UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarter ended September 30, 2000MARCH 31, 2001 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 NumberCOMMISSION FILE NUMBER 0-22844
SYLVAN LEARNING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1492296
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Lancaster Street, Baltimore, Maryland 21202
(Address, including zip code, of principal executive offices)(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.)
1001 FLEET STREET, BALTIMORE, MARYLAND 21202
-------------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410)843-8000
(Registrant's telephone number, including area code)-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ].
The registrant had 37,281,38837,799,177 shares of Common Stock outstanding as of November
8, 2000.May 7,
2001.
SYLVAN LEARNING SYSTEMS, INC.
-----------------------------
INDEX
-----
Page No.PAGE NO.
--------
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2000March 31, 2001 and
December 31, 1999.........................................................3
Consolidated Statements of Operations- Three months ended
September 30, 2000 and September 30, 1999.................................52000.......................................3
Consolidated Statements of Operations - NineThree months ended
September 30, 2000March 31, 2001 and September 30, 1999.................................6March 31, 2000.......................5
Consolidated Statements of Cash Flows - NineThree months ended
September 30, 2000March 31, 2001 and September 30, 1999..................................7March 31, 2000........................6
Notes to Consolidated Financial Statements - September 30, 2000................8March 31, 2001..7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................................18Operations.......................14
Item 3. Quantitative and Qualitative Disclosure of Market Risk........................28Risk......20
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................................30
SIGNATURES............................................................................308-K............................22
SIGNATURES...........................................................22
2
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share data)CONSOLIDATED BALANCE SHEETS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, DecemberMARCH 31, DECEMBER 31,
2001 2000
1999
------------- ----------------------------- -------------------
(Unaudited) (Restated)
AssetsASSETS
Current assets:
Cash and cash equivalents $192,243 $ 18,995
Marketable66,306 $ 116,490
Available-for-sale securities 185,923 10,890123,673 202,077
Receivables:
Accounts receivable 57,043 45,53758,995 68,468
Costs and estimated earnings in excess of billings on
uncompleted contracts 3,655 3,0611,032 2,613
Notes receivable from tuition financing 6,628 4,6478,283 7,489
Other notes receivable 20,924 16,78313,597 13,317
Other receivables 2,703 1,265
-------- --------
90,953 71,29314,206 15,549
----------------- -------------------
96,113 107,436
Allowance for doubtful accounts (2,746) (2,138)
-------- --------
88,207 69,155(6,735) (5,554)
----------------- -------------------
89,378 101,882
Inventory 5,451 6,0985,798 5,832
Deferred income taxes 6,963 6,9633,960 3,936
Prepaid expenses and other current assets 17,187 9,073
Net current assets of discontinued operations -- 280,287
-------- --------19,983 20,955
----------------- -------------------
Total current assets 495,974 401,461309,098 451,172
Notes receivable from tuition financing, less current portion 7,612 5,3309,518 8,313
Other notes receivable, less current portion 2,908 1,879
Costs and estimated earnings in excess of billings on
uncompleted contracts, less current portion 37 2894,839 2,378
Property and equipment:
Land and buildings 77,873 63,31990,235 94,151
Furniture, computer equipment and software 78,592 69,770101,356 94,249
Leasehold improvements 13,064 10,818
-------- --------
169,529 143,90727,448 22,407
----------------- -------------------
219,039 210,807
Accumulated depreciation (39,200) (28,089)
-------- --------
130,329 115,818(46,387) (38,965)
----------------- -------------------
172,652 171,842
Intangible assets:
Goodwill 222,727 200,382293,412 296,422
Other 2,594 2,574
-------- --------
225,321 202,9564,757 2,611
----------------- -------------------
298,169 299,033
Accumulated amortization (18,205) (11,952)
-------- --------
207,116 191,004(23,544) (21,078)
----------------- -------------------
274,625 277,955
Investments in and advances to affiliates 81,021 57,999
Other investments 25,601 25,935
Deferred costs, net of accumulated amortization of $1,649$2,485
and $984$1,969 at September 30, 2000March 31, 2001 and December 31, 1999 6,117 3,641
Investments in and advances to affiliates 44,835 13,317
Other investments 29,207 25,9332000, respectively 11,067 7,200
Other assets 7,173 5,953
-------- --------15,126 14,169
----------------- -------------------
Total assets $931,308 $764,625
======== ========$903,547 $1,016,963
================= ===================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (continued)
(Amounts in thousands, except per share data)CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, DecemberMARCH 31, DECEMBER 31,
2001 2000
1999
------------- ------------------------------ ------------------
(Unaudited) (Restated)
Liabilities and stockholders' equityLIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued$ 18,076 $ 20,108
Accrued expenses $ 39,534 $ 44,69039,801 40,452
Income taxes payable 130,661 9,71114,046 119,511
Current portion of long-term debt 17,920 14,31510,979 20,292
Due to shareholders of acquired companies 16,194 22,47427,050 40,195
Deferred revenue 28,234 23,234
Net39,986 42,483
Other current liabilities of discontinued operations 1,480 2,726
-------- --------21,161 10,673
------------------ ------------------
Total current liabilities 234,023 117,150171,099 293,714
Long-term debt, less current portion 126,400 146,095129,727 128,575
Deferred income taxes 11,729 12,1524,724 4,824
Other long-term liabilities 3,214 3,050
-------- --------9,435 3,707
------------------ ------------------
Total liabilities 375,366 278,447314,985 430,820
Minority interest 25,030 12,08551,148 32,880
Stockholders' equity:
Preferred stock, par value $0.01 per share --- - authorized
10,000 shares, no shares issued and outstanding as of
September 30, 2000March 31, 2001 and December 31, 1999 -- --2000 - -
Common stock, par value $0.01 per share --- - authorized
90,000 shares, issued and outstanding shares of
37,27337,741 as of September 30, 2000March 31, 2001 and 50,90437,278 as of
December 31, 19992000 377 373 509
Additional paid-in capital 205,926 414,567211,349 205,343
Retained earnings 346,241 60,762348,648 360,232
Accumulated other comprehensive loss (21,628) (1,745)
-------- --------(22,960) (12,685)
------------------ ------------------
Total stockholders' equity 530,912 474,093
-------- --------537,414 553,263
------------------ ------------------
Total liabilities and stockholders' equity $931,308 $764,625
======== ========$903,547 $1,016,963
================== ==================
See accompanying notes to financial statements.SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three months ended September 30,THREE MONTHS ENDED MARCH 31,
2001 2000
1999
(Restated)
----------------------------------------------------------------------------
(Unaudited)
Revenues $59,969REVENUES $120,446 $ 66,749
Cost and expenses75,540
COST AND EXPENSES
Direct costs 53,227 43,571108,074 64,428
Sylvan Ventures operating costs 5,577 1,382
General and administrative expenses 4,620 5,518
Sylvan Ventures development costs 5,912 --
------- --------5,986 4,801
-------------------- -------------------
Total expenses 63,759 49,089
------- --------119,637 70,611
-------------------- -------------------
Operating income (loss) (3,790) 17,660
Other income (expense)809 4,929
OTHER INCOME (EXPENSE)
Investment and other income 4,680 753,327 2,819
Interest expense (2,097) (1,188)(2,229) (1,918)
Sylvan Ventures realized investment losses (3,051) --(400) -
Equity in net loss of affiliates:
Sylvan Ventures investments (1,229) --(19,786) (280)
Other (105) (888)
------- --------
(1,334) (888)
------- --------(126) (596)
--------------------- ---------------------
(19,912) (876)
Minority interest in consolidated subsidiaries:
Sylvan Ventures 2,930 --1,291 -
Other 932 523
------- --------
3,862 523
------- --------(1,420) (752)
--------------------- ---------------------
(129) (752)
--------------------- ---------------------
Income (loss) from continuing operations before income taxes (1,730) 16,182(18,534) 4,202
Income tax expense 1,607 3,537
------- --------benefit (expense) 6,950 (793)
--------------------- -------------------
Income (loss) from continuing operations (3,337) 12,645
Income from discontinued operations, net of income
Tax expense of $163 in 2000 and $4,526 in 1999 1,903 3,287(11,584) 3,409
Loss on disposal of discontinued operations, including
Income tax expense of $2,400 -- (25,082)
------- --------
Net loss $(1,434) $ (9,150)
======= ========
Earnings (loss) per common share, basic:
Income (loss) from continuing operations per share $(0.08) $0.24
Loss per common share $(0.03) $(0.18)
Earnings (loss) per common share, diluted:
Income (loss) from continuing operations per share $(0.08) $0.24
Loss per common share $(0.03) $(0.17)
See accompanying notes to financial statements.
5
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Nine months ended September 30,
2000 1999
(Restated)
--------------------------------
(Unaudited)
Revenues $217,737 $200,806
Cost and expenses
Direct costs 187,048 150,254
General and administrative expenses 13,987 15,284
Sylvan Ventures development costs 10,501 --
-------- --------
Total expenses 211,536 165,538
-------- --------
Operating income 6,201 35,268
Other income (expense)
Investment and other income 14,282 262
Interest expense (4,727) (2,592)
Sylvan Ventures realized investment losses (3,051) --
Equity in net loss of affiliates:
Sylvan Ventures investments (2,338) --
Other (984) (2,276)
-------- --------
(3,322) (2,276)
-------- --------
Minority interest in consolidated subsidiaries:
Sylvan Ventures 2,930 --
Other (134) (651)
-------- --------
2,796 (651)
-------- --------
Income from continuing operations before income taxes and cumulative 12,179 30,011
effect of change in accounting principle
Income tax expense 5,480 4,511
-------- --------
Income from continuing operations before cumulative effect of change in
accounting principle 6,699 25,500
Income (loss) from discontinued operations, net of income
tax expense of $163 in 2000 and $12,918 in 1999 (3,922) 8,622- (3,868)
Gain (loss) on disposal of discontinued operations, net of income
tax expense of $136,762 in 2000 and $2,400 in 1999- 288,454
(25,082)
-------- --------
Income before cumulative effect of change in accounting principle 291,231 9,040
Cumulative effect of change in accounting principle, net of income tax
benefit of $682 in 1999 -- (1,323)
-------- ------------------------------ -------------------
Net income $291,231 $ 7,717
======== ========(loss) $(11,584) $287,995
====================== ===================
Earnings (loss) per common share, basic:
Income (loss) from continuing operations before cumulative effect of change
in accounting principle per share $0.15 $0.49$(0.31) $0.07
Net income (loss) $(0.31) $5.67
Earnings per common share $6.38 $0.15
Earnings(loss) per common share, diluted:
Income (loss) from continuing operations before cumulative effect of change
in accounting principle per share $0.15 $0.48
Earnings per common share $6.02 $.14$(0.31) $0.07
Net income (loss) $(0.31) $5.58
See accompanying notes to financial statements.
6SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Nine months ended September 30,THREE MONTHS ENDED MARCH 31,
2001 2000
1999
-------------------------------------------------------------------------
(Unaudited)
Operating activities
OPERATING ACTIVITIES
Net income (loss) $ 291,231 $ 7,717(11,584) $287,995
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 13,929 17,5065,603 6,296
Amortization 7,759 12,591
(Gain) loss3,703 3,909
Gain on disposal of discontinued operations - (288,454) 25,082
Cumulative effect of change in accounting principle -- 1,323
Deferred income taxes 335 (80)
Realized loss(41) 365
Loss on sale of investments 3,051 --400 -
Equity in net loss of affiliates 3,809 81519,912 1,363
Minority interest in income of consolidated subsidiary (2,796) 651129 751
Other non-cash items 1,617 162657 166
Changes in operating assets and liabilities:
Receivables (21,822) (19,360)14,663 9,671
Tuition loans, net (2,533) (1,527)
Inventory, prepaid and other current assets 2,067 (6,770)(4,043) 1,743
Payables and accrued expenses (16,280) 86797 (5,210)
Income taxes payable (102,738) -
Deferred revenue and other current liabilities (4,703) 17,700
--------- ---------(461) (987)
-------------------- ------------------
Net cash provided by (used in) provided by operating activities (10,257) 58,204
--------- ---------
Investing activities(76,236) 16,081
-------------------- ------------------
INVESTING ACTIVITIES
Purchase of marketableavailable-for-sale securities (183,337) (1,097)(23,494) -
Proceeds from sale or maturity of marketableavailable-for-sale securities 2,033 2,855103,098 965
Investment in and advances to affiliates (36,309) (1,339)
Proceeds from sale of investment in JLC Learning Corporation -- 15,211
Increase inand other investments (6,970) (1,245)(32,203) (19,709)
Purchase of property and equipment (18,699) (41,140)
Purchase of WSI franchises, net of cash received -- (34,503)(13,301) (9,402)
Proceeds from sale of Prometric, net of closing costs 710,312 --
Purchase of Ivy West, including direct costs of acquisition, net of cash
received (7,288) --
Purchase of Les Roches, net of cash received (5,075) --
Purchase of Universidad Europea de Madrid, including direct costs of
acquisition, net of cash received -- (26,377)- 712,151
Cash paid for other acquired businesses, net of cash received (18,710) (1,003)(2,630) (12,806)
Payment of contingent consideration for prior period acquisitions (19,323) (16,660)(13,145) (10,323)
Expenditures for deferred costs (2,603) (5,815)
Other investing activities (4,211) (956)
--------- ---------(4,395) (1,682)
Decrease (increase) in other assets (520) 59
------------------- -------------------
Net cash provided by (used in) investing activities 409,820 (112,069)
--------- ---------
Financing activities13,410 659,253
------------------- -------------------
FINANCING ACTIVITIES
Proceeds from exercise of options and warrants 458 2,8853,806 50
Proceeds from issuance of common stock 785 962- 722
Repurchases of common stock (211,014) (36,213)- (9,860)
Proceeds from issuance of long-term debt 135,478 115,401747 19,315
Payments on long-term debt and capital lease obligations (163,149) (32,460)(7,452) (146,894)
Cash received from minority interest members inof Sylvan Ventures 15,741 --
--------- ---------16,114 -
Decrease in other long-term liabilities 572 -
-------------------- --------------------
Net cash provided by (used in) provided by financing activities (221,701) 50,575
--------- ---------13,787 (136,667)
-------------------- --------------------
Effect of subsidiary year-end change on cash and cash - (2,565)
equivalents
(2,565) --
EffectsEffect of exchange rate changes on cash (2,049) (2,020)
--------- ---------(1,145) (1,584)
--------------------- -------------------
Net increase (decrease) in cash and cash equivalents 173,248 (5,310)(50,184) 534,518
Cash and cash equivalents at beginning of period 18,995 33,170
--------- ---------116,490 20,410
-------------------- -------------------
Cash and cash equivalents at end of period $ 192,243 $ 27,860
========= =========$66,306 $554,928
==================== ===================
See accompanying notes to financial statements.
7SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
Sylvan Learning Systems, Inc.
Notes to Consolidated Financial Statements
Unaudited
(Amounts in thousands, except share and per share amounts)
September 30, 2000
NoteSYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, 2001
NOTE 1 - Basis of PresentationBASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month and nine month periodsperiod ended September 30, 2000March 31, 2001 are not necessarily indicative of
the results that may be expected for the year endingended December 31, 2000.2001. The
traditional semester programs in the education industry, with a summer break,
result in unusually large seasonality in the operating results of Sylvan
Learning Systems, Inc. ("the Company.Company"). The consolidated balance sheet at
December 31, 19992000 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 audited consolidated
financial statements and footnotes thereto included in the Sylvan Learning
Systems, Inc. and Subsidiaries (the "Company")Company's annual
report on Form 10-K for the year ended December 31, 1999.2000.
Certain amounts previously reported for 19992000 have been reclassified to conform
with the 20002001 presentation.
NoteNOTE 2 - Discontinued Operations
On JulyADOPTION OF NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which was adopted
effective January 1, 2000,2001. Because of the Company adopted a formal plan to disposeCompany's minimal use of Aspect Language
Schools, Inc. ("Aspect") its English language immersion business.derivatives,
the adoption of the new standard did not have any effect on the Company's
consolidated financial position and results of operations.
NOTE 3 - DISCONTINUED OPERATIONS
On October 7,6, 2000, the Company sold its English Language immersion business,
Aspect, ("Aspect") for $22,000$19,794 in cash. The estimated gain on sale
includingthe disposition recognized
in the year ended December 31, 2000 was $22,353, which includes an income tax
benefits was $22,399.benefit of $3,047. The gainCompany has estimated the domestic and foreign income
taxes resulting from the sale based on the expected allocation of proceeds to
subsidiaries that are parties to the transaction and the tax laws of the
jurisdictions in which these subsidiaries operate, assuming that undistributed
gains outside the United States will be recorded in October
2000. The final gain may differ from this preliminary amount due to adjustments
to closing costs and employee severance amounts.reinvested outside the United States.
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
saledisposition recognized in the year ended December 31, 2000 was $288,000,approximately
$288,454, net of income taxes of approximately $137,000, subject$136,762. The final proceeds from the sale may
change based on contractual provisions that provide for certain adjustments to
a futurethe sale price, including an adjustment for changes in working capital of
Prometric between November 30, 1999 and March 3, 2000. The Company and the buyer
have not completed the process required to provide for a final working capital.settlement of the
sale proceeds. However, management believes that any future adjustments will be
immaterial to the Company's financial position and results of operations. 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
7
NOTE 3 - DISCONTINUED OPERATIONS (CONTINUED)
of the jurisdictions in which these subsidiaries operate.
On December 31, 1999,operate, assuming that
undistributed gains outside the Company closed a sale transaction forUnited States will be reinvested outside the
Pace
corporate training business.
8
Note 2 - Discontinued Operations (continued)United States.
Summarized operating information of the Company's discontinued operations,
including both Prometric and Aspect for 1999 and 2000, Prometric for 1999 and the period owned in 2000, and Pace for 1999, areis as follows
for the ninethree months ended September 30:
2000 1999
---- ----
Revenues $75,898 $210,979
------- --------
Income (loss) before income taxes (3,759) 21,540
Income tax expense 163 12,918
------- --------
Net income (loss) $(3,922) $ 8,622
======= ========March 31, 2000:
Revenues $47,655
-----------------
Loss before income taxes (3,705)
Income tax expense 163
------------------
Net loss $ (3,868)
==================
Included in income from discontinued operations for the ninethree month periodsperiod ended
September 30,March 31, 2000 and 1999 is an allocation of corporate interest expense of $106 and $1,425, respectively, primarily$678, based
upon a percentage of the net equity investment in discontinued operations to the
net equity of the Company including the discontinued operations.
NOTE 4 - INVESTMENTS IN AND ADVANCES TO AFFILIATES
FORMATION OF SYLVAN VENTURES
The accompanying consolidated balance sheetsSylvan Ventures segment was established during the first quarter of 2000
to invest in and develop companies developing emerging technology solutions
for the education and training marketplace ("portfolio companies"). On June
30, 2000, affiliates of Apollo Management L.P. ("Apollo") and certain members
of Sylvan's management ("management investors") joined the Company to
form Sylvan Ventures, LLC, with total committed funds of $400,000. Of the
$400,000 commitment, the Company has committed $285,000, including
investments in portfolio companies valued at $65,000; Apollo has committed
$100,000; and the management investors have committed $15,000. On June 30,
2000, the Company transferred four investments in portfolio companies to
Sylvan Ventures - eSylvan, Inc., Caliber Learning Network, Inc.,
OnlineLearning.net, and Zapme! corporation.
Upon formation, Sylvan Ventures issued common membership interests to Sylvan
and the management investors and preferred membership interests to Apollo.
Additionally, Sylvan Ventures authorized the granting of plan membership
profit interests to members of management that entitle the recipients to
receive an aggregate allocation of up to 20% of any cumulative net profits.
As of March 31, 2001, plan membership profit interests have been restatedgranted to
reflectmanagement for an aggregate allocation of approximately 15% of the cumulative
net liabilitiesprofits upon a profits interest event.
In 2000, the membership agreement provided for the allocation of Aspectnet losses
to the common and preferred members on a pro rata basis, subject to certain
limitations. Beginning January 1, 2001, net losses are being allocated on a
pro rata basis only to the common membership interest holders until their
capital account balances have been reduced to zero, at which time any losses
will be allocated to Apollo until its capital account balance has been
reduced to zero. Thereafter, any losses will be allocated on a pro rata basis
to all membership interest holders. Any profits earned after January 1, 2001
will first be allocated to Apollo until it has recovered its 2000 allocated
losses and then to the common membership interest holders to recover
previously allocated losses. After all previously allocated losses have been
recovered through profit allocations, any additional net assetsprofits will be
allocated on a pro rata basis to all interest holders, including the plan
membership profit interest holders.
8
NOTE 4 - INVESTMENTS IN AND ADVANCES TO AFFILIATES (CONTINUED)
CONSOLIDATED INVESTMENTS
eSylvan, Inc. ("eSylvan") is a start-up organization designed to distribute
the Company's learning center tutoring product to students at home via
computer. Sylvan Ventures owns 88% of Prometric as net liabilitieseSylvan. eSylvan had not generated
significant revenue through March 31, 2001, and net assets of discontinued operations. Net long-lived liabilities of Aspect as
of September 30, 2000 and December 31, 1999its operating expenses have
been included in the net
current liability amount because the sale transaction closed on October 7, 2000.
Net long-lived assets2001 and 2000 consolidated statement of Prometric are included in the net current asset amount
at December 31, 1999 because the sale transaction closed March 3, 2000. The net
liabilities and net assetsoperations as a
component of discontinued operations include the following for
AspectSylvan Ventures' operating costs. Sylvan Ventures has committed
additional funding of $10,000 as of September 30, 2000March 31, 2001 for eSylvan development
and for Prometric and Aspect as of December 31,
1999:
September 30, December 31,
2000 1999
------------- ------------
Accounts and notes receivable, net $ -- $50,598
Accounts payable and accrued expenses -- (41,332)
Other, net -- 1,621
Net long-lived assets -- 269,400
------- --------
Net current assets of Prometric discontinued operations $ -- $280,287
======= ========
Cash and marketable securities $ 3,227 $ 1,415
Accounts and notes receivable, net 3,051 6,312
Accounts payable and accrued expenses (4,367) (7,226)
Other current liabilities, net (9,868) (10,948)
Net long-lived assets 10,998 13,070
Long-term debt (4,409) (5,109)
Other non-current liabilities, net (112) (240)
------- --------
Net current liabilities of Aspect discontinued operations $(1,480) $ (2,726)
======= ========
Note 3 - Acquisitions
Effective July 25, 2000, the Company obtained control of the Board of Directors'
control of Les Roches, a private, for-profit universityoperating costs in Switzerland. The
transaction is subject to Swiss government approval and final approval is
considered likely. The purchase price totalled approximately $26,103 including
estimated net cash payments of $6,275 and the assumption of $10,806 in
outstanding debt and $9,022 of liabilities. The final purchase price may differ
from this preliminary amount due to adjustments to acquisition related costs.
The transaction was accounted for using the purchase method of accounting. The
results of operations of Les Roches are included in the accompanying 2000
consolidated statements of operations from July 25, 2000 through September 30,
2000. In connection with the Company's acquisition of Les Roches, variable
amounts of contingent consideration are also payable to the seller if specified
levels of earnings are achieved in 2000, 2001 and 2002. The Company will record
the contingent consideration when the contingencies are resolved and the
additional consideration is payable.
9
Note 4 - Commencement of New Segment
The Company's newest segment, Sylvan Ventures, began operations during the first
quarter of 2000. Sylvan Ventures invests in and incubates companies to bring
emerging technology solutions to the education and training marketplace.2001. During the nine month periodquarter ended September 30, 2000,March 31, 2001 eSylvan
issued common stock representing an 11% ownership interest to franchisees of
Sylvan included its investments
in Caliber Learning Network, Inc., OnLine Learning.net, ZapMe! Corporation,
Chancery, Inc., LeapIt.com, Inc., Classwell Learning Group Inc., Kawama.com,
Inc., ClubMom, Inc., and Sylvan's on-line tutoring venture, eSylvan, Inc., as
part of the Sylvan Ventures segment.
During the nine month period ended September 30, 2000, the Sylvan Ventures
segment incurred development costs related to its efforts to develop the
investments, identify potential additional investments and operate eSylvan.
These costs were comprised primarily of Internet development, technology
infrastructure, start-up costs, professional fees, consulting fees, salaries and
other related operational costs.
The Company has committed to fund $285,000 to Sylvan Ventures, including
contributions of specified investments. On June 30, 2000, an agreement was
finalized with affiliates of Apollo Management L.P. to provide $100,000 in
funding for Sylvan Ventures. Additionally, certain members of the Company's
management and other investors will invest $15,000 in Sylvan Ventures. The
Company, however, will maintain a majority-ownership position in Sylvan Ventures
and account for Sylvan Ventures as a consolidated subsidiary with a minority
interest balance representing the minority owners' net investment.
Note 5 - Change in Year-end of Subsidiary
Effective January 1, 2000, the Company changed the year-end of Aspect, from
September 30 to December 31 to produce a consistent reporting period for the
consolidated entity. As a result of this change in year-end, Aspect's net
results of operations for the three month period ended December 31, 1999 are
reflected as an adjustment to retained earnings on the consolidated balance
sheet as of January 1, 2000. The impact of this change resulted in a decrease in
retained earnings of approximately $5,752. The results of Aspect's operations,
which are included in discontinued operations (see Note 2), for the period
October 1, 1999 to December 31, 1999 are summarized as follows:
Three months ended
December 31, 1999
------------------
Revenues $ 10,709
Direct costs (16,350)
--------
Operating loss (5,641)
Other expense (111)
--------
Loss before income taxes (5,752)
Income tax benefit --
--------
Net loss $ (5,752)
========
Direct costs for the three months ended December 31, 1999 included $1,300 of
advertising costs, which had been treated as prepaid prior to the October 1
start of the program term, $1,500 of salaries, travel and other costs for the
relocation of the corporate management offices, which occurred in the three
months ended December 31, 1999, and $400 of goodwill impairment write-offs
related to the closing of two schools, which were announced in the three months
ended December 31, 1999.
10
Note 6 - Marketable Securities
The following is a summary of marketable securities:
September 30, December 31,
2000 1999
------------- ------------
Equity securities $ 2,196 $ 8,281
Debt securities 183,340 --
Cash reserve fund 387 2,609
-------- -------
$185,923 $10,890
======== =======Centers.
INVESTMENT IN AFFILIATES (EQUITY METHOD INVESTMENTS):
The Company's investment in debt securities mature within one yearand advances to affiliates consist of the
balance sheet date.
Note 7 - Investmentsinvestments in
and Advancesloans to Affiliates
Thecompanies in the initial or early stages of development. These
companies are frequently illiquid or experiencing cash flow deficits from
operations. Further, investments are generally unsecured and subordinated to the
claims of other creditors. Accordingly, the Company's investments in and
advances to affiliates accountedare subject to a high degree of investment and credit
risk. The Company has made estimates of the recoverability of loans and advances
to its affiliates, and due to the inherent uncertainty of the operations of
these affiliates, it is reasonably possible that these estimates may change in
the near term.
Investments in and advances to affiliates consist principally of investments in
common stock and preferred stock, as follows as of March 31, 2001 and December
31, 2000, respectively:
MARCH 31, OWNERSHIP DECEMBER 31, OWNERSHIP
2001 INTEREST 2000 INTEREST
------------------ ----------------- --------------------- ----------------
Walden E-Learning, Inc. $32,657 41% - -
Chancery Software Limited 13,248 42% $14,224 42%
Classwell Learning Group, Inc. 10,879 42% 13,045 42%
Caliber Learning Network, Inc. 9,039 35% 15,123 34%
HigherMarkets, Inc. 4,880 31% 6,694 31%
ilearning, Inc. 4,331 27% 5,568 29%
Mindsurf, Inc. 2,770 50% 1,109 47%
Other 3,217 - 2,236 -
------------------ ---------------------
Total $81,021 $57,999
================== =====================
Each period in the tables below includes summarized financial data of those
affiliates in which Sylvan Ventures had an interest at the end of the respective
period and includes results of operations data of such affiliates for under the equity method includes a 10% voting interest inentire
quarter.
MARCH 31, 2001 DECEMBER 31, 2000
-------------------- --------------------
Current assets $46,321 $44,420
Other assets 68,410 67,191
Current liabilities 40,175 37,902
Long-term and other liabilities 10,392 7,149
Redeemable convertible preferred stock 87,179 77,643
9
NOTE 4 - INVESTMENTS IN AND ADVANCES TO AFFILIATES (CONTINUED)
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
2001 2000
-------------------- --------------------
Net sales $ 10,623 $ 5,070
Gross profit 6,753 2,981
Net loss (28,988) (6,142)
The Caliber Learning Network, Inc. ("Caliber"), investment includes a note
payable, secured by Caliber assets, to the Company for management services in
the amounts of $6,150 and related loans. Caliber is a publicly traded company formed for
the purpose$7,150 as of providing learning services to corporationsMarch 31, 2001 and universities
using the Internet, telecommunications and multimedia technology.
The Company's investment in and advances to Caliber consist of the following:
September 30, December 31, 2000,
1999
------------- ------------
Invested capital $14,491 $14,491
Allocable share of losses
from inception (8,999) (6,740)
------- -------
5,492 7,751
Advances to affiliates 6,084 3,024
------- -------
Total investment and
advancesrespectively. The Company has also guaranteed certain future non-cancelable
lease obligations relating to Caliber $11,576 $10,775
======= =======
Summarized financial data oftotaling $5,154. Caliber is as follows:
September 30, December 31,
2000 1999
------------- ------------
Balance sheet data:
Current assets $11,404 $31,765
Non-current assets 18,775 21,519
Current liabilities 14,637 12,570
Non-current liabilities 7,587 10,250
Redeemable preferred stock 16,032 15,153
11
Note 7 - Investments in and Advancescurrently
seeking additional long-term financing to Affiliates (continues)
Three months ended September 30,
2000 1999
------------- ------------
Statementprovide for its anticipated cash
needs. There can be no assurance that such efforts by Caliber will be
successful.
Sylvan Ventures has committed additional funding of operations data:
Revenues $ 5,982 $ 6,570
Operating loss (8,314) (6,052)
Net loss (8,440) (6,094)
Nine months ended September 30,
2000 1999
------------- ------------
Statement of operations data:
Revenues $ 17,133 $ 18,492
Operating loss (22,995) (16,834)
Net loss (22,582) (16,941)
Investments in and advances$21,150 to affiliates include other investments totaling
$33,259 and $2,542 at September 30, 2000 and December 31, 1999, respectively.Mindsurf, Inc.
("Mindsurf") if specified performance targets are achieved.
The Company's allocable sharesshare of losses related to the investments in affiliates
for the quarters ended March 31, 2001 and 2000 was $19,912 and $876,
respectively. At March 31, 2001, the difference between the carrying amount of
equity method investments and the amount of underlying equity in net assets of
these investments was $42,697. This amount is being amortized for the
nine month periods ended September 30, 2000 and 1999 were $3,322 and $2,276,
respectively.
Note 8 - Long Term Debt
Long-term debt consists of the following:
September 30, December 31,
2000 1999
-------------------------------------
Long-term revolving credit facility with banks $ 3,529 $122,991
Convertible debentures 100,000 --
Mortgages and notes payable bearing interest
at rates ranging from 4.25% to 8.00% 3,521 249
Mortgages, notes payable, and lines of credit
related to International Universities 37,270 37,170
-------- --------
144,320 160,410
Less: current portion of long-term debt (17,920) (14,315)
-------- --------
Total long-term debt $126,400 $146,095
======== ========
At September 30, 2000, the Company hadeach
investment primarily over a revolving credit facility (the
"Facility") withthree-year period as a group of five banks, which allows the Company to borrow up to
an aggregate of $100,000 at variable rates. Outstanding borrowings under the
Facility are unconditionally guaranteed by a pledge of the capital stockcomponent of the Company's
subsidiaries, and are due on December 23, 2003. Asallocable share of Decemberincome or loss. For the quarter ended March 31, 1999, the Company had $122,9912001, equity
in net loss of borrowings outstanding under the facility,
which were repaid in the first quarteraffiliates includes $2,805 of 2000 with a portion of the proceeds
from the sale of Prometric. Debt covenants of the Facility require the Company
to maintain certain debt-to-earnings and interest coverage ratios. Other
provisions require maintenance of minimum net worth levels and restrict
advances, investments, loans, capital expenditures and dividends.
12
Note 8amortization.
NOTE 5 - Long Term Debt (continued)
The outstanding borrowings assumed as part of the Universidad Europea de Madrid
("UEM") and Les Roches acquisitions are secured by the underlying property and
fixed assets of the respective universities. These borrowings bear interest at a
blended variable rate of approximately 4.81% as of September 30, 2000, and 4.75%
as of December 31, 1999.
On June 30, 2000, the Company issued $100,000 of ten year convertible
subordinated debentures. The debentures bear interest at a fixed rate of 5.00%,
payable semi-annually, and are convertible at any time into the Company's common
stock at $15.735 per share. The debentures mature on June 30, 2010.
Note 9 - Due to Shareholders of Acquired CompaniesDUE TO SHAREHOLDERS OF ACQUIRED COMPANIES
Due to shareholders of acquired companies consists of the following:following amounts
payable in cash:
September 30, DecemberMARCH 31, DECEMBER 31,
2001 2000
1999
------------- --------------------------------- --------------------
Amounts payable to former shareholders of Schulerhilfe in cashCanter $ -- $10,424
Amounts payable to former shareholders of Canter in cash 13,144 9,000- $13,145
Amounts payable to former shareholders of Prometric in cash 3,050 3,050
------- -------
$16,194 $22,474
======= =======Amounts payable to former shareholders of WSI franchises 12,000 12,000
Amounts payable to former shareholders of UDLA 12,000 12,000
--------------------- --------------------
$27,050 $40,195
===================== ====================
In connection with the Company's acquisition of Canter, and based on Canter's
earnings in 1999, additional cash consideration of
$9,000$13,145 was paid to the seller
in the second quarter of 2000. The liability and additional goodwill was
recorded at December 31, 1999. Additional consideration of $13,144 was accrued
as of September 30, 2000, and additional goodwill was recorded, for a final settlement with the former shareholders of Canter.
In connection with the Company's 1998 acquisition of Schulerhilfe, the Company
paid the sellers a final cash payment of an additional $10,424Canter
during the first
quarter of 2000. This amount was based on the amount of 1999 franchise fees,
whichended March 31, 2001. The liability and additional goodwill
were collected by Schulerhilfe on or before Januaryrecorded at December 31, 2000.
Note 10NOTE 6 - Investment and Other Income
The Company's investment and other income consists of the following:
Three months ended Nine months ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Interest and other income $ 7,179 $64 $16,363 $ 534
Gain (loss) on foreign exchange (2,499) 11 (2,081) (272)
------- --- ------- -----
$ 4,680 $75 $14,282 $ 262
======= === ======= =====
The three and nine months ended September 30, 2000 gain (loss) on foreign
exchange include a $3,149 loss related to the settlement of a foreign exchange
contract that settled in August 2000. The foreign exchange contract was entered
into to protect against the impact of fluctuations in the exchange rate between
the U.S. dollar and a foreign currency on the amount of U.S. dollars required
for a potential foreign university acquisition.
13
Note 11 - Income TaxesINCOME TAXES
The tax provisions for the three month and nine month periods ended September
30,March 31, 2001 and 2000
and 1999 arewere based on the estimated effective tax rates applicable for the full
years, after giving effect to significant eventsunusual 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 impact of the
discontinued operations of Aspect and the inability to recognize tax benefits
from Sylvan Ventures investment losses has resulted in an increase in theCompany's effective
tax rate to 45% for the nine month period ended September 30, 2000.
Sylvan Ventures is organized as a limited liability company ("LLC"), and its
equity losses attributable to investments in corporations are not included in
the Company's consolidated income tax returns. As a result of the revision in
the effective income tax rate, income tax expense from continuing operations of
$1,607 was recognized in37.5% for the third quarter, of which expense of $2,307 related
to a change in estimate from the first sixthree months of 2000.ended
March 31, 2001. The Company estimates that its effective income tax rate from
continuing operations for the year ended December 31, 20002001 will be 45%37.5%. The effective tax
rate for 2000 is based upon available information. However, uncertainties exist
that could cause the effective tax rate on an annual basis to vary from this
estimated effective rate. These uncertainties include the Company's share of
losses relating to the investments of Sylvan Ventures, and the level of profits
generated in the United States versus foreign countries.
The Company's effective tax rate onfrom continuing operations in 19992000 was
significantly impactedaffected by utilized tax credits, foreignthe inability to utilize tax benefits from certain
investment losses of Sylvan Ventures, the impact of minority interests and
state
income taxes, offset by permanent differences that arose due to the significant
amounttiming of restructuring and non-recurring charges.recognition of corporate level tax benefits from subsidiary losses.
Because of these factors, comparison of the 2000 and 1999 effective tax rates is not meaningful.
Note 12rate varied substantially from
the statutory rate.
10
NOTE 7 - Stockholders' Equity
On May 5, 2000, upon conclusion of a Company sponsored tender offer, the Company
purchased approximately 8.5 million shares of common stock at $15.25 per share.
The value of the shares purchased was approximately $130,097, including
transaction costs.
On September 13, 2000, upon conclusion of a second Company sponsored tender
offer, the Company purchased approximately 4.7 million shares of common stock at
$15.00 per share. The value of the shares purchased was approximately $71,057,
including transaction costs.
14
Note 12 - Stockholders' Equity (continued)STOCKHOLDERS' EQUITY
The components of stockholders' equity are as follows:
Accumulated
Additional Other Total
Common Paid-In Retained Comprehensive Stockholders'
Stock Capital Earnings Loss Equity
------ ---------- -------- ------------- -------------ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY
-------------- --------------- -------------- --------------------- -------------------
Balance at January 1,December 31, 2000 $ 509 $ 414,567 $ 60,762 $ (1,745) $ 474,093
Repurchase of 13,166 shares of
Common stock in connection
with self tender offers (132) (201,022) (201,154)
Repurchase of 639 shares of (6) (9,854) (9,860)
Common stock$373 $205,343 $360,232 $(12,685) $553,263
Options exercised for purchase
of 66456 shares of common
stock, including income tax
benefit of $178 1 562 563
Stock options granted to non-
employees 82 82
Issuance of 62 shares of
common stock in connection
with the Employee Stock
purchase Plan 1 784 785
Effect of subsidiary's year-end (5,752) (5,752)
change (See Note 5)
Effect of stock option vesting
acceleration for employees of
discontinued operations 171 171
Issuance of 45 shares of common
stock in connection with other
acquisitions 636 636$2,078 4 5,880 5,884
Other equity activity 126 126
Comprehensive income:income (loss):
Net incomeloss for the ninethree
months ended September 30, 2000 291,231 291,231
Other comprehensive income (loss):March 31, 2001 (11,584) (11,584)
Unrealized lossgain on marketableavailable-
for-sale securities (3,033) (3,033)23 23
Foreign currency translation
adjustment (16,850) (16,850)
---------(10,298) (10,298)
--------------------
Total comprehensive income 271,348
----- --------- -------- -------- ---------loss (21,859)
-------------- --------------- -------------- ---------------------- -------------------
Balance at September 30,March 31, 2001 $377 $211,349 $348,648 $(22,960) $537,414
============== =============== ============== ====================== ===================
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of related tax, are as
follows:
THREE MONTHS ENDED MARCH 31,
2001 2000
$ 373 $ 205,926 $346,241 $(21,628) $ 530,912
===== ========= ======== ======== =========--------------- ---------------
Net income (loss) $(11,584) $287,995
Foreign currency translation adjustment (10,298) (3,488)
Unrealized gain (loss) on available-for-sale securities 23 (1,424)
---------------- ---------------
Comprehensive income (loss) $(21,859) $283,083
================ ===============
1511
Note 13NOTE 9 - Earnings Per ShareEARNINGS (LOSS) PER SHARE
The following table summarizes the computations of basic and diluted earnings
(loss) per common share:
Three months ended Nine months ended
September 30, September 30,THREE MONTHS ENDED MARCH 31,
2001 2000
1999 2000 1999
---- ---- ---- ----------------- --------------
Numerator used in basic and diluted earnings (loss) per common share:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $(3,337)$(11,584) $ 12,645 $ 6,699 $ 25,500
Income (loss)3,409
Loss from discontinued operations, net of tax 1,903 3,287 (3,922) 8,622- (3,868)
Gain (loss) on disposal of discontinued operations, net of tax - (25,082) 288,454
(25,082)
Cumulative effect of change in accounting principle,
net of tax - - - (1,323)
------- -------- -------- --------------------- --------------
Net income (loss) $(1,434) $ (9,150) $291,231 $ 7,717
======= ======== ======== ========
Numerator used in diluted earnings per common share:
Income (loss) from continuing operations, before cumulative
effect of change in accounting principle $(3,337) $ 12,645 $ 6,699 $ 25,500
Add: Interest expense from assumed conversion of
convertible debentures, net of tax - - 688 -
------- -------- -------- --------
Income (loss) from continuing operations, before cumulative (3,337) 12,645 7,387 25,500
effect of change in accounting principle, after assumed
conversion of convertible debentures
Income (loss) from discontinued operations, net of tax 1,903 3,287 (3,922) 8,622
Gain (loss) on disposal of discontinued operations, net of tax - (25,082) 288,454 (25,082)
Cumulative effect of change in accounting principle,
Net of tax - - - (1,323)
------- -------- -------- --------
$(1,434) $(9,150) $291,919 $ 7,717
======= ======== ======== ========$(11,584) $287,995
============= ==============
Denominator:
Denominator for basic earnings per share - weighted-averageWeighted average common shares outstanding 41,084 51,897 45,667 51,64237,441 50,802
Net effect of dilutive stock options based on treasury Stockstock
method using average market price - 1,387 689 1,800768
Effect of dilutive convertible debentures - -
2,142 -
------- -------- -------- --------
Denominator for diluted earnings per share - weighted------------- --------------
Weighted average common shares outstanding and assumed conversions 41,084 53,284 48,498 53,442
======= ======== ======== ========additional
dilution from common stock equivalents 37,441 51,570
============= ==============
Earnings (loss) per common share, basic:
Income (loss) from continuing operations before
Cumulative effect of change in accounting principle $(0.08) $0.24 $0.15 $0.49
Income (loss)$(0.31) $0.07
Loss from discontinued operations, net of tax 0.05 0.06 (0.09) 0.17- (0.08)
Gain (loss) on disposal of discontinued operations, net of tax - (0.48) 6.32 (0.48)
Cumulative effect of change in accounting principle, net of
tax - - - (0.03)
------- -------- -------- --------5.68
------------- --------------
Net income (loss) $(0.31) $5.67
============= ==============
Earnings (loss) per common share, basic $(0.03) $ (0.18) $ 6.38 $ 0.15
------- -------- -------- --------
Earnings per common share, diluted:
Income(loss)Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ (0.08) $ 0.24 $ 0.15 $ 0.48
Income (loss)$(0.31) $0.07
Loss from discontinued operations, net of tax 0.05 0.06- (0.08)
0.16
Gain (loss) on disposal of discontinued operations, net of tax - (0.47) 5.95 (0.47)
Cumulative effect of change in accounting principle, net of
tax - - - (0.03)
------- -------- -------- --------
Earnings5.59
------------- --------------
Net income (loss) per common share $ (0.03) $ (0.17) $ 6.02 $ 0.14
======= ======== ======== ========$(0.31) $5.58
============= ==============
16
Note 14Stock options and the convertible debentures were not dilutive for the quarter
ended March 31, 2001 as the Company reported a net loss from continuing
operations.
NOTE 10 - Contingencies
The Company is the defendant in a legal proceeding filed onCONTINGENCIES
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 filed suit against the Company's
acquisition of rights to administer testing services for the National
Association of Securities Dealers, Inc. ("NASD"). ACT has assertedCompany alleging that
the Company tortuously interfered with ACT's relations, contractualviolated federal antitrust laws and quasi-contractual,committed various state law
torts in connection with the NASD, that the Company caused ACT to suffer the lossoperations 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. Inin obtaining 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 incurredtesting services contract 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.NASD. The
Company believes that allthe grounds of ACT's claimsthe lawsuit are without merit butand is
defending the lawsuit vigorously. Management is unable to predict the
ultimate outcome of the ACT litigation at this time.
The Company islawsuit, but believes that the defendant in arbitration proceeding pending in Los Angeles,
California initiatedultimate resolution of
the matter will not have a material effect on or about March 22, 1999 bythe Company's consolidated
financial position.
On November 18, 1998, James Jinsoo Choi and Christine Choi.Choi filed suit against the
Company seeking damages and recission under the Development Agreement they
had entered into for Korea in 1995 and which had been terminated by the
Company due to their default under the Development Agreement. The Chois' claim arose outdispute
will be decided by arbitration pursuant to the terms of the previous relationship Mr. Choi
had as a licensee of Sylvan. Mr. Choi was licensed to operate Sylvan Learning
Centers in Korea pursuant to a license agreement. In June 1998, Sylvan
terminated the license agreement for non-curable defaults. In their complaint,
the Chois allege fraud, negligent misrepresentation, breach of fiduciary duty,
and breach of contract. The Chois have claimed unspecified compensatory and
punitive damages. The arbitration hearing has been completed; however, the
arbitrators' ruling is not expected until the first quarter of 2001.Agreement. The
Company believes that allthe grounds of the Chois' claimslawsuit are without merit butand is
defending the lawsuit vigorously. Management is unable to predict the
ultimate outcome of the Choi arbitration at this time.
Note 15lawsuit but believes that the ultimate resolution of
the matter will not have a material effect on the Company's consolidated
financial position.
The Company is subject to other legal actions arising in the ordinary course
of its business. In management's opinion, the Company has adequate legal
defenses and/or insurance coverage with respect to the eventuality of such
actions and does not believe any settlement would materially affect the
Company's financial position.
12
NOTE 11 - Business Segment InformationBUSINESS SEGMENT INFORMATION
Three months ended Nine months ended
September 30, September 30,THREE MONTHS ENDED MARCH 31,
2001 2000
1999 2000 1999
---- ---- ---- --------------------- -----------------
Operating revenues:
Sylvan Learning Centers:
Franchise $10,458 $13,425 $28,913 $29,680
Company-owned 15,500 13,589 45,788 40,702Centers $ 27,842 $22,659
Sylvan Education Solutions 18,262 18,415 74,315 69,99426,770 25,945
Sylvan English Language Instruction:
Franchise 4,045 9,328 12,125 20,572
Company-owned 7,504 10,551 23,988 23,679Instruction 13,017 12,435
Sylvan International Universities 4,200 1,441 32,608 16,17952,817 14,501
Sylvan Ventures - -
- -
-------- ------- -------- --------
$ 59,969 $66,749 $217,737 $200,806
======== ======= ======== ========----------------- -----------------
$120,446 $75,540
================= =================
Segment profit (loss):
Sylvan Learning Centers $6,554 $11,010 $ 17,985 $22,4235,690 $ 5,002
Sylvan Education Solutions 3,417 6,500 11,197 13,3851,675 1,867
Sylvan English Language Instruction 346 8,958 2,289 14,983688 1,558
Sylvan International Universities (3,575) (3,290) (782) (239)4,319 2,685
Sylvan Ventures (10,192) - (15,890) -
-------- ------- -------- --------(25,763) (1,662)
------------------ -----------------
$(13,391) $ (3,450) $23,178 $ 14,799 $ 50,552
======== ======= ======== ========9,450
================== =================
17
Note 15 - Business Segment Information (continued)
September 30, DecemberMARCH 31, DECEMBER 31,
Segment assets: 2001 2000
1999
------------- ------------------------------ -----------------
Sylvan Learning Centers $ 87,96690,169 $ 71,09784,895
Sylvan Education Solutions 111,796 105,273109,429 120,756
Sylvan English Language Instruction 114,950 121,408128,414 135,857
Sylvan International Universities 137,429 97,344239,762 239,166
Sylvan Ventures 81,606 -
-------- --------
Segment assets 533,747 395,122
Corporate assets 397,561 89,216
Net assets of discontinued operations - 280,287
-------- --------
Total assets $931,308 $764,625
======== ========94,303 82,006
------------------ -----------------
$662,077 $662,680
================== =================
As discussed in Note 4, during the first quarter of 2000, the Company commenced
operations of its newest segment, Sylvan Ventures. Segment profit (loss) is calculated as net operating profit (loss) for operating
segments. Segment profit for Sylvan Ventures is calculated as the net development andsum of the
operating profit (loss), plus
thecosts, net investment incomegain (loss). There have been no other changes since
December 31, 1999 and equity in the Company's method for identificationnet loss of
reportable
segments or for determination of segment profit or loss.affiliates. There are no significant intercompany sales or transfers. The
following table reconciles the reported information on segment profit (loss) to
continuing income (loss) from continuing operations before income taxes reported in the
consolidated statements of operations:
Three months ended Nine months ended
September 30, September 30,THREE MONTHS ENDED MARCH 31,
2001 2000
1999 2000 1999
---- ---- ---- ------------------- --------------------
Total profit (loss) for reportable segments $(13,391) $ (3,450) $23,178 $ 14,799 $ 50,5529,450
Corporate general and administrative expense (4,620) (5,518) (13,987) (15,284)(5,986) (4,801)
Other income (expense), and minority interest, net 6,340 (1,478) 11,367 (5,257)
-------- ------- -------- --------843 (447)
--------------- --------------------
Income (loss) from continuing operations before income taxes and cumulative effect of change in
accounting principle$(18,534) $ (1,730) $16,182 $ 12,179 $ 30,011
======== ======= ======== ========4,202
=============== ====================
Note 16 - Comprehensive Income
The components of comprehensive income, net of related tax, are as follows:
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Net income (loss) $ (1,434) $(9,150) $291,231 $ 7,717
Foreign currency translation adjustment (10,784) 2,037 (16,850) (2,275)
Unrealized gain (loss) on marketable securities 2,696 - (3,033) -
-------- ------- -------- --------
Comprehensive income (loss) $ (9,522) $(7,113) $271,348 $ 5,442
======== ======= ======== ========
18
Note 16 - Restructuring
During the fourth quarter of 1999, the Company completed an analysis of its
operating structure to improve operating efficiency and to enhance shareholder
value. As a result of this analysis, management approved a formal restructuring
plan in 1999, and the Company recorded a restructuring charge to operations of
approximately $5,100 at December 31, 1999. The restructuring plan was comprised
of employee termination and facility exit costs resulting primarily from the
Company's plan to exit certain activities outside the core business of providing
educational instruction. The Company eliminated 58 professional and
administrative positions as a result of the plan. Facility exit costs include
approximately $3,500 of costs to close schools and school-based facilities. The
Company expects to complete implementation of the plan by the end of fiscal
2000. The accrued restructuring costs and the amounts charged against the
provision were as follows:
Payments in the
Balance at nine months ended Balance at
December 31, 1999 September 30, 2000 September 30, 2000
----------------- ------------------ ------------------
Employee termination costs $1,118 $1,072 $46
School closing costs 1,042 1,042 -
------ ------ ---
Total $2,160 $2,114 $46
====== ====== ===
The remaining costs at September 30, 2000 represent the Company's best estimate
of the remaining employee termination costs to be paid.
Note 17- Subsequent Events
On October 26, 2000, the Company reached a definitive agreement to acquire a
controlling interest in Universidad deValle de Mexico (UVM) for a cash purchase
price in the range of $40,000 to $48,000. The final purchase price may differ
from the preliminary amount due to adjustments to acquisition related costs. The
agreement is subject to government and regulatory approval.
1913
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL -------------------------------------------------
CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------
Overview
The CompanyOVERVIEW
Sylvan Learning Systems, Inc. ("the Company" or "Sylvan") 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;primarily franchise royalties, company-owned center
revenue and franchise sales fees; and Sylvan International Universities,
which earns tuition and dormitory fees frompaid by the students of UEM, which was acquired in April 1999 andUniversidad
Europea de Madrid CEES ("UEM"), Swiss Hotel Association Hotel Management
School Les Roches where Board control was obtained in July 2000. Additionally, during the first
quarter of 2000, the Company initiated a new("Les Roches"), Universidad del Valle de Mexico ("UVM") and
Universidad de Las Americas ("UDLA"). A fifth segment, Sylvan Ventures. Minority
interest owners investedVentures,
invests in Sylvan Ventures on June 30, 2000, however, Sylvan
maintains a majority-ownership position in Sylvan Ventures and accounts for
Sylvan Ventures as a consolidated subsidiary. Sylvan Ventures is focused on
bringing emergingdevelops companies to bring technology solutions to the
education and training marketplace. For the nine months ended September 30, 2000, the Sylvan Ventures segmenthas not generated
revenues since its inception in 2000, but costs have been incurred development coststo oversee
and recorded its share of equity losses from
affiliates but did not generate revenues.develop the investments.
The following table sets forth the percentage relationships of operating
revenues and direct costs for each segment,division, as well as certain income statement
line items expressed as a percentage of total revenues for the periods
indicated:
Three months ended Nine months ended
September 30, September 30,THREE MONTHS ENDED MARCH, 31
2001 2000
1999 2000 1999
--------------------- ---------------------------------- ---------------
Revenues:
Sylvan LearningLearn ing Centers 43% 40% 34% 35%23% 30%
Sylvan Education Solutions 31% 28%22% 34% 35%
Sylvan English Language Instruction 19% 30%11% 17% 22%
Sylvan International Universities 7% 2% 15% 8%
--- --- --- ---44% 19%
--------------- ---------------
Total revenues 100% 100% 100% 100%
Direct costs:
Sylvan Learning Centers 32% 24% 26% 24%18% 23%
Sylvan Education Solutions 25% 18% 29% 28%21% 32%
Sylvan English Language Instruction 19% 17% 16%10% 14%
Sylvan International Universities 13% 7% 15% 8%
--- --- --- ---40% 16%
--------------- ---------------
Total direct costs 89% 66% 86% 74%85%
General and administrative expenses 8% 8%5% 6% 8%
Sylvan Ventures developmentoperating costs 10% 0% 5% 0%
--- --- --- ---2%
--------------- ---------------
Operating income (loss) (7%) 26% 3% 18%1% 7%
Non-operating income (expense) 4% (2%) 3% (3%)
--- --- --- ---expense (including equity in net loss of Ventures affiliates) 16% 1%
---------------- ---------------
Income (loss) from continuing operations before taxes and
cumulative effect of change in accounting principle (3%(15%) 24% 6% 15%
Income tax expense (2%benefit (expense) 5% (1%)
(5%) (3%) (2%)
--- --- --- ------------------ ---------------
Income (loss) from continuing operations (5%(10%) 19% 3% 13%
Discontinued operations:
Income (loss) from discontinued operations, net of tax 3% 5%
(2%) 4%
Gain (loss) on disposal of discontinued operations, net of tax 0% (38%) 133% (12%)
--- --- --- ---
Income (loss) before cumulative effect of change in accounting principle (2%) (14%) 134% 5%
Cumulative effect of change in accounting principle, net of tax 0% 0% 0% (1%)
--- --- --- ---
Net income (loss) (2%) (14%) 134% 4%
=== === === =================== ===============
20
ResultsRESULTS OF OPERATIONS
Sylvan is a leading international provider of Operationseducational services to
families and schools. The core businesses ofCompany provides lifelong educational services
through five separate business segments. The Sylvan Learning Centers segment
designs and delivers individualized tutorial programs to school age children
through franchised and Company-owned Learning Centers. This segment also
includes the operations of Schulerhilfe, a major provider of tutoring
services in Germany. The Sylvan Education Solutions (formerly Contract Services)segment principally
provides educational programs to students of public and non-public school
districts through contracts funded by Title 1 and state-based programs. This
segment also
14
provides professional development and graduate degree programs to teachers
through the Canter Group. The Sylvan English Language Instruction were
supplemented withsegment
consists of the additionoperations of Wall Street Institute, Kft., ("WSI"), a
European-based franchiser and operator of learning centers that teach the
English language to professionals. Sylvan International Universities segment
owns or maintains controlling interests in April
1999.four private, for-profit universities
located in Spain, Switzerland, Mexico and Chile. The Company has also moved to addressCompany's newest segment,
Sylvan Ventures, invests in and develops companies that are creating emerging
technology solutions for the increasing importanceeducation marketplace.
Consistent with the stated goal of technology in learning by focusing resources and management's efforts
on developmentthe core business of educational services, and funding of
technology applications in the education and instruction marketplaces. In order to fund expansion of
technology applications in educational and training services, and to ensure that management remains focused on core business
strengths, the Company
consummated the sale of the PACE corporate training
business, the Prometric, a computer-based testing business and Aspect
Language Schools, B.V. ("Aspect"), an English languageLanguage immersion business in
December 1999, March 20002000. Unless specifically noted, all discussion of financial results excludes
the results Prometric and October 2000,
respectively. The operating results of theAspect except as disclosed as discontinued businesses have been
reported in the discontinued operations section of the consolidated statements
of operations.
The following comparison of operating results focuses on the
continuing operations of the Company.
Comparison of results for the three months ended September 30, 2000 to results
for the three months ended September 30, 1999.
Revenues.COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 TO RESULTS FROM
THE THREE MONTHS ENDED MARCH 31, 2000.
REVENUES. Total revenues from continuing operations decreased by $6.7 million,
or 10%, to $60.0 million in 2000 from $66.7 million in 1999. This revenue
decrease was driven primarily by a $13.6 million decrease in fees associated
with sales of territory rights related to the Learning Centers, Canter and Wall
Street Institute businesses. This decline in territory fees resulted from a
change in the Company's international expansion strategy to one of retaining
ownership of franchise territories in high potential markets. Although this
strategy change results in declining current period revenue comparisons and
deterioration of the current period operating margins, the strategy will result
in the retention of a greater share of the system revenues in future periods.
Excluding these territory fee reductions, total revenues from continuing operations increased by $6.5$44.9 million,
or 12% for59%, to $120.4 million in 2001 from $75.5 million in 2000. Included in the
three month period ended
September 30, 2000 overtotal revenues from continuing operations in 2001 were $36.7 million of revenues
from Les Roches, UVM and UDLA, which were acquired in the same period in 1999.
Sylvan Learning Centersthird and fourth
quarters of 2000. Total revenues from continuing operations increased 11%,
excluding the increase due to the Les Roches, UVM and UDLA acquisitions.
SYLVAN LEARNING CENTERS revenue decreasedincreased by $1.1$5.2 million, or 4%23%,
to $26.0$27.8 million for the quarter ended September 30, 2000March 31, 2001, compared to $22.7
million in the same period in 1999. Franchise sales decreased by $5.4 million primarily due to an
international area development agreement for $5.0 million during the quarter
ended September 30, 1999. Franchise royalties increased by $0.8 million, or 16%,
in 2000 as a result of a net increase of 65 new Centers opened after September
30, 1999, and a 10% increase in same center revenue.2000. Revenues from Company-owned learning
centers increased $1.9$1.7 million, or 16%15%, to $13.4$12.8 million during 2000.the first
quarter of 2001. Same center revenues increased 9%7%, or $1.1$0.8 million, with the
remaining revenue increase of $0.8$0.9 million generated from five Company-owned
centers acquired from franchise owners and a net of one new center opened
during the past year. International revenues, primarily Schulerhilfe, declined to $2.8 million in 2000
from $3.0 million in 1999 primarily as a resultIn May of foreign exchange declines. On
May 19, 2000, the Company acquired Sylvan Ivy Prep, formerly Ivy West, an SAT
preparation company based in California. ThisThe acquisition of Ivy West resulted
in additional revenue of $1.5$1.9 million for the three months ended September 30,March 31,
2001. Franchise sales increased by $0.3 million primarily due to increased
territory sales in the U.S. and Canada. Franchise royalties increased by $0.9
million, or 17%, in the first quarter of 2001 as a result of a net increase
of forty-nine new Learning Centers opened after March 31, 2000, and a 12%
increase in same center revenue. International revenues, primarily
Schulerhilfe, remained constant at $4.0 million in the first quarter of 2001
and 2000. Operating revenue for Sylvan Learning Centers represents 43%23% of
total revenues from continuing operations of the Company for the three month
period ended September 30, 2000.
Sylvan Education SolutionsMarch 31, 2001.
SYLVAN EDUCATION SOLUTIONS revenue decreasedincreased by $0.1$0.8 million, or 1%3%, to
$18.3$26.8 million for the quarter ended September 30, 2000March 31, 2001, compared to $18.4 million for the same period
in 1999. Sylvan2000. Career Starters (formerly known as "Sylvan At SchoolWork") revenue increased
$1.0 million over the same period in 2000 as a result of new contracts signed
since March 31, 2000. Canter revenue decreased $0.2 million to $5.2 million for
the quarter ended September 30,
2000 increased by $0.5 million in comparison with the same period in 1999.
Canter teacher-training revenue decreased $0.6 million to $10.0 million in the
third quarter 2000March 31, 2001 from $10.6$5.4 million in the same period in 2000,
primarily as a result of 1999. The quarter
ended September 30, 1999 included $3.5 million in non-recurring revenue relatedtiming differences of shipments of materials to
the sale of an international Canter license agreement to provide Canter's
masters degree program. This decrease in international license fee revenue for
the quarter ended September 30, 2000 was offset by a $2.8 million increase in
recurring Canter revenue due to a strong demand for Canter's products,
particularly Canter's distance learning masters program.students between periods. Operating revenue for Sylvan Education Solutions
represents 31% of total revenues from continuing
operations of the Company for the quarter ended September 30, 2000.
21
English Language Instruction revenue decreased $8.3 million to $11.6
million in the third quarter of 2000 from $19.9 million in the third quarter of
1999. The primary reason for the revenue decrease in the third quarter of 2000
is that sales of territory fees decreased by $5.2 million to $0.2 million for
the three months ended September 30, 2000 from $5.4 million for the same period
of 1999. This decline in territory fees resulted from the aforementioned change
in the Company's expansion strategy to one of retaining ownership of franchise
territories in high potential markets. The remaining $3.1 million decrease in
revenue was a result of lower franchise sales, maturing of the Spain market and
foreign exchange differences for the three month period in comparison to the
same period in 1999. Operating revenue for English Language Instruction
represents 19% of the total revenues from continuing operations of the Company
for the quarter ended September 30, 2000.
Sylvan International Universities revenue increased $2.8 million to $4.2
million for the quarter ended September 30, 2000 compared to $1.4 million for
the same period in 1999. The acquisition of control of Les Roches in July 2000
contributed $2.9 million in additional revenues which was offset by a $0.1
million decline in revenues at UEM primarily due to currency exchange changes
and the effect of a program that was phased out later in 1999. The three month
period ended September 30, 2000 is traditionally a low revenue period for UEM
since classes are not in session for most of the period. Operating revenue for
the Sylvan International Universities segment represents 7%22% of total revenues from continuing operations of the Company for
the three month period ended September 30,March 31, 2001.
SYLVAN ENGLISH LANGUAGE INSTRUCTION revenue increased $0.6 million, or
5%, to $13.0 million for the quarter ended March 31, 2001, compared to the same
period in 2000. Direct Costs. Total direct costsThis increase was almost entirely the result of increased
tuition revenues from Company-owned centers along with improved sales volumes in
existing franchised centers. Operating revenue for Sylvan English Language
Instruction segment represents
15
11% of total revenues from continuing operations excluding Sylvan
Ventures, increased 22% to $53.2 millionof the Company for the three
month period ended September 30,March 21, 2001.
SYLVAN INTERNATIONAL UNIVERSITIES revenue for the first quarter of
2001 increased $38.3 million, or 264%, to $52.8 million, compared to the same
period in 2000. International Universities revenue increased $36.7 million
due to the acquisitions of controlling interests of Les Roches, UVM and UDLA,
which occurred in the third and fourth quarters of 2000 and are, therefore,
not included in revenue for the quarter ended March 31, 2000. Seasonality of
university semesters significantly impacts these operating revenues as
evidenced by the semester break at UDLA in the first quarter which results in
limited class schedules for the summer break during the first two months of
the first quarter. Operating revenue for Sylvan International Universities
represents 44% of total revenues from $43.6continuing operations of the Company
for the three month period ended March 31, 2001.
DIRECT COSTS. Total direct costs of revenues excluding Sylvan Ventures increased
68% to $108.1 million in 1999.2001 from $64.4 million in 2000. Included in direct
costs in the first quarter of 2001 were $33.9 million of costs of Les Roches,
UVM and UDLA, which were acquired in the third and fourth quarters of 2000.
Total direct costs increased $9.7 million, or 15%, excluding the costs related
to Les Roches, UVM and UDLA. Direct costs as a percentage of total revenues
increased to 89%90% in 20002001 from 65%85% in 1999.2000. This increase in direct costs as a
percentage of revenues is primarily due to the effectsexpenses related to the expansion
of the changeInternational Universities and the impact of seasonality in the Company's expansion strategy to reduce high-margin territory sales
revenues as well as the seasonality of the semester-based education industry.
Timing of semester-based revenues, primarily at Education Solutions and UEM,
also contributed to reducing revenues in the period and increased the percentage
of direct costs to those revenues. Excluding the territory fee revenue, direct
costs as a percentage of revenue declined to 89% in 2000 from 92% in the three
month period ended September 30, 1999.
Sylvan Learning Centersacquired
universities.
SYLVAN LEARNING CENTERS expenses increased $3.4$4.5 million to $19.4$22.2
million, or 75%80% of Learning Centers revenue for 2000,2001, compared to $16.0$17.7
million, or 59%78% of Learning Centers revenue for the same period in 1999.2000.
Approximately $1.5$1.7 million of the increase in 2000the first quarter of 2001
relates to expenses incurred in Company-owned learning centers due to the
acquisition of franchised learning centers and variable costs associated with
higher revenues at existing Company-owned centers. Expenses as a
percentage of revenues in Company-owned learning centers remained consistent
with those of the same period last year. The acquisition of Sylvan Ivy
PrepWest resulted in $1.2$1.6 million of increased costscost during the three months ended
September 30, 2000.March 31, 2001. The remaining cost increase for the quarter relates to
additional franchise support costs. Despite this increase, franchise support
costs which remain consistentactually decreased as a percentage of franchise royalty revenue. The growthrevenue to 55%
compared to 58% for the first quarter of expenses as a percentage of revenue is attributed
to the high-margin international territory sale during the quarter ended
September 30, 1999. Excluding the impact of this sale, expenses as a percentage
of revenue have remained consistent between periods.
Sylvan Education Solutions2000.
SYLVAN EDUCATION SOLUTIONS expenses increased by $2.9$1.0 million to $14.8$25.1
million, or 81%94% of Sylvan Education Solutions revenue for the quarter ended
September 30, 2000,March 31, 2001, compared to $11.9$24.1 million or 65%93% of Sylvan Education Solutions
revenue for the third quarter of 1999.same period in 2000. The increase in expenses as a percentage of
revenue for the quarter ended September 30, 2000March 31, 2001 is primarily due to $3.5 million of high-margin revenue related to the sale of a license feeinvestments
made in Canter personnel and technology systems to provide the necessary
infrastructure to support Canter's masters degree program in Mexico during the quarter ended
September 30, 1999. Excluding the impactexpected future growth.
SYLVAN ENGLISH LANGUAGE INSTRUCTION expenses increased by $1.4
million to $12.3 million or 95% of this sale, expenses as a percentage
of revenue have remained consistent between the periods.
22
Sylvan English Language Instruction
expenses increased $0.3 million to $11.2
million or 97% of revenues for the quarterthree month period ended September 30, 2000,March 31, 2001, compared to $10.9
million or 55%88% of Sylvan English Language Instruction revenues for the same
period in 1999.2000. The increase in expenses as a percentage of revenue for the
three months ended September 30,
2000March 31, 2001 is primarily athe result of increasing
overhead costs related to the business decisionfuture internal expansion of the international
network of centers.
SYLVAN INTERNATIONAL UNIVERSITIES expenses increased by $36.7
million to reduce the amount$48.4 million, or 92% of high
margin territory sales further compounded by cost increases in staffing
administrative efforts for the internally supported international expansion
program. Sylvan International Universities expenses were $7.8 million,revenue
for the three month period ended September 30, 2000March 31, 2001, compared to $4.7$11.1 million or
81% of Sylvan International Universities revenue for the same period in 1999.2000.
This $3.1 million increase wasis primarily due to $2.2 millionthe acquisition of direct costs generated fromcontrolling interests of
Les Roches. An additional $1.4 million of the
increase in direct costs is due to the headquarters personnel costs for Sylvan
International Universities during 2000, which included approximately $0.3
million of unsuccessful acquisition due diligence expenses during the period.
These cost increases were partially offset by the favorable effect of currency
rate changes.
Sylvan Ventures costsRoches, UVM and losses were $7.3 million, net of minority
interest allocation, for the three months ended September 30, 2000. These costs
primarily relate to efforts to identify potential technology driven investmentsUDLA in the educational services market, the developmentthird and incubationfourth quarters of the
investments it currently holds and losses from investments held by Ventures.
Costs associated with development of eSylvan, the Internet based instruction
solution, totaled $3.8 million for the three months ended September 30, 2000.
These costs are primarily comprised of professional and consulting fees,
infrastructure development costs,2000, as well as
salariesan increase in headquarter expenses to support the expansion of the
university network. Closure of UDLA for the summer break in January and
other related
operational expenses. Ventures losses relatedFebruary was the primary reason for the division's decreased operating
margins in comparison to equity losses in affiliates
were primarily impacted by the losses generated at Caliber. These losses are
greater than the comparable period in the prior year due to changes that are
occurring within the Caliber business model which will result in improved future
operating performance.
Other Expenses.first quarter of 2000.
16
OTHER EXPENSES. General and administrative expenses decreasedincreased by $0.9$1.2 million
during the three month period ended September 30, 2000,March 31, 2001, compared to the same period
in 1999. These2000. The increase was primarily due to performance-based bonus recognition
and moving costs remained constant at 8%incurred in 2001. General and administrative expenses decreased
to 5% of total revenues for the three month period ended September 30, 2000,March 31, 2001,
compared to 6% of revenues for the same period in 1999.
The decrease2000.
Sylvan Ventures operating costs increased by $4.2 million to $5.6
million for the three months ended March 31, 2001, compared to $1.4 million
for the same period in general and administrative2000. eSylvan, a subsidiary of Sylvan Ventures,
incurred $3.6 million of expenses is primarily duerelated to the Company's effortsdevelopment of its
Internet-based tutoring operations. Sylvan Ventures incurred management
expenses of $2.0 million in connection with research, evaluation and
management of its portfolio companies.
Sylvan Ventures equity in net losses of affiliates increased by
$19.5 million to control overhead costs despite market expansion.$19.8 million for the first quarter of 2001, compared to
$0.3 million for the same period in 2000. These losses relate to Sylvan
Ventures' share of operating losses generated by the early stage enterprises
in the investment portfolio and the amortization of the difference between
the initial carrying amount of equity method investments and the underlying
equity in net assets of these investments at the time of purchase. Sylvan
Ventures investment losses of $0.4 million consisted of impairment charges
related to portfolio investments. Minority interests' share of Sylvan
Ventures losses totaled $1.3 million for the first quarter of 2001.
Other non-operating items increased $4.9remained constant at $0.4 million infor the
third quarter of
2000 asended March 31, 2001, compared to the same period in 1999. This2000. The
increase is largely
attributable to an increase of $7.1 million in net interest and other income related to investing the net proceeds the Company received from the March 2000
sale of Prometric. The increaseand decrease in equity in net interest income wasloss of
other affiliates of $0.4 million and $0.5 million, respectively, were partially
offset by an increase in foreign currency exchange lossother minority interest of $2.5$0.7 million. The primary reason for the
exchange loss was a loss of $3.1 million that was incurred on the settlement of
a forward exchange contract that the Company had entered to protect against
fluctuations in local currency related to a pending International University
transaction.
The Company's effective tax rate forfrom continuing operations is not
representative of the expected annual rate due to changes in estimates made in
the quarter to adjust income taxes recorded in prior quarterswas 37.5%
for the three month period ended September 30, 2000.March 31, 2001. The reported effective income
tax rate forfrom continuing operations exceedsdiffers from the U.S. federal statutory tax
ratesrate due to the impact of state income taxes, the impact of minority interest, and the
Company's inability to utilize tax benefits related to certain investments of
Sylvan Ventures. The Company anticipates that its effective income tax rate for
continuing operations for the year ending December 31, 2000 will be 45%. The
effect on the third quarter of the adjustment in the full year rate resulted in
the creation of a tax expense on a loss from continuing operations.
The Company's effective tax rate for continuing operations in 1999 was
significantly impacted by utilized tax credits, foreign tax benefits and state
income taxes offset by permanent differences that arose due to the significant
amount of restructuring and non-recurring charges. Because of these factors,
comparison of the 2000 and 1999 effective tax rates is not meaningful. Please
refer to the Company's annual report on Form 10-K for the year ended December
31, 1999 for the 1999 tax rate reconciliation.
23
Pretax Income (Loss) from Continuing Operations. Pretax results from continuing
operations decreased by $17.9 million to a loss of $1.7 million for the three
months ended September 30, 2000 compared to income of $16.2 million in the same
period in 1999. The decrease is primarily a result of the announced change in
the Company's strategy regarding territory fees combined with costs required to
begin Sylvan Ventures, offset by increases in interest income.
Income from Discontinued Operations. Income from discontinued operations
includes the operating results of Aspect for the quarter ended September 30,
2000 and 1999. The comparable period in 1999 also includes the operating results
of PACE which was sold in December 1999 and Prometric, which was sold in March
2000.
Loss or Gain on Disposal of Discontinued Operations. At September 30, 1999 the
Company approved a formal plan to dispose of the Pace Group. The loss on
disposal of Pace was anticipated to be approximately $25.0 million, and was
recorded in the period ended September 30, 1999. The disposal of Aspect in
October 2000 resulted in an estimated $22.4 million gain, which will be
recognized in the fourth quarter of 2000.
Comparison of results for the nine months ended September 30, 2000 to results
for the nine months ended September 30, 1999.
Revenues. Total revenues from continuing operations increased by $16.9 million,
or 8%, to $217.7 million in 2000 from $200.8 million in 1999. This revenue
increase has been primarily driven by expansion of the International
Universities segment through university acquisitions in 1999 and 2000, solid
revenue growth in the Learning Centers and Education Solutions segments, offset
by the impact of the change in the Company's international expansion strategy to
retaining ownership of franchise territories in high potential markets and
thereby reducing territory revenues. The $15.0 million decline in territory fees
for the nine month period ended September 30, 2000 in comparison to the same
period in 1999 resulted from a change in the Company's international expansion
strategy. Although this strategy change results in declining current period
revenue comparisons and deterioration in the current period operating margins,
the strategy will result in the retention of a greater share of the system
revenues in future periods. Excluding these territory fee reductions, total
revenues from continuing operations increased by $31.9 million or 17%, for the
nine month period ended September 30, 2000 over the same period in 1999.
Sylvan Learning Centers revenue increased by $4.3 million, or 6%, to
$74.7 million for the nine months ended September 30, 2000 compared to the same
period in 1999. Franchise sales decreased by $5.6 million primarily due to an
international area development agreement sold to France for $5.0 million during
the nine months September 30,1999. Franchise royalties increased by $2.3
million, or 17%, in 2000 as a result of the net increase of 65 new Centers
opened after September 30, 1999, and a 12% increase in same center revenue.
Revenues from Company-owned learning centers increased $4.9 million, or 15%, to
$37.3 million during 2000. Same center revenues increased 7%, or $1.8 million,
with the remaining revenue increase of $3.1 million was generated from five
Company-owned centers acquired from franchise owners and a net of one new
Company-owned center opened during the past year. International revenues,
primarily Schulerhilfe, declined to $10.7 million in 2000 from $10.9 million in
1999 primarily as a result of foreign currency exchange rate changes. On May 19,
2000 the Company acquired Sylvan Ivy Prep, formerly Ivy West, an SAT preparation
company based in California. This acquisition resulted in additional revenue of
$1.7 million for the nine months ended September 30, 2000. The remaining $1.0
million growth in revenue relates to increased volume in Tuition Finance and
product sales. Operating revenue for Learning Centers represents 34% of total
revenues from continuing operations of the Company for the nine month period
ended September 30, 2000.
24
Sylvan Education Solutions revenue increased by $4.3 million or 6% to $74.3
million for the nine months ended September 30, 2000 compared to the same period
in 1999. Sylvan At School revenue increased $0.6 million or 1% over the same
period in 1999. Canter teacher training revenue increased $3.7 million to $26.6
million for the nine months ended September 30, 2000, from $22.9 million in the
same period of 1999. The $3.7 million increase in 2000 resulted from a $7.2
million increase in Canter's program sales revenue, offset by a $3.5 million
decrease in license fee revenues. Operating revenue for Sylvan Education
Solutions represents 34% of total revenues from continuing operations of the
Company for the nine month period ended September 30, 2000.
English Language Instruction revenue decreased $8.2 million to $36.1
million in the nine months ended September 30, 2000 from $44.3 million in the
same period of 1999. The primary reason for the revenue decrease in the nine
month period ended September 30, 2000 is that territory sales fees decreased by
$7.6 million to $0.3 million in 2000 from $7.9 million in the same period in
1999. Area development agreement sales also declined in 2000 by $1.0 million
from $1.5 million in 1999 to $0.5 million in 2000. The decline in territory fees
and area development fees resulted from the Company's change in international
expansion strategy to one of retaining ownership of franchise rights in high
potential markets. The impact of these revenue decreases was partially offset by
higher revenues from franchise operations and Company-owned centers during the
nine months ended September 30, 2000. Operating revenues from English language
instruction represents 17% of total revenues from continuing operations of the
Company for the nine month period ended September 30, 2000.
Sylvan International Universities revenue increased $16.4 million to $32.6
million for the nine month period ended September 30, 2000 compared to $16.2
million for the same period in 1999. This increase is primarily due to $14.5
million from the full year 2000 revenue impact of UEM which was acquired in
April 1999 and the $2.9 million impact of the acquisition of control of Les
Roches in the third quarter of 2000. These acquisition related revenue increases
were partially offset by declines in UEM revenues primarily due to currency
exchange rate changes and the effect of a program that was phased out in the
fourth quarter of 1999.
Direct Costs. Total direct costs from continuing operations, excluding Sylvan
Ventures, increased 24% to $187.0 million for the nine month period ended
September 30, 2000 from $150.3 million in 1999. Direct costs as a percentage of
total revenues increased to 86% in 2000 from 75% in 1999. This increase in
direct costs as a percentage of revenue is primarily due to a change in the
Company's expansion strategy to reduce the sales of franchise territories in
order to retain the long-term benefits of owning franchise centers in high
growth potential markets. The territory sales in prior comparable periods were
at high margins, which reduce the percentage of direct costs to revenues in the
1999 period.
Sylvan Learning Centers expenses increased $8.7 million to $56.7 million,
or 76% of Learning Centers revenue for the nine month period ended September 30,
2000, compared to $48.0 million, or 68% of Learning Centers revenue for the same
period in 1999. Approximately $4.2 million of the increase in 2000 relates to
expenses incurred in Company-owned centers due to costs associated with higher
revenues at existing Company-owned centers. Expenses as a percentage of revenues
in Company-owned learning centers remained consistent with those of the same
period last year. The acquisition of Sylvan Ivy Prep resulted in $1.6 million of
increased costs during the nine months ended September 30, 2000. The remaining
cost increase for the period relates to international development costs,
franchise support costs, including Tuition Finance, and legal expenses. The
growth of expenses as a percentage of revenue is attributed to the International
area development sale during the nine month period ended September 30, 1999. The
costs associated with this sale were minimal resulting in lower expense as a
percentage of revenue. Excluding the impact of this sale, expenses as a
percentage of revenue remain consistent.
25
Sylvan Education Solutions expenses increased by $6.6 million to $63.1
million, or 85% of Sylvan Education Solutions revenue for the nine months ended
September 30, 2000, compared to $56.6 million or 81% of Sylvan Education
Solutions revenue for the same period of 1999. The increase in expenses as a
percentage of revenue for the nine months ended September 30, 2000 is primarily
due to the $3.5 million of high-margin revenue related to the 1999 sale of a
license fee to provide Canter's masters degree program in Mexico. Excluding the
impact of this sale, expenses as a percentage of revenues have decreased from
the comparable period in 1999 due to the implementation of a new model, which
reduces labor costs.
English Language Instruction expenses increased $4.6 million to $33.8
million or 94% of revenues for the nine months ended September 30, 2000,
compared to $29.2 million or 66% of revenues for the same period in 1999. The
increase in expenses as a percentage of revenue for the nine months ended
September 30, 2000 is primarily a result of the business decision to reduce the
amount of high margin territory sales further compounded by cost increases of
administrative efforts for the internally supported international expansion
program.
Sylvan International Universities expenses were $33.4 million for the
nine month period ended September 30, 2000, as compared to $16.4 million for the
same period in 1999. This increase in expenses is primarily related to
acquisitions made to expand the International Universities segment. Sylvan
acquired a 54% interest in UEM in the second quarter of 1999; therefore, no
direct costs were reported for the first quarter of 1999. Direct costs reported
for the first quarter of 2000 were $11.1 million. An additional $2.2 million of
the direct costs in the nine month period ended September 30, 2000 were
generated from Les Roches. Another $3.1 million of the increase in direct costs
is due to headquarters personnel costs for Sylvan International Universities
during 2000, and approximately $0.4 million of unsuccessful acquisition due
diligence expenses during the period. Excluding the effects of acquisitions and
headquarters direct costs, direct costs of UEM over the nine month periods ended
September 30, 2000 decreased by $0.6 million primarily due to currency exchange
rate changes offset by program enhancement costs.
Sylvan Ventures costs and losses were $13.0 million, net of minority
interest allocations, for the nine months ended September 30, 2000. These costs
primarily relate to efforts to identify potential investments in the educational
services market, the development and incubation of technology driven investments
it currently holds, and losses from investments held by Ventures. Costs
associated with development of eSylvan, the Company's Internet based tutoring
solution, totaled $7.2 million for the nine months ended September 30, 2000.
These costs are primarily comprised of professional and consulting fees,
Internet development costs, as well as salaries and other related operational
expenses. Ventures losses related to equity losses in affiliates were primarily
impacted by the losses generated at Caliber. These losses are greater than the
comparable period in the prior year due to changes that are occurring within the
Caliber business model which will result in improved future operating
performance.
Other Expenses. General and administrative expenses decreased by $1.3 million
during the nine month period ended September 30, 2000, compared to the same
period in 1999. These costs decreased to 6% of total revenues for the nine month
period ended September 30, 2000, compared to 8% of revenues for the same period
in 1999. This decrease in general and administrative expense as a percentage of
total revenues is primarily due to the Company's efforts to control overhead
costs despite market expansion.
Income from non-operating items increased $13.7 million in the nine months
ended September 30, 2000 as compared to the same period in 1999. This
improvement is largely attributable to an increase of $15.8 million in net
interest and other income related to investing the net proceeds the Company
received from the March 2000 sale of Prometric. The increase in interest income
was partially offset by an increase in interest expense of $2.1 million and
foreign exchange losses of $3.1 million generated from the settlement of forward
exchange contract that the Company entered to protect against future
fluctuations in local currencies related to a pending International University
transaction.
26
The Company's effective tax rate for continuing operations was 45% for the
nine month period ended September 30, 2000. The reported effective income tax
rate exceeds the U.S. federal statutory tax rates due to the impact of state
income taxes, the impact of minority interests, foreign income
taxed at lower rates and the inability to utilize tax benefits from certain
investment losses of Sylvan Ventures. The Company anticipates that its effective
income tax rate from continuing operations for the year ending December 31, 20002001
will be 45%37.5%.
The Company's effective tax rate forfrom continuing operations in 19992000
was significantly impactedsignifcantly affected by utilized tax credits, foreignthe inability to utilize tax benefits from
certain investment losses of Sylvan Ventures, the impact of minority
interests and state
income taxes offset by permanent differences that arose due to the significant
amounttiming of restructuring and non-recurring charges.recognition of corporate level tax benefits from
subsidiary losses. Because of these factors, comparison of the 2000 and 1999 effective tax rates is not meaningful. Please
refer torate
varied substantially from the Company's annual report on Form 10-K for the year ended December
31, 1999 for the 1999 tax rate reconciliation.
Pretaxstatutory rate.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from Continuing Operations. Pretax income from continuing operations
decreased by $17.8$15.0 million, or 59%, to $12.2a loss of $11.6 million for the ninethree months
ended September 30, 2000 compared to the same period in 1999.March 31, 2001. The decrease is primarily athe result of the Company's announced change in strategy
regarding territory fees in order to allow the Company to retain increased
future benefit, and increased costs required to beginadditional Sylvan
Ventures offsetrelated costs and investment losses totaling $14.5 million in the
quarter ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by the additional interest income earned on the investment of the Prometric sale
proceeds.
Income (Loss) from Discontinued Operations. Income (loss) from discontinued
operations includes the operating results of Aspectwas $76.2 million for the ninethree month period
ended September 30, 2000 andMarch 31, 2001, a decrease of $92.3 million as compared to the operating results of Prometric for the period
January 1, 2000 through the sale date ofthree
months ended March 3,31, 2000. The comparable periodreported net loss of $11.6 million was
offset by significant non-cash items such as depreciation and amortization
charges of $9.3 million and equity in 1999 includes the operating resultsnet loss of Aspect and Prometric as well as the
operating resultsaffiliates, primarily due
to Sylvan Ventures, of Pace which was sold$19.9 million. Working capital related decreases in
December 1999.
Gain or Loss on Discontinued Operations. On March 3, 2000, the Company sold
Prometric for approximately $775liquidity of $95.0 million in cash and recorded an estimated gain
on the sale of approximately $288.4 million netconsisted primarily of income taxestax payments of
approximately
$136.8$95.0 million, subject to a future adjustment for final working capital. The
Company has estimated the domestic and foreign income taxesprimarily resulting from the sale based on the expected allocation of proceeds to subsidiaries that are a
party to the transaction and the tax laws of the jurisdictions in which these
subsidiaries operate. The disposal of Aspect in October 2000 resulted in an
estimated gain of $22.4 million, which will be recognizedPrometric in the fourthfirst
quarter of 2000.
During the period ended September 30, 1999, the Company approved a formal
plan to dispose of the Pace Group. The loss on disposal of Pace was estimated to
be approximately $25.0 million, and was recorded in the period ended September
30, 1999.
Liquidity and Capital Resources
The Company used $10.3 million of cash flow to fund operations for the
nine month period ended September 30, 2000, compared to cash provided by
operations of $58.2 million in 1999. The cash flow from operations consists
primarily of income from continuing operations for the period excluding the gain
on the sale of Prometric and non-cash charges (principally depreciation and
amortization). Cash flow from continuing operations before working capital
changes was $30.5 million for the nine month period ended September 30, 2000.
The reduction of net operating assets, primarily as a result of receivable
increases and payables and other current liability decreases, decreased cash
generated by operations by $40.8 million.
27which were not payable until 2001.
17
Cash provided by investing activities was $409.8$13.4 million forin the ninethree
month period ended September 30, 2000March 31, 2001 compared to cash used inprovided by investing
activities of $112.1$659.3 million in 1999.2000. The 20002001 investment activity was
primarily athe result of proceeds from the net sale of Prometricavailable-for-sale
securities ($710.379.6 million), partially offset by Sylvan
Venture's investmentincreases in Chancery ($17.1 million), LeapIt ($7.5 million), Club
Mom ($7.0 million) and Classwell ($5.2 million), other investments in
and advances to affiliates primarily related to Sylvan Ventures ($6.532.2
million), purchases of property and equipment ($13.3 million) and the payment
of contingent consideration and
other accrued liabilities for current anda prior period acquisitionsacquisition ($50.4
million), purchase of investment securities ($183.3 million) and the purchase of
property and equipment ($18.713.1 million). The
1999 investment activity wassignificant investing proceeds received in 2000 related primarily to the sale
of the Prometric division ($712.2 million). At March 31, 2001, the Company
has accrued obligations payable in cash of $27.1 million related to
investments madecontingent consideration for certain prior acquisitions. The amounts are
expected to commence operations ofbe paid later in 2001.
Cash provided by financing activities was $13.8 million in the new
International Universities segment,three
month period ended March 31, 2001 compared to acquire existing successful Sylvan
Learning and English Language Instruction Franchise Centers and to invest in
furniture, computer equipment and software development for the Company's general
business expansion.
Cashcash used inby financing activities
of $221.7$136.7 million in 2000. The 2001 financing activity related primarily to cash
received from the minority interest members of Sylvan Ventures ($16.1 million)
and proceeds from the exercise of options ($3.8 million) partially offset by net
payments of long-term debt ($6.7 million). Cash used by financing activities of
$136.7 million in 2000 relatesrelated primarily to the net repayment of the Company's
borrowings under it's existingits revolving credit agreementsfacility ($163.0127.6 million) and the
payment to repurchase of shares of its common sharesstock ($211.09.9 million) offset by issuance of convertible debentures and borrowings
under bank lines of credit ($135.4 million) and cash received from Sylvan
Ventures investors ($15.7 million). The Company used a portion of the funds from
the sale of Prometric to fund these financing activities. Cash provided by
financing activities in 1999 was primarily a result of $115.4 million received
from net borrowings offset by stock repurchases of $36.2 million and repayment
of debt of $32.4 million, which was used along with operating cash flows to fund
investing activities.
The Company anticipates that future cash flowsflow from operations, available
cash and existing credit facilities, will be sufficient to meet its operating
requirements, including the expansion of its existing business, fundingfund
International University acquisitions, payment ofpay contingent consideration and funding offund
Sylvan Ventures'Ventures investments and developmentoperating costs. Sylvan Ventures has
outstanding commitments to provide certain additional funding totaling $21.2
million to certain portfolio companies. The Company continues to examine
opportunities in the educational services industry for potential synergistic
acquisitions and investments.
Euro Conversionacquisitions.
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.Euro. The euroEuro is now traded on currency exchanges and may be used
in business transactions. The Company encountered no difficulties related to the
initial adoption of the Euro in 1999. 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-
bordercross-border transparency. The Company hasAt present, management does 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
euroEuro conversion will have a material impact on the Company's financial condition
or results of operations.
Restructuring
During the fourth quarter of 1999, the Company completed an analysis of
its operating structure to improve operating efficiency and to enhance
shareholder value. This analysis of the Company's operating structure revealed
that the significant growth the Company had achieved had come at a cost of
increased business complexity, added costs, slowed decision making, and diffused
responsibility and accountability within the Company. As a result of this
analysis, management approved a formal restructuring plan, and the Company
recorded a restructuring charge to operations of approximately $5.1 million. The
restructuring plan was comprised of employee termination and facility exit costs
resulting primarily from the Company's plan to exit certain activities outside
the core business of providing educational services. Facility exit costs include
approximately $3.5 million of costs to close schools and school-based
facilities. $5.0 million of the restructuring costs were paid through September
30, 2000. The remaining closing costs at September 30, 2000 represent the
Company's best estimate of the remaining employee termination costs to be paid.
The Company expects to complete implementation of the plan by the end of fiscal
2000.
28
The restructuring plan adopted by management is consistentCONTINGENT MATTERS
In connection with the Company's strategyacquisition of simplifyingLes Roches, variable
amounts of contingent consideration are payable to the Company by focusing on its core
educational services businessseller if specified
levels of earnings are achieved in 2001 and discontinuing involvement in the corporate
training and computerized testing businesses. The restructuring will also
streamline the Company's operations to allow management to focus on core
business competencies and expansion into educational opportunities on the
Internet. Direct cost savings from the restructuring plan will be primarily in
the form of reduced employee expense across all segments and in general and
administrative expenses. Other changes in the business model through entrance
into Internet educational services opportunities and the dynamics of the
education marketplace prevent quantification of the impact of future cost
savings, if any, from this restructuring plan.
Impact of Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements."2002. The Company will be requiredrecord the
contingent consideration when the contingencies are resolved and the additional
consideration is payable.
In connection with the Company's acquisition of UDLA, variable amounts
of contingent consideration are payable to adopt SAB 101the seller in 2006 and 2007 if
specified levels of earnings are achieved in 2004, 2005 and 2006. The Company
will record the fourth quartercontingent consideration when the contingencies are resolved and
the additional consideration is payable.
The Company has entered into agreements with certain franchisees of
2000,Sylvan Learning Centers and based uponWall Street Institute that allow the franchisees
to require that the Company purchase the centers back at a preliminary reviewpredetermined
multiple of operating results if specified operating results thresholds are
achieved. When the
18
Company can assess the likelihood of a put being exercised and the amount of the
SAB management believes thatrelated commitment to purchase the adoption of SAB 101 will not have a material effect on the Company's
reported operating results.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Statement, which the Company will be required to adopt in
January 2001, provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. Management
believes that the adoption of Statement No. 133 will not have a material effect
on the Company's financial statements.
Effects of Inflationcenter, such obligation is disclosed.
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 Fluctuationseffect in the foreseeable future.
SEASONALITY IN RESULTS OF OPERATIONS
The Company's revenuesCompany experiences seasonality in results of operations primarily
as a result of changes in the level of student enrollments and the timing of
semester cycles, particularly in the International Universities segment. Timing
of semester breaks at the International Universities results in the most
favorable operating performance being achieved in the second and fourth quarters
of the year. Other factors that impact the seasonality of operating results
have varied substantially from
quarter to quarter and may continue to vary, depending upon a number of factors
including theinclude: timing of contracts funded under Title I, or similar programstiming of franchise license
fees and the timing of Sylvan Ventures' development costs. The International Universities
segment experiences seasonality in operating results as a result of the school
term which extends from September through May with limited summer classes. The
Company's English language instruction businesses experience seasonal
fluctuations based on the timing of delivery of instruction to individuals.
Additionally, franchise license fees earned by the Company in its Sylvan
Learning Centers segment may vary significantly from quarter to quarter.
Revenues orand profits
in any period will not necessarily be indicative of results in subsequent
periods.
All statements contained herein that are not historical facts, including but not
limited to, statements regarding the anticipated impact of uncollectible
accounts receivable on future liquidity, the Company's contingent payment
obligations relating to acquisitions, future capital requirements, potential
acquisitions, Sylvan Ventures transactions and the Company's future development
plans are based on current expectations. These statements are forward looking in
nature and involve a number of risks and uncertainties. Actual results may
differ materially. Among the factors that could cause actual results to differ
materially are the following: amount of revenues earned by the Company's
tutorial and teacher training operations; the availability of sufficient capital
to finance the Company's business plan on terms satisfactory to the Company;
foreign currency risk; general business and economic conditions; and other risk
factors described in the Company's reports filed from time to time with the
Securities and Exchange Commission. The Company wishes to caution readers not to
place undue reliance on any such forward looking statements, which statements
are made pursuant to the Private Securities Litigation Reform Act ofALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS, INCLUDING BUT
NOT LIMITED TO, STATEMENTS REGARDING THE COMPANY'S CONTINGENT PAYMENT
OBLIGATIONS RELATING TO ACQUISITIONS, FUTURE CAPITAL REQUIREMENTS, POTENTIAL
ACQUISITIONS, 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. POLITICAL, ECONOMIC, CURRENCY, TAX,
REGULATORY, TECHNOLOGICAL, COMPETITIVE AND OTHER FACTORS DESCRIBED IN THE
COMPANY'S REPORTS FILED FROM TIME TO TIME WITH THE COMMISSION COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FORM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS. THE COMPANY CAUTIONS 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.
29AND, AS
SUCH, SPEAK ONLY AS OF THE DATE MADE.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
------------------------------------------------------
Market risk is the risk of loss to future earnings, to fair values or
to future cash flows that may result from the changes in the price of financial
instruments. The Company is exposed to financial market risks, including changes
in foreign currency exchange rates, interest rates and investment values. The
Company occasionally 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 itsthe
Company's regular operating and financing activities.
Foreign Currency RiskFOREIGN CURRENCY RISK
The Company derives approximately 36%58% 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% ofadverse change in average annual foreign currency
exchange rates would reduce net income and cash flows for the U.S. dollar relative to all
other currencies should not materially adversely affect expected 2000 earnings
or cash flows.quarter ended
March 31, 2001 by $0.8 million. The Company generally views its investment in
the majority of its foreign subsidiaries as long-term. The functional currencies of these foreign
subsidiaries are principally denominated in Euro-based currencies. The effects of a change
in foreign currency exchange rates on the Company's net investment in foreign
subsidiaries are reflected in other comprehensive income. A 10% depreciation in
functional currencies relative to the U.S. dollar would result in a decrease in
consolidated stockholders' equity at September 30, 2000March 31, 2001 of approximately $7.4$15.5
million.
INTEREST RATE RISK
The Company enters into forward foreign exchange contracts principally to
manageholds its cash and cash equivalents in high quality
short-term fixed income securities. Consequently, the currency fluctuations in significant foreign transactions, thereby
limiting the Company's risk that would otherwise result from changes in exchange
rates. Gains and losses on forward foreign exchange contracts for purposes of
business acquisitions are reflected in the income statement.
Interest Rate Risk
The fair value of the
Company's cash and cash equivalents would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due to the
short-term nature of the Company's portfolio. The Company's long-term revolving
credit facility bears interest at variable rates, and the fair value of this
instrument is not significantly affected by changes in market interest rates.
The Company's convertible debentures bear interest at 5%, which presently
approximates the market rate and therefore the fair value approximates the
recorded value of this liability. A 100 basis point decrease in interest rates
would impact net interest income and interest expense by reducing pretax income
for the nine monthsquarter ended September 30, 2000March 31, 2001 by $2.8 million and
increasing the pretax income for the same period in 1999 by $0.7$0.4 million.
Investment RiskINVESTMENT RISK
The Company's investment portfolio contains debt securities that mature
within one year. A hypothetical 10% adverse change in the fair value of the debt
securities would not materially adversely effect earnings or cash flows because
of the Company's ability to hold the debt securities until maturity.
In addition to the debt securities, the Company also has an investment
portfolio that consists of direct investment positions in education technology
companies through Sylvan Ventures as well as short-term investments in
available-for-sale debt and equity securities. The Company's investment
portfolio is primarily exposed to risks arising from changes in these investment values.
The Company's investment portfolio includes a number of holdings of
non-publicly traded companies in the educational services industry. The
Company accounts for these investments using either the cost method (cost
less impairment, if any) or the equity prices.method of accounting. Equity method
investments are specifically excluded from the scope of this disclosure.
Non-public investments where the Company owns less than a 20% interest are
subject to fluctuations in market value, but their current illiquidity
reduces the exposure to
20
pure market risk while resulting in risk that the Company may not be able to
liquidate these investments in a timely manner.
The Company is exposed to equity price risks on equity securities
included in the portfolio of investments entered into for the promotion of
business and strategic objectives. These investments are generally small
capitalization stocks in the Internet segment of the educational services
industry. The Company typically does not attempt to reduce or eliminate its
market exposure on these securities. A 10% adverse change in equity prices would
not materially impact the fair value of the Company's marketable securities and
comprehensive income.
The Company's investment portfolio also contains debt
securities that mature within one year. A hypothetical 10% adverse change in the
fair value of the debt securities should not materially adversely effect
earnings or cash flows because of the Company's ability to hold the debt
securities until maturity.
30
The Company's investment portfolio includes a number of holdings of
non-publicly traded companies in the educational services industry. The Company
values these investments at either cost less impairment (if any) or under the
equity method of accounting. Equity method investors are specifically excluded
from the scope of this disclosure. Non-public investments where the Company owns
less than a 20% stake are subject to fluctuations in market value, but their
current illiquidity reduces the exposure to pure market risk while resulting in
risk that the Company may not be able to liquidate these investments in a timely
manner.
All the potential impacts noted above are based on sensitivity analysis
performed on the Company's financial position at September 30, 2000.March 31, 2001. Actual results
may differ materially.
3121
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
Reference is made to the Exhibit Index.None.
(b) Reports on Form 8-K
The Company filed threedid not file any reports on Form 8-K during the ninethree month
period ended September 30, 2000. The 8-K dated JanuaryMarch 31, 2000 related to the sale
of Prometric. The 8-K dated March 21, 2000 related to the filing of
unaudited pro forma financial statements for the year ended December 31,
1999 relating to the sale of Prometric. The 8-K dated September 7, 2000
related to the formation of the Classwell Learning Group joint venture and
the sale of Aspect. In addition, the Company filed Form 8-K dated
November 11, 2000 related to the sale of Aspect.2001.
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
Sylvan Learning Systems, Inc.
Date: November 14, 2000 _______________________________________
Neal S. Cohen, ExecutiveMay 11, 2001 /s/ Sean Creamer
------------------------------------------
Sean Creamer, Vice President and Chief Financial Officer
32
Exhibit Index
Index
Number Description
- -------------------------------------------------------------------------------
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
33Corporate Finance
22