-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, STpnY5ffyKmjo3quiNLlNpdCC566kwN15O0gQDJC4CASPnTaCJErr9y0h2k53YTR HnyfF1B91g2RIbbGvmrVUw== 0000928385-98-001033.txt : 19980515 0000928385-98-001033.hdr.sgml : 19980515 ACCESSION NUMBER: 0000928385-98-001033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYLVAN LEARNING SYSTEMS INC CENTRAL INDEX KEY: 0000912766 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 521492296 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22844 FILM NUMBER: 98620347 BUSINESS ADDRESS: STREET 1: 1000 LANCASTER ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4108438000 MAIL ADDRESS: STREET 1: 1000 LANCASTER ST CITY: BALTIMORE STATE: MD ZIP: 21202 10-Q 1 FORM 10-Q FOR 3/31/1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the quarter ended MARCH 31, 1998 or -------------- [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _________ to__________. COMMISSION FILE NUMBER 0-22844 ------- SYLVAN LEARNING SYSTEMS, INC. ----------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 52-1492296 - ------------------------------- ------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1000 LANCASTER STREET, BALTIMORE, MARYLAND 21202 - ------------------------------------------ ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410)843-8000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No [ ]. The registrant had 29,770,293 shares of Common Stock outstanding as of April 30, 1998. SYLVAN LEARNING SYSTEMS, INC. ----------------------------- INDEX -----
Page No. -------- PART I. - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Balance Sheets - December 31, 1997 and March 31, 1998........................................... 3 Statements of Income - Three months ended March 31, 1997, three months ended March 31, 1998........ 5 Statements of Cash Flows - Three months ended March 31, 1997, three months ended March 31, 1998........ 6 Notes to Unaudited Financial Statements - March 31, 1998.. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 12 PART II. - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K........................... 18 SIGNATURES................................................................ 18
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ------------------------------ SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ IN THOUSANDS)
December 31, March 31, 1997 1998 -------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 23,150 $ 25,160 Available-for-sale securities 82,925 57,880 Receivables: Accounts receivable 56,188 54,329 Costs and estimated earnings in excess of billings on uncompleted contracts 3,900 6,463 Notes receivable 2,943 3,201 Other receivables 7,000 - -------------- ------------- 70,031 63,993 Allowance for doubtful accounts (1,755) (1,970) -------------- ------------- 68,276 62,023 Inventory 4,777 6,802 Deferred income taxes 3,738 3,719 Prepaid expenses and other current assets 3,675 5,107 -------------- ------------- Total current assets 186,541 160,691 Notes receivable, less current portion 6,232 6,176 Costs and estimated earnings in excess of billings on uncompleted contracts, less current portion 352 161 Property and equipment: Furniture and equipment 55,381 67,099 Leasehold improvements 7,650 8,250 -------------- ------------- 63,031 75,349 Accumulated depreciation (18,725) (21,602) -------------- ------------- 44,306 53,747 Intangible assets: Goodwill 182,168 205,750 Contract rights 13,973 13,973 Other 2,522 2,777 -------------- ------------- 198,663 222,500 Accumulated amortization (16,649) (18,975) -------------- ------------- 182,014 203,525 Deferred contract costs, net of accumulated amortization of $6,205 as of December 31, 1997 and $7,500 as of March 31, 1998 10,324 11,767 Investments in and advances to affiliates 12,464 16,024 Other investments 28,017 28,524 Other assets 3,266 4,490 -------------- ------------- Total assets 473,516 485,105 ============== =============
3 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ IN THOUSANDS)
December 31, March 31, 1997 1998 --------------- ------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 36,435 $ 39,367 Income taxes payable 4,876 4,879 Current portion of long-term debt 930 1,318 Current portion of due to shareholders of acquired companies 13,794 13,870 Deferred revenue 11,752 11,512 Other current liabilities 780 979 --------------- ------------- Total current liabilities 68,567 71,925 Deferred income taxes 7,335 7,335 Due to shareholders of acquired companies, less current portion 56,366 31,365 Other long-term liabilities 877 359 Commitments and contingent liabilities - - --------------- ------------- Total liabilities 133,145 110,984 --------------- ------------- Stockholders' equity: Preferred stock, par value $.01 per share--authorized 10,000,000 shares, no shares issued and outstanding as of December 31, 1997 and March 31, 1998 - - Common stock, par value $.01 per share--authorized 40,000,000 shares, issued and outstanding shares of 28,964,278 as of December 31, 1996 and 29,743,660 as of March 31, 1998 290 297 Additional paid-in capital 301,391 329,518 Retained earnings 39,652 45,340 Foreign currency translation adjustments (962) (1,034) --------------- ------------- Total stockholders' equity 340,371 374,121 --------------- ------------- Total liabilities and stockholders' equity $ 473,516 $ 485,105 =============== =============
See accompanying notes. 4 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three months ended March 31, ---------------------------------- 1997 1998 ---------------------------------- REVENUES 51,944 $ 75,356 COST AND EXPENSES Direct costs 43,630 63,915 General and administrative expense 2,961 3,327 --------------- -------------- Total expenses 46,591 67,242 --------------- -------------- Operating income 5,353 8,114 OTHER INCOME (EXPENSE) Investment and other income 662 1,594 Interest expense (182) (67) Equity in net loss of affiliates (128) (1,212) --------------- -------------- Income before income taxes 5,705 8,429 Income taxes (2,258) (2,782) --------------- -------------- Net income 3,447 $ 5,647 =============== ============== Earnings per common share, basic $0.14 $0.19 =============== ============== Earnings per common share, diluted $0.13 $0.18 =============== ==============
See accompanying notes. 5 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ($ IN THOUSANDS)
Three Months Ended March 31, -------------------------------------- 1997 1998 -------------------------------------- OPERATING ACTIVITIES Net income $ 3,447 $ 5,647 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 1,860 2,806 Amortization 2,106 3,384 Non-cash dividend income (500) (500) Provision for doubtful accounts 40 175 Equity in net loss of affiliates 128 1,211 Changes in operating assets and liabilities: Accounts and notes receivable (3,522) 9,084 Cost and estimated earnings in excess of billings on uncompleted contracts 953 (2,372) Inventory 29 (744) Prepaid expenses and other current assets 813 (1,324) Other assets (902) (1,224) Accounts and notes payable and accrued expenses (5,675) 2,654 Billings in excess of costs and estimated earnings on uncompleted contracts 553 392 Other current liabilities (87) 207 Deferred revenue and other long-term liabilities 618 (1,555) ----------- ------------- Net cash provided by (used in) operating activities (139) 17,841 ----------- ------------- INVESTING ACTIVITIES Purchase of available-for-sale securities (4,827) (4,354) Proceeds from sale of available-for-sale securities 11,045 29,400 Investment in and advances to affiliates (880) (4,778) Increase in other investments (742) - Purchase of property and equipment (2,533) (11,348) Proceeds from sale of property and equipment 43 - Cash paid for Canter, net of cash received - (24,262) Cash paid for other acquired businesses, net of cash received - (24) Increase in other intangible assets - (255) Expenditures for deferred contract costs and other assets (11) (193) ----------- ------------- Net cash provided by (used in) investing activities 2,095 (15,814) ----------- ------------- FINANCING ACTIVITIES Payments on loans from stockholders of acquired companies (4,671) (15) Proceeds from exercise of options and warrants 922 1,403 Distributions to shareholders of pooled entity (550) - Payments on long-term debt and capital lease obligations (2,932) (789) Proceeds from issuance of long-term debt 56 - Payments on bank lines of credit - (544) Proceeds from bank lines of credit 7,164 - ----------- ------------- Net cash provided by (used in) financing activities (11) 55 ----------- ------------- Effects of exchange rate changes on cash (354) (72) ----------- ------------- Net increase in cash and cash equivalents 1,591 2,010 Cash and cash equivalents at beginning of period 11,198 23,150 ----------- ------------- Cash and cash equivalents at end of period $ 12,789 $ 25,160 =========== =============
See accompanying notes. 6 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) MARCH 31, 1998 NOTE A - BASIS OF PRESENTATION --------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. NOTE B - INCOME TAXES ------------ The tax provisions for the three month periods ended March 31, 1998 and 1997 are based on the estimated effective tax rates applicable for the full years. The Company's income tax provision of $2.8 million for the three month period ended March 31, 1998 consists of federal, state, and foreign income taxes. The Company's effective tax rate has decreased from 40% during the first quarter of 1997 to 33% during the first quarter of 1998 mainly due to the effect of higher earnings levels in certain lower tax jurisdictions. 7 NOTE C - EARNINGS PER SHARE ------------------ The following table summarizes the computations of basic and diluted earnings per share:
Three Months ended March 31, ---------------------------- 1997 1998 ------- ------- Numerator used in basic and diluted earnings per common share: Net income $ 3,447 $ 5,647 ======= ======= Denominator: Denominator for basic earnings per common share weighted average shares 25,379 30,504 Effect of dilutive securities: Employee stock options 1,679 1,444 Common stock contingently issuable 193 - ------- ------- Total dilutive potential common shares 1,872 1,444 ------- ------- Denominator for diluted earnings per common share weighted average shares and assumed conversions 27,251 31,948 ======= ======= Earnings per common share, basic $ 0.14 $ 0.19 Earnings per common share, diluted $ 0.13 $ 0.18
NOTE D - RECLASSIFICATIONS ----------------- Certain amounts in the 1997 financial statements have been reclassified to conform with the 1998 presentation. Note E - ACQUISITIONS ------------ Effective January 1, 1998 the Company acquired all of the outstanding stock of Canter and Associates, Inc. and Canter Educational Productions, Inc. (collectively, "Canter"), commonly controlled companies, for an initial purchase price of $25 million in cash. Additional contingent consideration is payable over the next three years based upon Canter's meeting certain earnings thresholds. The acquisition was accounted for using the purchase method of accounting. During the first quarter of 1998, goodwill of 8 approximately $23.6 million was recorded and is being amortized over a period of 25 years. Results of operations of Canter are included in the accompanying 1998 consolidated statement of income from January 1, 1998. Canter develops and markets staff development materials, including books and videotapes for teachers, as well as graduate level courses for educators that are delivered primarily through distance learning. The companies provide courseware for a complete distance learning Master's program offered by five independent colleges and universities. Additionally, Canter provides courseware for 11 other graduate level courses that are offered by 14 independent colleges and universities nationwide. NOTE F - SUBSEQUENT EVENTS ----------------- The Company has authorized a 3 for 2 stock split of its Common Stock to be effective in the form of a stock dividend which will be distributed on May 22, 1998 to shareholders of record at the close of business on April 1, 1998. Holders of the Company's Common Stock will receive a stock dividend at the rate of 1/2 share of Common Stock for each share of Common Stock owned. Shareholders will not be entitled to receive any resulting fractional shares, but will receive the value of any such fractional shares in cash. On April 13, 1998, the Company announced it has entered into an agreement to acquire all of the outstanding stock of privately held ASPECT in a merger transaction that would be accounted for as a pooling-of-interests, in exchange for Sylvan common stock valued at $65 million. This transaction was consummated on May 6, 1998. ASPECT, which had 1997 revenues of approximately $52 million, is a leading provider of English as a Second Language programs for college-age students. Founded in 1992, ASPECT delivers intensive English language programs at 19 schools in five countries. 9 NOTE G - STOCKHOLDERS' EQUITY -------------------- The components of stockholders' equity are as follows:
Foreign Additional Currency Total Common Paid-In Retained Translation Stockholders' Stock Capital Earnings Adjustments Equity ------------- --------------- --------------- ------------------ ------------------ Balance at January 1, 1998 $290 $301,391 $39,652 $ (962) $340,371 Options exercised for purchase of 69 shares of common stock, including income tax benefit of $458 1 1,860 1,861 Issuance of 643 shares of common stock in connection with the acquisition of NAI/Block 6 25,710 25,716 Issuance of 53 shares of common stock in connection with other acquisitions 119 41 160 Issuance of 15 shares of common stock in connection with the Employee Stock Purchase Plan 438 438 Foreign currency translation adjustment (72) (72) Net income for the three months ended March 31, 1998 5,647 5,647 --------------- ----------------- ----------------- ----------------- ----------------- Balance at March 31, 1998 $297 $329,518 $45,340 $(1,034) $374,121 =============== ================= ================= ================= =================
NOTE H - CONTINGENCIES ------------- From time to time, the Company may be a party to routine litigation incidental to its business. At this time, the Company is the defendant in a legal proceeding pending in the United States District Court for the Northern District of Iowa, Civil Action No. C96-334MJM, filed on November 18, 1996 by ACT, Inc., an Iowa nonprofit corporation formerly known as American College Testing Program, Inc. ("ACT"). ACT's claim arises out of the Company's purchase of contract rights to administer testing services for the National Association of Securities Dealers, Inc. ("NASD"). ACT has asserted that the Company tortuously interfered with ACT's relations, contractual and quasi-contractual, with the NASD, caused ACT to suffer the loss of its advantageous economic prospects with the NASD and other ACT clients and that the Company has monopolized and attempted to monopolize the computer-based testing services market. ACT has claimed unspecified amounts of compensatory, treble and punitive damages, as well as injunctive relief. The Company believes that all of ACT's claims are without merit. 10 NOTE I - BUSINESS SEGMENT INFORMATION ----------------------------
Three months ended March 31, ----------------------------------- 1997 1998 ----------- ----------- Operating revenues: Learning Centers $ 9,231 $ 12,136 Contract Educational Services 17,574 26,620 Sylvan Prometric 25,139 36,600 -------- -------- $ 51,944 $ 75,356 ======== ======== Segment profit: Learning Centers $ 2,402 $ 2,707 Contract Educational Services 1,406 3,806 Sylvan Prometric 4,506 4,928 -------- -------- $ 8,314 $ 11,441 ======== ======== Segment assets: Learning Centers $ 21,694 $ 27,840 Contract Educational Services 28,820 82,382 Sylvan Prometric 147,894 254,575 -------- -------- $198,408 $364,797 ======== ========
There have been no changes since December 31, 1997 in the Company's method for identification of reportable segments or for determination of segment profit or loss. There are no significant intercompany sales or transfers. The following table reconciles the reported information on segment profit to income before income taxes reported in the consolidated statements of income for the three months ended March 31, 1997 and 1998, respectively:
Three months ended March 31, ------------------------------ 1997 1998 ---------- ---------- Total profit for reportable segments $ 8,314 $11,441 Corporate general and administrative expense (2,961) (3,327) Other income (expense) 352 315 ------- ------- Income before income taxes $ 5,705 $ 8,429 ======= =======
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- 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, EXPENDITURES TO DEVELOP LICENSING AND CERTIFICATION TESTS UNDER EXISTING CONTRACTS, THE COMPANY'S CONTINGENT PAYMENT OBLIGATIONS RELATING TO THE DRAKE ACQUISITION, 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. ACTUAL RESULTS MAY DIFFER MATERIALLY. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY ARE THE FOLLOWING: CHANGES IN THE FINANCIAL RESOURCES OF THE COMPANY'S CLIENTS; TIMING AND EXTENT OF TESTING CLIENTS CONVERSIONS TO COMPUTER-BASED TESTING; AMOUNT OF REVENUES EARNED BY THE COMPANY'S TESTING OPERATIONS; THE AVAILABILITY OF SUFFICIENT CAPITAL TO FINANCE THE COMPANY'S BUSINESS PLAN ON TERMS SATISFACTORY TO THE COMPANY; GENERAL BUSINESS AND ECONOMIC CONDITIONS; AND OTHER RISK FACTORS DESCRIBED IN THE COMPANY'S REPORTS FILED FROM TIME TO TIME WITH THE COMMISSION. THE COMPANY WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD LOOKING STATEMENTS, WHICH STATEMENTS ARE MADE PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND, AS SUCH, SPEAK ONLY AS OF THE DATE MADE. OVERVIEW The Company generates revenues from three business segments: core educational services which primarily consist of franchise sales, royalties and Company-owned Learning Center revenues; testing services, which consist of computer-based testing fees paid to the Company and the operations of the Wall Street Institute ("WSI"); and contract educational services, which consist of revenues attributable to providing supplemental and remedial education services to public and non-public schools and major corporations as well as providing teacher training services. The following selected segment data for the quarters ended March 31, 1997 and 1998 is derived from the Company's unaudited consolidated financial statements.
Three Months Ended March 31, ---------------- 1997 1998 ------- ------- (In thousands) Operating Revenue: Core educational services...... $ 9,231 $12,136 Contract educational services.. 17,574 26,620 Testing services............... 25,139 36,600 ------- ------- Total revenue............... $51,944 $75,356 ======= ======= Direct costs: Core educational services...... $ 6,829 $ 9,429 Contract educational services.. 16,168 22,814 Testing services............... 20,633 31,672 ------- ------- Total direct costs.......... $43,630 $63,915 ======= =======
12 RESULTS OF OPERATIONS Comparison of results for the quarter ended March 31, 1998 to results for the quarter ended March 31, 1997. Revenue. Total revenues increased by $23.4 million, or 45% to $75.4 million for the quarter ended March 31, 1998, compared to the same period in 1997. This increase resulted from higher revenues in all business segments - core educational services, testing services, and contract educational services. Core educational services revenue increased by $2.9 million, or 31%, to $12.1 million during the first quarter of 1998, compared to the same period in 1997. Franchise royalties increased by $500,000, or 16%, to $3.5 million for the quarter ended March 31, 1998, compared to the same period in 1997. The increase in franchise royalties was due to an overall 14% increase in revenues at existing Learning Centers open for more than one year combined with royalties generated at a net of 29 new Centers opened after March 31, 1997. Franchise sales fees decreased $500,000 to $200,000 for the quarter ended March 31, 1998, compared to the same period in 1997. For the three months ended March 31, 1998, there were four territory sales and no area development agreements sold, compared to five territory sales and a $500,000 area development agreement sold in the first three months of 1997. Revenue from Company-owned Learning Centers increased by $2.1 million, or 43%, to $7.0 million during the first quarter of 1998, compared to the first quarter of 1997. Company-owned same center revenues increased 10%, or $600,000, with the remaining increase of $1.5 million generated from the acquisition of 13 Centers from certain franchisees which occurred after March 31, 1997. Product sales increased by $500,000, or 73%, to $1.1 million. The remaining increase in core educational services revenue was generated by other franchise service income. Contract educational services revenue increased by $9.0 million, or 51%, to $26.6 million for the quarter ended March 31, 1998, compared to the first quarter of 1997. The revenue increase was the result of a $6.7 million increase in revenue from the Canter Group, a provider of teacher training services which was acquired in January 1998, a $1.9 million increase in revenue from public and non-public school contracts and a $400,000 increase in revenue from PACE services. Revenue from public and nonpublic school contracts obtained during 1998 contributed $2.9 million to the revenue increase for the first quarter of 1998. The first quarter of 1997 included $1.0 million of revenue from a segment of Educational Inroads, which was a non-related business activity, and was disposed of after it was acquired in 13 1997. Revenue from existing public and nonpublic school contracts was consistent with the prior year. Testing services revenue increased by $11.5 million or 46% to $36.6 million during the first quarter of 1998 compared to the first quarter of 1997. NAI/Block, acquired during the fourth quarter of 1997, accounted for $3.1 million of the revenue growth. Without the acquisition, revenue growth would have been 33% for the quarter. Academic admissions testing revenues increased 97% compared to the first quarter of 1997 primarily due to volume increases under Educational Testing Service (ETS) contracts, which included the international cost-plus contract, the Graduate Record Examinations (GRE), Graduate Management Admission Test (GMAT) and Test of English as a Foreign Language (TOEFL). Information Technology and professional certification testing revenues increased 35% and 18%, respectively, over the comparable 1997 period mainly due to volume increases. Revenues from Wall Street Institute (WSI), Sylvan's international chain of English language centers, decreased compared to the first quarter of 1997 as a result of master franchise sales recorded in 1997 with none recognized in the 1998 quarter. Cost and Expenses. Total direct costs increased 46% from $43.6 million in the first quarter of 1997 to $63.9 million in the first quarter of 1998 and increased as a percentage of total revenues from 84% to 85%. The overall margin reduction was mainly the result of reduced margins in the testing services division. Core educational services expenses increased by $2.6 million to $9.4 million, or 78% of core educational services revenue for the quarter ended March 31, 1998, compared to $6.8 million or 74% of core educational services revenue for the quarter ended March 31, 1997. The Company incurred $400,000 for the development of certain educational programs that were not incurred in the first quarter of the prior year which are not expected to continue. Excluding such non-recurring expenses, core educational services expenses were 74% of core educational services revenues for the first quarter of 1998. Company-owned Learning Center expenses increased 37%, from $4.3 million in the first quarter of 1997 to $5.9 million in the first quarter of 1998. The increase in expenses was primarily related to advertising and labor associated with increases in Center enrollment. As a percentage of revenue, expenses for Company-owned Centers decreased from 88% of revenues to 85% of revenues for the first quarter of 1998, compared to the same period in 1997. Contract educational services expense increased by $6.6 million to $22.8 million, or 86% of contract educational services revenue for the quarter ended March 31, 1998, compared to $16.2 million or 92% of contract services revenue for the first quarter of 1997. The increase in contract educational services expense for the quarter ended March 31, 1998 versus the comparable period of 1997 is the result of a $300,000 increase in costs from public and nonpublic school contracts and a $6.3 million increase in costs from PACE services and the Canter Group, which was acquired in January 1998. The 14 decrease in contract educational expenses as a percentage of revenue for the first quarter of 1998 versus 1997 is the result of our ability to leverage our increasing student volumes over the fixed cost infrastructure of this division. Testing services expenses for the first quarter of 1998 increased by $11.1 million to $31.7 million, or 87% of total testing services revenue, compared to $20.6 million, or 82% of total testing services revenue for the first quarter of 1997. The first quarter 1998 increase in expense of $11.1 million is directly attributable to the increase in revenue from the same period in 1997. After adjusting for the 1997 master franchise sales at WSI, the 1998 expenses and the 1997 expenses are the same at 87% of recurring revenue. General and administrative expenses increased by $400,000 to $3.3 million during the first quarter of 1998 compared to the first quarter of 1997 but decreased as a percentage of revenue from 6% to 4% . The percentage decline resulted from increased revenues from all business segments without corresponding increases in administrative expenses. The Company's effective tax rate has decreased from 40% during the first quarter of 1997 to 33% during the first quarter of 1998 mainly due to the effect of higher earnings levels in certain lower tax jurisdictions. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $17.8 million for the three months ended March 31, 1998 as compared to $139,000 used in the comparable period of 1997. Cash flow from operations before working capital changes increased from $7.1 million in the 1997 period to $12.7 million in the 1998 period, primarily as a result of the significant overall growth in income from Company operations before considering non-cash charges, which primarily consist of depreciation, amortization and equity in the net losses of affiliates. Of the $9.1 million operating cash flow increase attributable to a decrease in accounts and notes receivable, $7.0 million relates to other receivables which was collected during the first quarter of 1998. The Company believes that uncollectible accounts receivable will not have a significant effect on future liquidity, as a significant portion of its accounts receivable are due from enterprises with substantial financial resources, such as large corporations and governmental units. The Company continues to incur expenditures for additions to property and equipment, which totaled $11.3 million in the first quarter of 1998. These additions primarily consist of furniture and equipment for general business expansion, including expenditures related to new public school contracts, testing center expansions, equipment upgrades, internal software development and equipment needed for overseas testing centers operated by the Company under the ETS international testing contract. Under this contract with ETS, the Company is reimbursed for overseas equipment expenditures 15 as the equipment is depreciated. This reimbursement includes a financing charge over the reimbursement period. In connection with the PACE acquisition, the Company has recorded a liability for additional consideration which is payable $14.5 million in cash and $11.3 million in Common Stock. The payment and issuance of common stock will be made during the second quarter of 1998 and will be recorded as goodwill to be amortized over the remaining estimated recovery period. PACE is expected to meet its cash needs from its operations. PACE provides most of its services to large corporations with favorable credit histories. PACE operations are not capital intensive and historically PACE has generated positive cash flow from operations. The Company has entered into a loan agreement with a bank, (hereinafter, "the credit line") that provides an unsecured revolving line of credit. The credit line allows the Company to borrow a maximum of $15.0 million through the expiration date of May 31, 1998, at which time the total outstanding principal balance can be converted into a term loan, at the option of the Company. The term loan would be repaid over 24 months from the time of conversion. The credit line and the term loan, when converted, both bear interest at a floating rate equal to the 30 day London Interbank Offered Rate ("LIBOR") plus 1.15% per annum (5.69% at March 31, 1998). The Company had no outstanding balance on the credit line at March 31,1998. During the first three months of 1998, the Company received $1.4 million as a result of the exercise of options to purchase 69,131 shares of Common Stock. During the first three months of 1998, the Company paid $25.0 million for the purchase of Canter, which was funded by the sale of available-for-sale securities. The Company believes that its capital resources will be sufficient on a short term basis and over the next 24 months to fund continued expansion of the business, including working capital needs and expected investments in property and equipment. CONTINGENT MATTERS The agreement with Drake provides for future contingent payments based on achievement of certain specified revenue targets in 1998 or 1999, at election of the Sellers which, if earned would be paid in the first quarter of 1999 or 2000. The contingent payments of up to $40 million are payable 12.5% in cash (or more at the discretion of the Company) with the remainder in shares of Common Stock. The amount of any contingent payments will be recorded as goodwill when paid and amortized over the remaining estimated recovery period. 16 EFFECTS OF INFLATION Inflation has not had a material effect on the Company's revenue and income from continuing operations in the past three years. Inflation is not expected to have a material future effect. QUARTERLY FLUCTUATIONS The Company's revenues and operating results have varied substantially from quarter to quarter and may continue to vary, depending upon the timing of implementation of new computer-based testing contracts and contracts funded under the Public and Non-public school or similar programs. Based on the Company's limited experience, revenue generated by computer-based testing services may vary based on the frequency or timing of delivery of individual tests and the speed of test administrators' conversion of tests to computer- based format. Revenue or profits in any period will not necessarily be indicative of results in subsequent periods. 17 PART II - OTHER INFORMATION ITEM 6. REPORTS ON FORM 8-K ------------------- (A) REPORTS ON FORM 8-K During the first quarter of 1998, the Company filed a report on Form 8-K, dated March 11, 1998, with respect to the filing of restated unaudited financial statements for the quarters ended March 31, June 30 and September 30, 1997 related to the retroactive effect to the Company's adoption of Statement of Financial Accounting Standards No. 128, Earnings Per Share, as of December 31, 1997. SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized. Sylvan Learning Systems, Inc. Date: May 13, 1998 /s/ B. Lee McGee ---------------------------------------------------- B. Lee McGee, Executive Vice President and Chief Financial Officer 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 25,160 57,880 63,993 1,970 6,802 160,691 75,349 21,602 485,105 71,925 0 297 0 0 373,824 485,105 0 75,356 0 67,242 0 0 67 8,429 2,782 0 0 0 0 5,647 0.19 0.18
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