consideration of $9.0 million is expected
to be paid to the seller in cash in 2000. The liability and additional goodwill
was recorded at December 31, 1999. Additional amounts of contingent
consideration are also payable to the seller if specified level of earnings are
achieved in 2000, payable in equal amounts of stock and cash. The Company will
record the contingent consideration when and if the contingencies are resolved
and the additional consideration is payable.
In connection with the Company's acquisition of Schulerhilfe, the Company paid
the sellers an additional $10.4 million of consideration in cash during the
first quarter of 2000 based on the amount of 1999 franchise fees which were
collected by Schulerhilfe on or before January 31, 2000.
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.
21
<PAGE>
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 Company's English language
instruction businesses experience seasonal fluctuations based on the timing of
delivery of instruction to individuals. 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.
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, the failure to remediate or the cost of remediating Year 2000
issues and the Company's future development plans are based on current
expectations. These statements are forward looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause actual results to differ materially are the
following: 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; general business
and economic conditions; and other risk factors described in the Company's
reports filed from time to time with the Commission. The Company wishes to
caution readers not to place undue reliance on any such forward looking
statements, which statements are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made.
22
<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 investments in
available-for-sale securities. The Company does not utilize derivative
financial instruments, but exposure to market risks is managed though its
regular operating and financing activities.
Foreign Currency Risk
The Company derives approximately 42% 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 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 March 31, 2000 of
approximately $8.0 million.
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. A 100 basis point increase in interest rates would
reduce pretax income for the three months ended March 31, 2000 and 1999 by less
than $0.1 million for each period.
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 result in an approximate $0.8 million decrease in the fair value of the
Company's available-for-sale securities and comprehensive income.
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.
All the potential impacts noted above are based on sensitivity analysis
performed on the Company's financial position at March 31, 2000. Actual results
may differ materially.
23
<PAGE>
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 two reports on Form 8-K during the three month period
ended March 31, 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.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
Sylvan Learning Systems, Inc.
Date: May 12, 2000 /s/ B. Lee McGee
--------------------------------------
B. Lee McGee, Executive Vice President
and Chief Financial Officer
24
<PAGE>
Exhibit Index
Index
Number Description
- --------------------------------------------------------------------------------
10.1 Stock Purchase Agreement, dated January 26, 2000 by and among Sylvan
Learning Systems, Inc., Prometric, Inc., Prometric Acquisition
Corporation and the Thomson Corporation.*
10.2 Acquisition Agreement, dated January 26, 2000 by and among Sylvan I
B.V. and Dodd Street Holdings B.V.*
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
- --------------------------------------------------------------------------------
* Incorporated by reference from the Exhibits to the Company's current
report on Form 8-K, dated January 31, 2000.
25
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 554,928
<SECURITIES> 8,434
<RECEIVABLES> 66,641
<ALLOWANCES> (4,005)
<INVENTORY> 7,253
<CURRENT-ASSETS> 658,063
<PP&E> 156,881
<DEPRECIATION> (33,811)
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<CURRENT-LIABILITIES> 247,564
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0
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<COMMON> 503
<OTHER-SE> 742,243
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<SALES> 85,283
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<ARTICLE> 5
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SALES> 69,344
<TOTAL-REVENUES> 69,344
<CGS> 0
<TOTAL-COSTS> 65,274
<OTHER-EXPENSES> (822)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (636)
<INCOME-PRETAX> 2,612
<INCOME-TAX> 220
<INCOME-CONTINUING> 2,832
<DISCONTINUED> 3,975
<EXTRAORDINARY> 0
<CHANGES> (1,323)
<NET-INCOME> 5,484
<EPS-BASIC> .11
<EPS-DILUTED> .10
</TABLE>
