<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 June 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 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 41,927,220 shares of Common Stock outstanding as of August
09, 2000.
<PAGE>
SYLVAN LEARNING SYSTEMS, INC.
-----------------------------
INDEX
-----
<TABLE>
<CAPTION>
PART I. - FINANCIAL INFORMATION Page No.
--------
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999...................................................... 3
Consolidated Statements of Income - Three months ended
June 30, 2000 and June 30, 1999........................................ 5
Consolidated Statements of Income - Six months ended
June 30, 2000 and June 30, 1999........................................ 6
Consolidated Statements of Cash Flows - Six months ended
June 30, 2000 and June 30, 1999........................................ 7
Notes to Consolidated Financial Statements - June 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................... 27
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................... 29
SIGNATURES............................................................................. 29
</TABLE>
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ --------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 421,241 $ 20,410
Marketable securities 61,774 10,890
Receivables:
Accounts receivable 55,130 53,118
Costs and estimated earnings in excess of billings on
uncompleted contracts 766 3,061
Notes receivable from tuition financing 5,972 4,647
Other notes receivable 22,884 16,783
Other receivables 3,051 1,265
---------- --------
87,803 78,874
Allowance for doubtful accounts (3,928) (3,407)
---------- --------
83,875 75,467
Inventory 6,207 6,261
Deferred income taxes 6,963 6,963
Prepaid expenses and other current assets 16,718 11,459
Net current assets of discontinued operations -- 280,287
---------- --------
Total current assets 596,778 411,737
Notes receivable from tuition financing, less current portion 6,716 5,330
Other notes receivable, less current portion 2,957 1,879
Costs and estimated earnings in excess of billings on
uncompleted contracts, less current portion 68 289
Property and equipment:
Land and buildings 69,083 73,167
Furniture, computer equipment and software 79,016 74,774
Leasehold improvements 12,467 11,736
---------- --------
160,566 159,677
Accumulated depreciation (37,478) (31,957)
---------- --------
123,088 127,720
Intangible assets:
Goodwill 225,358 201,716
Other 2,596 2,574
---------- --------
227,954 204,290
Accumulated amortization (16,389) (12,118)
---------- --------
211,565 192,172
Deferred costs, net of accumulated amortization of $1,380
and $984 at June 30, 2000 and December 31, 1999 5,402 3,641
Investments in and advances to affiliates 30,714 13,317
Other investments 22,207 25,933
Other assets 7,645 6,108
---------- --------
Total assets $1,007,140 $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>
June 30, December 31,
2000 1999
------------- --------------
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 43,312 $ 51,917
Income taxes payable 129,707 9,465
Current potion of long-term debt 16,069 14,436
Due to shareholders of acquired companies 16,194 22,474
Deferred revenue 29,777 36,855
------------ -------------
Total current liabilities 235,059 135,147
Long-term debt, less current portion 123,999 151,204
Deferred income taxes 12,225 12,547
Other long-term liabilities 2,799 3,050
------------ -------------
Total liabilities 374,082 301,948
Minority interest 21,849 12,085
Stockholders' equity:
Preferred stock, par value $0.01 per share -- authorized
10,000 shares, no shares issued and outstanding as of
June 30, 2000 and December 31, 1999 - -
Common stock, par value $0.01 per share -- authorized
90,000 shares, issued and outstanding shares of
41,916 as of June 30, 2000 and 50,904 as of
December 31, 1999 419 509
Additional paid-in capital 276,654 414,567
Retained earnings 347,675 60,762
Accumulated other comprehensive loss (13,539) (1,745)
------------ -------------
Total stockholders' equity 611,209 474,093
------------ -------------
Total liabilities and stockholders' equity $ 1,007,140 $ 788,126
============ =============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended June 30,
2000 1999
(Restated)
--------------------------------
(Unaudited)
<S> <C> <C>
Revenues $ 92,490 $ 89,928
Cost and expenses
Direct costs 81,168 74,353
General and administrative expenses 4,566 5,042
Sylvan Ventures development costs 3,207 --
-------- --------
Total expenses 88,941 79,395
-------- --------
Operating income 3,549 10,533
Other income (expense)
Investment and other income 6,605 112
Interest expense (946) (1,148)
Equity in net loss of affiliates
- Sylvan Ventures (829) --
-Sylvan Learning Systems (283) (625)
-------- --------
(1,112) (625)
Minority interest in income of consolidated subsidiary (315) (1,174)
-------- --------
Income from continuing operations before income taxes 7,781 7,698
Income tax expense (3,112) (1,199)
-------- --------
Income from continuing operations 4,669 6,499
Income from discontinued operations, net of income
tax expense of $4,667 in 1999 -- 4,884
-------- --------
Net income $ 4,669 $ 11,383
======== ========
Earnings per common share, basic:
Income from continuing operations per share, basic $ 0.10 $ 0.13
Earnings per common share, basic $ 0.10 $ 0.22
Earnings per common share, diluted:
Income from continuing operations per share, diluted $ 0.10 $ 0.12
Earnings per common share, diluted $ 0.10 $ 0.21
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended June 30,
2000 1999
(Restated)
-------------------------------
(Unaudited)
<S> <C> <C>
Revenues $ 177,773 $ 159,272
Cost and expenses
Direct costs 157,085 134,903
General and administrative expenses 9,367 9,766
Sylvan Ventures development costs 4,589 -
--------- ---------
Total expenses 171,041 144,669
--------- ---------
Operating income 6,732 14,603
Other income (expense)
Investment and other income 9,136 53
Interest expense (3,051) (1,784)
Equity in net loss of affiliates
-Sylvan Ventures (1,109) -
-Sylvan Learning Systems (879) (1,388)
--------- ---------
(1,988) (1,388)
Minority interest in income of consolidated subsidiary (1,066) (1,174)
--------- ---------
Income from continuing operations before income taxes
and cumulative effect of change in accounting principle 9,763 10,310
Income tax expense (3,905) (979)
--------- ---------
Income from continuing operations before cumulative
effect of change in accounting principle 5,858 9,331
Income (loss) from discontinued operations, net of income
tax expense of $163 in 2000 and $8,391 in 1999 (1,647) 8,859
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 292,665 18,190
Cumulative effect of change in accounting principle, net of
income tax benefit of $682 in 1999 - (1,323)
--------- ---------
Net income $ 292,665 $ 16,867
========= =========
Earnings per common share, basic:
Income from continuing operations before cumulative
effect of change in accounting principle per share, basic $ 0.12 $ 0.18
Earnings per common share, basic $ 6.10 $ 0.33
Earnings per common share, diluted:
Income from continuing operations before cumulative
effect of change in accounting principle per share, diluted $ 0.12 $ 0.17
Earnings per common share, diluted $ 6.01 $ 0.32
</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>
Six months ended June 30,
2000 1999
-----------------------------
(Unaudited)
<S> <C> <C>
Operating activities
Net income $ 292,665 $ 16,867
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 10,106 11,030
Amortization 6,489 10,066
Gain on disposal of discontinued operations (288,454) --
Cumulative effect of change in accounting principle -- 2,005
Deferred income taxes 370 (40)
Equity in net loss of affiliates 2,475 444
Minority interest in income of consolidated subsidiary 1,066 1,174
Other non-cash items 196 121
Changes in operating assets and liabilities:
Receivables (13,087) (2,695)
Inventory, prepaid and other current assets 2,637 934
Payables and accrued expenses 32 (2,619)
Deferred revenue and other current liabilities (23,020) 4,317
--------- ---------
Net cash (used in) provided by operating activities (8,525) 41,604
--------- ---------
Investing activities
Purchase of marketable securities (58,006) (2,025)
Proceeds from sale of marketable securities 1,272 2,855
Investment in and advances to affiliates (20,942) (679)
Increase in other investments -- (2,416)
Purchase of property and equipment (13,706) (22,043)
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 Universidad Europea de Madrid, including
direct cost of acquisition, net of cash received -- (25,768)
Cash paid for other acquired businesses, net of cash received (14,876) (16,355)
Payment of contingent consideration for prior period acquisitions (19,323) (16,475)
Expenditures for deferred costs (2,393) (2,981)
Increase in other assets (1,369) (4,906)
--------- ---------
Net cash provided by (used in) investing activities 573,681 (90,793)
--------- ---------
Financing activities
Proceeds from exercise of options and warrants 263 2,392
Proceeds from issuance of common stock 723 716
Repurchases of common stock (139,957) (7,764)
Proceeds from issuance of long-term debt 130,752 74,760
Payments on long-term debt and capital lease obligations (161,555) (16,965)
Cash received from minority interest partners in Sylvan Ventures 9,302 --
--------- ---------
Net cash (used in) provided by financing activities (160,472) 53,139
--------- ---------
Effect of subsidiary year-end change on cash and cash equivalents (2,565) --
Effects of exchange rate changes on cash (1,288) (2,260)
--------- ---------
Net increase in cash and cash equivalents 400,831 1,690
Cash and cash equivalents at beginning of period 20,410 33,170
--------- ---------
Cash and cash equivalents at end of period $ 421,241 $ 34,860
========= =========
</TABLE>
7
<PAGE>
Notes to Consolidated Financial Statements
Unaudited
(Amounts in thousands, except per share amounts)
June 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 six month periods ended
June 30, 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 six months ended June 30:
2000 1999
------------ ------------
Revenues $ 37,912 $ 112,966
------------ ------------
Income (loss) before income taxes (1,484) 17,251
Income tax expense 163 8,392
------------ ------------
Net income (loss) $ (1,647) $ 8,859
============ ============
Included in income from discontinued operations for the six month periods ended
June 30, 2000 and 1999 is an allocation of corporate interest expense of $678
and $664, respectively, based upon a percentage of the net equity investment in
discontinued operations to the net equity of the Company including the
discontinued operations.
8
<PAGE>
Note 3 - 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 six month period ended June 30, 2000, Sylvan included its 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 six month period ended June 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 Internet 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 at management's discretion 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 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 of goodwill impairment write-offs
related to the closing of two schools, which was announced in the three months
ended December 31, 1999.
9
<PAGE>
Note 5 - Marketable Securities
The following is a summary of marketable securities:
June 30, December 31,
2000 1999
--------- ------------
Equity securities $ 2,553 $ 8,281
Debt securities 57,992 --
Cash reserve fund 1,229 2,609
--------- ------------
$61,774 $10,890
========= ============
The Company's investment in debt securities mature within one year of the
balance sheet date.
Note 6 - 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"), 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:
June 30, December 31,
2000 1999
---------- ------------
Invested capital $ 18,515 $ 17,348
Amounts due for management fee 923 167
---------- ------------
19,438 17,515
Allocable share of losses from inception (8,250) (6,740)
---------- ------------
$ 11,188 $ 10,775
========== ============
Summarized financial data of Caliber is as follows:
June 30, December 31,
2000 1999
--------- ------------
Balance sheet data:
Current assets $19,042 $31,765
Non-current assets 19,428 21,519
Current liabilities 14,342 12,570
Non-current liabilities 7,731 10,250
Redeemable preferred stock 15,731 15,153
Three months ended June 30,
2000 1999
-------- --------
Statement of operations data:
Revenues $ 6,080 $ 6,570
Operating loss (7,401) (6,052)
Net loss (6,846) (6,094)
10
<PAGE>
Note 6 - Investments In and Advances to Affiliates (continued)
Six months ended June 30,
2000 1999
--------- --------
Statement of operations data:
Revenues $ 11,150 $ 11,128
Operating loss (14,683) (12,210)
Net loss (14,144) (12,236)
Investments in and advances to affiliates include other investments totaling
$19,526 and $2,542 at June 30, 2000 and December 31, 1999, respectively. The
Company's allocable share of losses related to these investments for the six
month periods ended June 30, 2000 and 1999 was $1,988 and $1,388, respectively.
Note 7 - Long-Term Debt
Long-term debt consists of the following at June 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------------------------
<S> <C> <C>
Long-term revolving credit facility with banks $ -- $ 122,991
Convertible debentures 100,000 --
Mortgages and notes payable bearing interest
at rates ranging from 4.25% to 8.00% 11,132 5,479
Mortgages, notes payable, and lines of credit
related to UEM 28,936 37,170
--------- ---------
140,068 165,640
Less: current portion of long-term debt (16,069) (14,436)
--------- ---------
Total long-term debt $ 123,999 $ 151,204
========= =========
</TABLE>
At June 30, 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 assumed as part of the Universidad Europea de Madrid
("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 5.02% as of June 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 rate of 5.00%, paid
semi-annually, and are convertible at any time into the Company's common stock
at $15.735 per share. The debenture bonds mature on June 30, 2010.
11
<PAGE>
Note 8 - Due to Shareholders of Acquired Companies
Due to shareholders of acquired companies consists of the following:
<TABLE>
<CAPTION>
June 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 consideration of $9,000 was paid to the seller in
cash in the second quarter of 2000. The liability and additional goodwill was
recorded at December 31, 1999. Additional consideration of $13,100 was accrued
as of June 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 payment of an additional $10,400 of consideration in
cash 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 9 - Income Taxes
The tax provisions for the three month and six month periods ended June 30, 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 month and six month periods
ended June 30, 2000. The Company estimates that its effective income tax rate
from continuing operations for the year ended 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.
12
<PAGE>
Note 10- Earnings Per Share
The following table summarizes the computations of basic and diluted earnings
per common share:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator used in basic and diluted earnings per common share:
Income from continuing operations, before cumulative
effect of change in Accounting principle $ 4,669 $ 6,499 $ 5,858 $ 9,331
Income (loss) from discontinued operations, net of tax - 4,884 (1,647) 8,859
Gain on disposal of discontinued operations, net of tax - - 288,454 -
Cumulative effect of change in accounting principle, - - - (1,323)
net of tax
-------- -------- -------- --------
Net income $ 4,669 $ 11,383 $292,665 $ 16,867
======== ======== ======== ========
Denominator:
Weighted average common shares outstanding 45,110 51,841 47,955 51,539
Net effect of dilutive stock options based on treasury
stock method 645 1,733 707 2,006
Effect of dilutive convertible debentures 70 - 35 -
-------- -------- -------- --------
Weighted average common shares outstanding and
common stock equivalents 45,825 53,574 48,697 53,545
======== ======== ======== ========
Earnings per common share, basic:
Income from continuing operations, before cumulative
effect of change in accounting principle $ 0.10 $ 0.13 $ 0.12 $ 0.18
Income (loss) from discontinued operations, net of tax - 0.09 (0.03) 0.17
Gain on disposal of discontinued operations, net of tax - - 6.01 -
Cumulative effect of change in accounting principle,
net of tax - - - (0.02)
======== ======== ======== ========
Earnings per common share, basic $ 0.10 $ 0.22 $ 6.10 $ 0.33
======== ======== ======== ========
Earnings per common share, diluted:
Income from continuing operations, before cumulative
Effect of change in accounting principle $ 0.10 $ 0.12 $ 0.12 $ 0.17
Income (loss) from discontinued operations, net of tax - 0.09 (0.03) 0.17
Gain on disposal of discontinued operations, net of tax - - 5.92 -
Cumulative effect of change in accounting principle,
net of tax - - - (0.02)
======== ======== ======== ========
Earnings per common share, diluted $ 0.10 $ 0.21 $ 6.01 $ 0.32
======== ======== ======== ========
</TABLE>
13
<PAGE>
Note 11 - Stockholders' Equity
On May 5, 2000, upon conclusion of a Company sponsored tender offer, the Company
purchased approximately 8.5 million shares at $15.25 per share. The value of the
shares purchased was approximately $130,097, including transaction costs.
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
Repurchase of 8,507 shares of
common stock in connection
with the self tender offer (85) (130,012) (130,097)
Repurchase of 639 shares of
common stock (6) (9,854) (9,860)
Options exercised for purchase
of 55 shares of common stock,
including income tax benefit of
$104 367 367
Stock options granted to non-
employees 56 56
Issuance of 57 shares of
common stock in connection
with the Employee Stock
purchase Plan 1 722 723
Effect of subsidiary's year-end
change (See Note 4) (5,752) (5,752)
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 637 637
Comprehensive income:
Net income for the six
months ended June 30, 2000 292,665 292,665
Other comprehensive income (loss):
Unrealized loss on marketable
securities (5,728) (5,728)
Foreign currency translation
adjustment (6,066) (6,066)
---------
Total comprehensive income 280,871
--------- --------- --------- --------- ---------
Balance at June 30, 2000 $ 419 $ 276,654 $ 347,675 $ (13,539) $ 611,209
========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
Note 12 - 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 scheduled for October 16
through October 27, 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 13 - Business Segment Information
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Sylvan Learning Centers $ 26,084 $ 23,544 $ 48,743 $ 43,368
Sylvan Education Solutions 30,108 24,411 56,053 51,579
Sylvan English Language Instruction 22,393 27,235 44,571 49,587
Sylvan International Universities 13,905 14,738 28,406 14,738
Sylvan Ventures -- -- -- --
--------- --------- --------- ---------
$ 92,490 $ 89,928 $ 177,773 $ 159,272
========= ========= ========= =========
Segment profit (loss):
Sylvan Learning Centers $ 6,429 $ 6,889 $ 11,431 $ 11,413
Sylvan Education Solutions 5,913 3,235 7,780 6,885
Sylvan English Language Instruction (1,124) 2,400 (1,312) 3,020
Sylvan International Universities 104 3,051 2,789 3,051
Sylvan Ventures (4,036) -- (5,698) --
--------- --------- --------- ---------
$ 7,286 $ 15,575 $ 14,990 $ 24,369
========= ========= ========= =========
</TABLE>
15
<PAGE>
Note 13- Business Segment Information (continued)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ------------
<S> <C> <C>
Segment assets:
Sylvan Learning Centers $ 77,095 $ 71,097
Sylvan Education Solutions 110,360 105,273
Sylvan English Language Instruction 112,435 144,909
Sylvan International Universities 98,369 97,344
Sylvan Ventures 56,293 --
---------- ----------
Segment assets 454,552 418,623
Corporate assets 552,588 89,216
Net assets of discontinued operations -- 280,287
---------- ----------
Total Assets $1,007,140 $ 788,126
========== ==========
</TABLE>
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 June 30, Six months ended June 30,
2000 1999 2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Total profit for reportable segments $7,286 $15,575 $14,990 $24,369
Corporate general and administrative expense 4,566 5,042 9,367 9,766
Other income (expense), net 5,061 (2,835) 4,140 (4,293)
------ ------- ------- -------
Income from continuing operations before income
taxes and cumulative effect of change in
accounting principle $7,781 $ 7,698 $ 9,763 $10,310
====== ======= ======= =======
</TABLE>
Note 14 - Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Net income $ 4,669 $11,383 $292,665 $16,867
Foreign currency translation adjustment (2,577) (3,723) (6,066) (4,311)
Unrealized loss on marketable securities (4,304) -- (5,728) --
------- ------- -------- -------
Comprehensive income (loss) $(2,212) $ 7,660 $280,871 $12,556
======= ======= ======== =======
</TABLE>
16
<PAGE>
Note 15 - 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 six
Balance at months ended Balance at
December 31, 1999 June 30, 2000 June 30, 2000
----------------- -------------------- ----------------
<S> <C> <C> <C>
Employee termination costs $1,118 $ 711 $ 407
School closing costs 1,042 230 812
--------- --------- --------
Total $2,160 $ 941 $1,219
--------- --------- --------
</TABLE>
The remaining costs at June 30, 2000 represent the Company's best estimate of
the remaining employee termination and facility exit costs to be paid.
Note 16 - Subsequent Events
In connection with a potential acquisition of a foreign university, the Company
entered into a forward exchange contract on June 6, 2000 to protect against the
impact of fluctuations in the exchange rate between the U.S. Dollar and the
local currency on the amount of U.S. Dollars required for the university
acquisition. On August 11, 2000, the Company had an unrealized loss of
approximately $3,100 related to the forward exchange contract. It can not be
presently determined whether the anticipated university acquisition will close,
but on August 15, 2000, the forward exchange contract will settle and any
realized gains or losses will be recorded.
On August 10, 2000 the Company announced a "Dutch Auction" tender offer for six
million of its shares, or approximately 14.3 percent of its outstanding common
stock. The price range for the tender offer is $13.50 to $15.00 per share. The
tender offer will expire on September 7, 2000 at 12:00 midnight eastern time
unless the Company elects to extend the offer.
17
<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 focused on bringing emerging
technology solutions to the education and training marketplace. For the six
months ended June 30, 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 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 June 30, Six months ended June 30,
2000 1999 2000 1999
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Revenues:
Sylvan Learning Centers 28% 26% 27% 27%
Sylvan Education Solutions 33% 28% 32% 32%
Sylvan English Language Instruction 24% 30% 25% 31%
Sylvan International Universities 15% 16% 16% 10%
---- ---- ---- ----
Total revenues 100% 100% 100% 100%
Direct costs:
Sylvan Learning Centers 21% 19% 21% 20%
Sylvan Education Solutions 26% 24% 27% 28%
Sylvan English Language Instruction 26% 27% 26% 29%
Sylvan International Universities 15% 13% 14% 8%
---- ---- ---- ----
Total direct costs 87% 83% 88% 85%
General and administrative expenses 5% 6% 5% 6%
Sylvan Ventures development costs 5% -- 3% --
---- ---- ---- ----
Operating income 3% 11% 4% 9%
Non-operating income (expense) 5% (3%) 1% (3%)
---- ---- ---- ----
Income from continuing operations before taxes and cumulative
effect of change in accounting principle 8% 8% 5% 6%
Income tax expense (3%) (1%) (2%) --
---- ---- ---- ----
Income from continuing operations 5% 7% 3% 6%
Discontinued operations:
Income (loss) from discontinued operations, net of tax -- 6% (1%) 6%
Gain on disposal of discontinued operations, net of tax -- -- 163% --
---- ---- ---- ----
Income before cumulative effect of change in accounting principle 5% 13% 165% 12%
Cumulative effect of change in accounting principle, net of tax -- -- -- (1%)
---- ---- ---- ----
Net income 5% 13% 165% 11%
==== ==== ==== ====
</TABLE>
18
<PAGE>
Results of Operations
The Company has continued to grow throughout 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 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 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 statements of income. The
following comparison of operating results focuses on the continuing operations
of the Company.
Comparison of results for the three months ended June 30, 2000 to results for
the three months ended June 30, 1999.
Revenues. Total revenues from continuing operations increased by $2.6 million,
or 3%, to $92.5 million in 2000 from $89.9 million in 1999. This revenue
increase was driven primarily by the expansion of the Learning Centers and
Education Solutions segments.
Sylvan Learning Centers revenue increased by $2.5 million, or 11%, to
$26.1 million for the quarter ended June 30, 2000 compared to the same period in
1999. Franchise royalties increased by $0.7 million, or 15%, in 2000. Same
center revenues for franchised centers increased 10% with the remaining
franchise royalty increase generated from 63 new centers opened during the past
year. Revenues from Company-owned learning centers increased $1.2 million, or
11%, to $12.8 million during 2000. Same center revenues increased 7%, or $0.7
million, with the remaining revenue increase of $0.6 million generated from 11
new Company-owned centers acquired from franchise owners and 5 new Company-owned
centers opened during the past year. International revenues, primarily
Schulerhilfe, remained constant at $4.0 million in 2000 and 1999 primarily due
to local currency revenue increases offset by currency devaluation of 11%.
Operating revenue for Learning Centers represents 28% of total revenues from
continuing operations of the Company for the three month period ended June 30,
2000.
Sylvan Education Solutions revenue increased by $5.7 million or 23% to
$30.1 million for the quarter ended June 30, 2000 compared to $24.4 million for
the same period in 1999. Sylvan At School revenue for the quarter ended June 30,
2000 declined by $0.4 million in comparison with the same period in 1999. The
revenue decline 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. Upon full implementation, it
is anticipated that this new model will result in greater operating margins for
the Company. Canter teacher-training revenue increased $5.7 million to $11.2
million in the second quarter 2000 from $5.5 million in the same period of 1999.
Canter revenue increased by $3.0 million due to a change in the timing of
recording revenues from Canter's distance learning masters program due to better
information regarding collectibility and program cancellation. The remaining
Canter revenue increase of $2.7 million is due to greater demand for products,
particularly the distance learning masters program. Operating revenue for Sylvan
Education Solutions represents 33% of total revenues from continuing operations
of the Company for the three month period ended June 30, 2000.
Sylvan English Language Instruction revenue decreased $4.8 million or
18%, to $22.4 million for the quarter ended June 30, 2000 compared to the same
period in 1999. Wall Street Institute ("WSI") revenue decreased $2.0 million to
$12.1 million in the second quarter of 2000 from $14.1 million in the second
quarter of 1999. The primary reason for the revenue decrease in the second
quarter of 2000 is that sales of territory fees decreased by $3.5 million to
$0.5 million for the three months ended June 30, 2000 from $4.0 million for the
same period of 1999. This decline in territory fees resulted from a change in
the WSI expansion strategy to retaining ownership of franchise territories in
high potential markets. The decrease in territory fees at WSI was partially
offset by $1.5 million in additional revenues resulting from growth in
educational product sales and growth in the operations of existing centers.
Aspect revenues decreased $2.8 million to $10.3 million in the second quarter of
2000 from $13.1 million in the same period in 1999. The disposal by Aspect of a
low margin line of business in 1999 accounted for $1.6 million of the decrease
in the quarter. The remaining decrease reflects lower sales volume for the
Language Schools in the second quarter of 2000 over the same period in 1999.
Operating revenue for Sylvan English Language Instruction segment
19
<PAGE>
represents 24% of total revenues from continuing operations of the Company for
the three month period ended June 30, 2000.
Sylvan International Universities revenues were $13.9 million for the
second quarter of 2000 compared to $14.7 million for the same period in 1999.
These revenues were generated from the UEM. The decrease in revenue is primarily
due to currency exchange differences as revenues in the local currency increased
4% when compared to the same period in 1999. Additionally, revenues for the
period in 1999 included a program that was phased out later in 1999. Local
currency revenue growth, excluding the phased out program, was 13% in 2000.
Operating revenue for the Sylvan International Universities segment represents
15% of total revenues from continuing operations of the Company for the three
month period ended June 30, 2000.
Direct Costs. Total direct costs from continuing operations, excluding Sylvan
Ventures, increased 9% to $81.2 million in 2000 from $74.4 million in 1999.
Direct costs as a percentage of total revenues increased to 87% in 2000 from 83%
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
dramatically reduce sales of territories in order to retain the long-term
benefits of owning franchise territories in high growth potential markets.
Sylvan Learning Centers expenses increased $3.0 million to $19.7 million,
or 75% of Learning Centers revenue for 2000, compared to $16.7 million, or 71%
of Learning Centers revenue for the same period in 1999. The increase in
expenses as a percentage of revenues is primarily due to increased costs related
to international expansion of the franchise network. Approximately $1.1 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 in 1999. Cost increases of $1.9 million in 2000 relate to franchise
services support costs, which resulted from growth in franchised centers over
the prior year.
Sylvan Education Solutions expenses increased by $3.0 million to $24.2
million, or 80% of Sylvan Education Solutions revenue for the quarter ended June
30, 2000, compared to $21.2 million or 87% of Sylvan Education Solutions revenue
for the second quarter of 1999. The decrease in expenses as a percentage of
revenue for the three months ended June 30, 2000 is primarily due to the
increase in higher margin products and services sold during the quarter ended
June 30, 2000, as compared to the same period in 1999. These higher margin
products and services include sales under the new public school model and the
increased volume of Canter's distance learning masters program, which generates
a higher margin.
Sylvan English Language Instruction expenses decreased by $1.3 million to
$23.5 million, compared to $24.8 million for the same period in 1999. Expenses
for WSI increased $1.9 million to $11.7 million or 97% of WSI revenues for the
quarter ended June 30, 2000 compared to $9.9 million or 70% of WSI revenues for
the same period in 1999. The increase in expenses as a percentage of revenue for
the three months ended June 30, 2000 is primarily a result of the decline in the
sale of high margin area development agreements. Expenses for Aspect decreased
$3.2 million to $11.8 million or 115% of Aspect's revenues for the quarter ended
June 30, 2000, compared to $15.0 million or 114% of Aspect's revenues for the
same period in 1999. Expenses decreased $2.7 million as a result of the disposal
of a line of business in 1999. The increase in expenses as a percentage of
revenue for the three month period ended June 30, 2000 is primarily a result of
a reduction of revenues without a corresponding decrease in overhead costs.
Sylvan International Universities expenses were $13.8 million, or 99% of
International Universities revenue for the three month period ended June 30,
2000 compared to $11.7 million for the same period in 1999. The increase in
expenses is due to a more focused marketing campaign in 2000. Direct expenses
consist primarily of personnel, marketing and advertising, and facility-related
costs of UEM.
20
<PAGE>
Other Expenses. General and administrative expenses decreased by $0.5 million
during the three month period ended June 30, 2000, compared to the same period
in 1999. These costs decreased to 5% of total revenues for the three month
period ended June 30, 2000, compared to 6% 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 revenue growth and market expansion.
Sylvan Ventures' development costs were $3.2 million for the three months
ended June 30, 2000. The costs for the Company's newest segment primarily relate
to efforts to identify potential technology driven investments in the
educational services market and to develop and incubate the investments it
currently holds. Costs associated with development of eSylvan, the Internet
based instruction solution, totaled $2.4 million for the three months ended June
30, 2000. These costs are primarily comprised of professional and consulting
fees, infrastructure development costs, as well as salaries and other related
operational expenses.
Other non-operating items increased $7.1 million in the second quarter 2000
as compared to the same period in 1999. This increase is largely attributable to
an increase of $6.7 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
equity in net losses of affiliates of $0.5 million. Additionally, during the
second quarter 2000, other expense declined by $0.9 million as a result of a
decrease in minority interest in income of UEM.
The Company's effective tax rate for continuing operations was 40% for the
three month period ended June 30, 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 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 increased by $0.1 million, or 1%, to $7.8 million for the three
months ended June 30, 2000 compared to the same period in 1999. The increase is
primarily a result of operating performance of the segments combined with the
investment income offset by the costs required to begin Sylvan Ventures.
Comparison of results for the six months ended June 30, 2000 to results for the
six months ended June 30, 1999.
Revenues. Total revenues from continuing operations increased by $18.5 million,
or 12%, to $177.8 million in 2000 from $159.3 million in 1999. Included in the
total revenues from continuing operations in the first quarter of 2000 were
$14.5 million of revenues from the UEM, which was acquired in the second quarter
of 1999. Total revenues from continuing operations increased 3% excluding the
increase caused by the impact of the 1999 UEM acquisition.
Sylvan Learning Centers revenue increased by $5.4 million, or 12%, to $48.7
million for the six months ended June 30, 2000 compared to the same period in
1999. Franchise royalties increased by $1.6 million, or 17%, in 2000 as a result
of the net increase of 63 new centers opened after June 30, 1999, and an 11%
increase in same center revenue generated by franchised centers. Revenues from
Company-owned learning centers increased $3.0 million, or 15%, to $23.9 million
during 2000. Company owned same center revenues increased 7%, or $1.3 million,
with the remaining revenue increase of $1.7 million generated from 11 new
Company-owned centers acquired from franchise owners and 5 new centers opened
during the past
21
<PAGE>
year. International revenues, primarily Schulerhilfe remained consistent at $7.9
million in 2000 and 1999. Operating revenue for Learning Centers represents 27%
of total revenues from continuing operations of the Company for the six month
period ended June 30, 2000.
Sylvan Education Solutions revenue increased by $4.5 million or 9% to $56.0
million for the six months ended June 30, 2000 compared to the same period in
1999. Sylvan At School revenue decreased $0.2 million or less than 1% over the
same period in 1999. The revenue decline for Sylvan At School is a result of a
previously announced change in Sylvan's contract model. The new model generates
lower revenue per school since the school is responsible with the school having
the responsibility for supplying and paying teachers. Upon full implementation,
it is anticipated that this new model will result in greater operating margins
for the Company. Canter teacher-training revenue increased $4.2 million to $16.5
million for the six months ended June 30, 2000 from $12.3 million in the same
period of 1999. $1.5 million of the Canter revenue increase was the result of a
change in the timing of enrollment recognition from Canter's distance learning
masters program as compared to the same period in 1999. The remaining Canter
revenue increase of $2.7 million is due to a significant increase in enrollment
in the masters degree programs. Operating revenue for Sylvan Education Solutions
represents 32% of total revenues from continuing operations of the Company for
the six month period ended June 30, 2000.
Sylvan English Language Instruction revenue decreased $5.0 million or 10%,
to $44.6 million for the six months ended June 30, 2000 compared to the same
period in 1999. WSI revenue increased $0.2 million to $24.6 million in the six
months ended June 30, 2000 from $24.4 million in the same period of 1999. The
increase is the result of a combination of a $2.9 million increase in tuition
revenues, and a $0.8 million increase in product sales which was offset by a
$3.5 million decrease in area development fee revenue. Revenue for Aspect
decreased $5.2 million to $20.0 million in the six months ended June 30, 2000
from $25.2 million in the same period in 1999. The disposal of a low margin line
of business in 1999 accounted for $2.6 million of the decrease in the period.
The remaining decrease reflects lower sales volume for the Language Schools in
the six months ended June 30, 2000 as compared to the same period in 1999.
Operating revenue for Sylvan English Language Instruction segment represents 25%
of total revenues from continuing operations of the Company for the six month
period ended June 30, 2000.
Sylvan International Universities revenues were $28.4 million for the six
month period ended June 30, 2000 compared to $14.7 million for the same period
last year. 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 16% of
total revenues from continuing operations of the Company for the three month
period ended June 30, 2000. Revenues of UEM are seasonal due to a limited class
schedule during July, August and September.
Direct Costs. Total direct costs from continuing operations excluding Sylvan
Ventures increased 15% to $157.1 million in 2000 from $134.9 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 $10.0 million, or
7% excluding the costs related to UEM. Direct costs as a percentage of total
revenues increased to 88% in 2000 from 85% in 1999. This increase in direct
costs as a percentage of revenues is primarily due to a change in the Company's
expansion strategy to dramatically reduce the sales of territories in order to
retain the long-term benefits of owning franchise territories in high growth
potential markets.
Sylvan Learning Centers expenses increased $5.4 million to $37.3 million,
or 77% of Learning Centers revenue for 2000, compared to $32.0 million, or 74%
of Learning Centers revenue for the same period in 1999. The increase in
expenses as a percentage of revenues is primarily due to increased costs related
to international expansion of the franchise network. Approximately $2.7 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.
22
<PAGE>
Cost increases of $2.7 million in 2000 related to franchise service support
costs as a result of growth in franchised centers over the past year.
Sylvan Education Solutions expenses increased by $3.6 million to $48.3
million, or 86% of Sylvan Education Solutions revenue for the six months ended
June 30, 2000, compared to $44.7 million or 87% of Sylvan Education Solutions
revenue for the same period of 1999. This decrease in expenses as a percentage
of revenues for the six month period ended June 30, 2000 is primarily due to
increased sales of higher margin products and services, such as Canter's
distance learning masters program.
Sylvan English Language Instruction expenses decreased by $0.7 million to
$45.9 million for the six month period ended June 30, 2000, compared to $46.6
for the same period in 1999. Expenses for WSI increased $4.3 million to $22.6
million or 92% of WSI revenues for the six months ended June 30, 2000 compared
to $18.3 million or 75% of WSI revenues for the same period in 1999. The
increase in expenses as a percentage of revenue for the six months ended June
30, 2000 is primarily a result of the decline in the sale of area development
agreements. Expenses for Aspect decreased $5.0 million to $23.3 million or 116%
of Aspect revenues for the six months ended June 30, 2000, compared to $28.2
million or 112% of Aspect revenues for the same period in 1999. Expenses
decreased $4.3 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
six month period ended June 30, 2000 is primarily a result of a reduction of
revenues without a corresponding decrease in overhead costs.
Sylvan International Universities expenses were $25.6 million, or 90% of
International Universities revenue for the six month period ended June 30, 2000
as compared to $11.7 million for the same period in 1999. The increase in
expenses is primarily due to costs incurred in enhancing the segments' expansion
strategy and identifying high growth potential markets and specific Universities
for expansion. The direct expenses consist primarily of personnel, marketing,
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.
Other Expenses. General and administrative expenses decreased by $0.4 million
during the six month period ended June 30, 2000, compared to the same period in
1999. These costs decreased to 5% of total revenues for the six month period
ended June 30, 2000, compared to 6% 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 revenue growth and market expansion.
Sylvan Ventures' development costs were $4.6 million for the six months
ended June 30, 2000. The costs for the Company's newest segment primarily relate
to efforts to identify potential investments in technology in the educational
services market and to develop and incubate the investments it currently holds.
Costs associated with development of eSylvan, the Company's Internet based
tutoring solution, totaled $3.4 million for the six months ended June 30, 2000.
These costs are primarily comprised of professional and consulting fees,
Internet development costs, as well as salaries and other related operational
expenses.
Other non-operating items increased $7.3 million in the six months ended
June 30, 2000 as compared to the same period in 1999. This improvement is
largely attributable to an increase of $7.9 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 equity in losses of affiliates of $0.6 million.
The Company's effective tax rate for continuing operations was 40% for the
six month period ended June 30, 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%.
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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 $0.5 million, or 5%, to $9.8 million for the six months
ended June 30, 2000 compared to the same period in 1999. The decrease is a
result of the factors discussed in the segment operating results including
Sylvan's decision to minimize sales of area development rights for franchises in
order to allow the Company to retain the future benefit, and 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 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 which 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 1999
estimate of the gain on sale is a result of additional transaction costs and
employee participation payments incurred in 2000. 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 used $8.5 million of cash flow to fund operations for the six
month period ended June 30, 2000 compared to cash provided by operations of
$41.6 million in 1999. The cash flow from operations consists primarily of
income from continuing operations for the period adjusted to exclude non-cash
charges (principally depreciation and amortization) resulting in cash flow from
continuing operations of $24.9 million for the six month period ended June 30,
2000. The reduction of net operating assets, primarily as a result of receivable
increases of $13.8 million during the period netted against increases in current
liabilities, decreased the cash generated by operations by $33.4 million. The
combination of operating activities and operating asset decreases resulted in
the $8.5 million cash flow from operations for the six month period ended June
30, 2000.
Cash provided by investing activities was $573.7 million for the six month
period ended June 30, 2000 compared to cash used in investing activities of
$90.8 million in 1999. The 2000 investment activity was primarily a result of
the sale of Prometric ($710.3 million), partially offset by an investment in
Chancery Software, Ltd. ($17.1 million) by Sylvan Ventures, other advances to
affiliates ($3.8 million), payment of contingent consideration and other accrued
liabilities for current and prior period acquisitions ($41.5 million), the net
purchase of investment securities ($56.7 million), purchase of property and
equipment (the Company $5.9 million; Sylvan Ventures $1.4 million; Sylvan
Prometric $6.4 million) and other investing uses ($3.8 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 WSI Centers and to invest in furniture, computer
equipment and software development for the Company's general business expansion.
Cash used in financing activities of $160.5 million in 2000, relates primarily
to the net repayment of the Company's borrowings under it's existing credit
agreements ($130.8 million) and the payment to repurchase
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common shares ($140.0 million) offset by borrowings under the debenture
agreement ($100.0 million) and cash received from Sylvan Ventures investors
($9.3 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 $57.8 million received from net
borrowings offset by net share repurchase activity of $5.4 million, which was
used along with operating cash flows to fund investing activities.
The Company anticipates that future cash flow 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. $3.9 million of the restructuring costs were paid through June 30,
2000. The remaining closing costs at June 30, 2000 represent the Company's best
estimate of the remaining employee termination and facility exit costs to be
paid. The Company expects to complete implementation of the plan by the end of
fiscal 2000.
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, which 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.
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 this SAB
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in the fourth quarter of fiscal 2000. The Company is currently evaluating the
impact of SAB on its revenue recognition practices and has not yet determined
the impact that the adoption of this SAB will have on the Company's financial
position or results of operations.
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 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, 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;
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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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 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 40% 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 June 30, 2000 of
approximately $12.1 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. At June 30, 2000,
the Company had outstanding forward foreign exchange contracts for the purchase
or sale of certain currencies which totaled $60.0 million at inception of the
contracts. A 10% fluctuation in exchange rates for these currencies would change
the fair value of these contracts by approximately $6.0 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. 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 investment income and interest expense by
reducing pretax income for the six months ended June 30, 2000 and 1999 by $1.2
million and $0.6 million respectively.
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 $0.3 million decrease in 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 June 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 two reports on Form 8-K during the six month period
ended June 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.
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: August 11, 2000 ______________________________________
B. Lee McGee, Executive Vice President
and Chief Financial Officer
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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 Thompson Corporation.*
10.2 Acquisition Agreement, dated January 26, 2000 by and among Sylvan
I.B.V and Dodd Street Holdings B.V.*
10.3 Attached Bylaws
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.
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