-----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, Nj1ujQQAiWqLLZjhtspnWd8CoEqjwUDHT3q0RRmbmEtuaWjB9MG8sQqAfVryG5eJ rrJ8+AnZx23e0RAu70/UDw== 0000928385-96-000575.txt : 19960517 0000928385-96-000575.hdr.sgml : 19960517 ACCESSION NUMBER: 0000928385-96-000575 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 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: 1934 Act SEC FILE NUMBER: 000-22844 FILM NUMBER: 96567020 BUSINESS ADDRESS: STREET 1: 9135 GUILFORD RD CITY: COLUMBIA STATE: MD ZIP: 21046 BUSINESS PHONE: 4108800889 MAIL ADDRESS: STREET 2: 9135 GUILFORD ROAD CITY: COLUMBIA STATE: MD ZIP: 21046 10-Q 1 FORM 10-Q 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, 1996 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.) 9135 GUILFORD ROAD, COLUMBIA, MARYLAND 21046 ----------------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410)880-0889 ------------- 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 15,392,528 shares of Common Stock outstanding as of April 30, 1996. SYLVAN LEARNING SYSTEMS, INC. ----------------------------- INDEX -----
PAGE NO. -------- PART I. - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) . Balance Sheets - December 31, 1995 and March 31, 1996...............................................3 . Statements of Operations - Three months ended March 31, 1995, three months ended March 31, 1996............5 . Statement of Cash Flows - Three months ended March 31, 1995, three months ended March 31, 1996............6 . Notes to Unaudited Financial Statements - March 31, 1996.....7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................10 PART II. - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K...............................15 SIGNATURES...............................................................16
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, MARCH 31, 1995 1996 -------------- -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 2,528,865 $ 3,843,936 Available-for-sale securities 30,379,065 22,172,652 Receivables: Accounts receivable 20,578,345 28,167,039 Costs and estimated earnings in excess of billings on uncompleted contracts 3,028,558 2,355,089 Notes receivable 1,583,843 1,721,356 -------------- -------------- 25,190,746 32,243,484 Allowance for doubtful accounts (1,466,027) (1,469,201) -------------- -------------- 23,724,719 30,774,283 Inventory 3,639,392 3,781,129 Deferred income taxes 1,271,925 1,271,925 Prepaid expenses 1,942,806 2,286,138 -------------- -------------- Total current assets 63,486,772 64,130,063 Notes receivable, less current portion 1,875,359 1,651,793 Costs and estimated earnings in excess of billings on uncompleted contracts, less current portion 673,181 692,574 Property and equipment: Furniture and equipment 19,564,005 20,791,265 Leasehold improvements 1,958,236 2,212,249 -------------- -------------- 21,522,241 23,003,514 Accumulated depreciation (6,142,009) (7,206,400) -------------- -------------- 15,380,232 15,797,114 Intangible assets: Goodwill 74,653,356 74,718,097 Contract rights 7,857,346 7,857,346 Other 2,451,091 2,451,091 -------------- -------------- 84,961,793 85,026,534 Accumulated amortization (4,640,450) (6,307,658) -------------- -------------- 80,321,343 78,718,876 Deferred contract costs, net of accumulated amortization of $684,177 as of December 31, 1995 and $803,372 as of March 31, 1996 2,528,029 2,453,628 Other assets 1,141,755 1,165,423 -------------- -------------- Total assets $ 165,406,671 $ 164,609,471 ============== ==============
3 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, March 31, 1995 1996 -------------- -------------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 12,253,614 $ 10,868,139 Bank lines of credit 3,500,000 - Current portion of long-term debt and capital lease obligations 1,895,567 1,571,502 Billings in excess of costs and estimated earnings on uncompleted contracts 237,644 857,970 Deferred revenue 6,487,134 7,358,446 Other current liabilities 795,967 754,881 -------------- -------------- Total current liabilities 25,169,926 21,410,938 Long-term debt, less current portion 2,465,399 2,108,737 Capital lease obligations, less current portion 55,113 22,442 Deferred income taxes 884,612 884,612 Other long-term liabilities 367,790 410,558 Commitments and contingent liabilities - - Stockholders' equity: Common stock, par value $.01 per share--authorized 40,000,000 shares, issued and outstanding shares of 13,953,462 as of December 31, 1995 and 14,156,450 as of March 31, 1996 139,534 141,564 Additional paid-in capital 139,863,681 141,416,949 Foreign currency translation adjustments 70,000 44,129 Accumulated deficit (3,609,384) (1,830,458) -------------- -------------- Total stockholders' equity 136,463,831 139,772,184 -------------- -------------- Total liabilities and stockholders' equity $ 165,406,671 $ 164,609,471 ============== ==============
See accompanying notes. 4 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, ============================= 1995 1996 ============================= (Unaudited) (Unaudited) REVENUES Franchise royalties $ 2,124,930 $ 2,522,483 Franchise sales fees 373,785 212,485 Testing services 5,259,198 17,800,149 Company-owned learning center services 2,461,623 3,368,102 Contract educational services 5,929,906 9,544,110 Product sales 853,814 1,109,823 ------------- ------------- Total revenues 17,003,256 34,557,152 COST AND EXPENSES Testing services expense 4,615,589 15,158,320 Company-owned learning center expense 2,256,338 3,034,077 Contract educational services expense 5,201,707 8,318,128 Cost of product sales 650,383 904,169 General and administrative expense 2,906,006 4,274,812 ------------- ------------- Total expenses 15,630,023 31,689,506 ------------- ------------- Operating income 1,373,233 2,867,646 OTHER INCOME (EXPENSE) Investment and other income 178,967 395,763 Interest expense (130,547) (107,783) Equity in net income (loss) of Sylvan National Advertising Committee, Inc. (27,667) 92,300 Income from continuing operations before ------------- ------------- income taxes 1,393,986 3,247,926 Income taxes (111,555) (1,469,000) ------------- ------------- Net income $ 1,282,431 $ 1,778,926 ============= ============= PER COMMON AND COMMON EQUIVALENT SHARE Net income $0.13 $0.11 ============= =============
See accompanying notes. 5 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, ==================================== 1995 1996 ==================================== (Unaudited) (Unaudited) OPERATING ACTIVITIES Net income $ 1,282,431 $ 1,778,926 Adjustments to reconcile net income to net cash used in operating activities: Depreciation 750,028 1,075,505 Amortization 347,489 1,775,403 Provision for doubtful accounts 69,916 35,940 Equity in net (income) loss of unconsolidated affiliate 27,667 (92,300) Changes in operating assets and liabilities: Accounts and notes receivable (4,983,646) (7,534,791) Cost and estimated earnings in excess of billings on uncompleted contracts 27,129 654,076 Inventory 106,089 (247,595) Prepaid expenses (84,288) (225,480) Other assets (99,915) (70,625) Accounts payable and accrued expenses 1,329,920 (1,390,498) Billings in excess of costs and estimated earnings on uncompleted contracts (394,347) 655,442 Other current liabilities - (41,086) Deferred revenue and other long-term liabilities 143,257 874,130 --------------- --------------- Net cash used in operating activities (1,478,270) (2,752,953) --------------- --------------- INVESTING ACTIVITIES Investment in and advances to unconsolidated affiliates 53,047 35,108 Purchase of available-for-sale securities - (4,626,109) Proceeds from sale of available-for-sale securities 1,254,037 12,832,522 Purchase of property and equipment (1,536,315) (1,492,907) Cash received upon acquisition of PACE 682,411 - Expenditures for deferred contract costs and other assets (200,000) (6,949) --------------- --------------- Net cash provided by investing activities 253,180 6,741,665 --------------- --------------- FINANCING ACTIVITIES Proceeds from exercise of options and warrants 7,831 1,022,048 Proceeds from issuance of common stock - 533,250 Payments on long-term debt (350,931) (487,503) Paydown of borrowings on line of credit - (3,500,000) Payments on capital lease obligations (192,328) (220,146) --------------- --------------- Net cash used in financing activities (535,428) (2,652,351) --------------- --------------- Effects of exchange rate changes on cash - (21,290) --------------- --------------- Net increase (decrease) in cash and cash equivalents (1,760,518) 1,315,071 Cash and cash equivalents at beginning of period 3,719,657 2,528,865 --------------- --------------- Cash and cash equivalents at end of period $ 1,959,139 $ 3,843,936 =============== ===============
See accompanying notes. 6 SYLVAN LEARNING SYSTEMS, INC. NOTES TO UNAUDITED FINANCIAL STATEMENTS MARCH 31, 1996 NOTE A - BASIS OF PRESENTATION --------------------- The accompanying unaudited 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, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. 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, 1995. NOTE B - ACQUISITIONS ------------ The PACE Group Effective February 28, 1995, the Company purchased the assets and liabilities of The PACE Group ("PACE"), a provider of educational services to corporations. The initial consideration for the acquisition was 174,964 shares of the Company's common stock having an aggregate market value of $3,160,861. The acquisition was accounted for using the purchase method of accounting. Additional contingent consideration is payable in an amount equal to 6.5 times PACE's earnings before interest and income taxes (EBIT) in 1997, determined in accordance with generally accepted accounting principles. If EBIT is less than $2.7 million in 1997, the PACE shareholders may elect to have the payment calculation based on EBIT for either calendar year 1998 or 1999. The contingent payment is payable two-thirds in cash and one third in shares of Sylvan common stock, unless the PACE shareholders determine that a smaller cash payment is required for their tax purposes. The Company will record any additional consideration payable to the PACE shareholders as additional goodwill, and will amortize that amount over the remaining amortization period. Drake Prometric, L.P. Effective September 30, 1995, the Company acquired Drake Prometric, L.P. ("Drake"), a Minneapolis based provider of computer-based certification, licensure and assessment testing programs. The acquisition was accounted for using the purchase method of accounting. The Company acquired Drake for an initial purchase price of $20 million in cash and 3,809,524 restricted shares of Common Stock (the "Initial Shares"). Of the Initial Shares, 1,190,476 shares (the "Revenue Escrow Shares") were placed in escrow and will be released to the sellers to the extent that certain revenue targets relating to portions of the combined computer-based testing business of Sylvan and 7 Drake are achieved from 1996 through 1998. The sellers may receive up to an additional $40 million (payable 12.5% in cash and the balance in either cash or restricted shares of Common Stock, at Sylvan's option) to the extent other revenue targets relating to portions of the combined computer-based testing business of Sylvan and Drake are achieved in 1998 or 1999 (with the measuring year selected by the sellers). The Company will record the contingent consideration consisting of the 1,190,476 Revenue Escrow Shares and the additional contingent payment of up to $40 million when the contingencies are resolved and the additional consideration is payable. Also in connection with the acquisition, management anticipates paying a cancellation fee to certain Drake Authorized Testing Centers that currently have contracts to provide computer based testing delivery. These cancellation costs will be recorded as additional purchase price when a reasonable estimate of the cost is determined which will be no later than June 30, 1996. Any amounts recorded will increase goodwill and will be amortized over the remaining amortization period. NOTE C - INCOME TAXES ------------ At December 31, 1995 the Company had net operating loss carryforwards of approximately $2,500,000 for income tax purposes that expire in years 2007 and 2008. The operation of certain provisions of the Internal Revenue Code will limit the amount of the net operating loss carryforwards available to offset taxable income in any one year. During 1996, approximately $2.5 million of net operating loss carryforwards are available to offset taxable income. The Company's effective tax rate has increased from 8% during the first quarter of 1995 to 45% during the first quarter of 1996 mainly due to non-deductible amortization expense of intangible assets related to the Drake acquisition and a lower net operating loss carryforward available for use in 1996. The Company's income tax provision of $1,469,000 for the three month period ended March 31, 1996, consists of federal, state, and foreign income taxes. NOTE D - BANK LOAN AGREEMENTS -------------------- The Company has entered into two loan agreements with a bank, hereinafter the "domestic credit line" and the "international credit line" that provide revolving lines of credit secured by accounts receivable balances. The domestic credit line, which is secured principally by accounts receivable arising from U.S. operations, allows the Company to borrow a maximum of $2.5 million, and is renewable on May 31, 1996. The international credit line is secured principally by accounts receivable arising from international testing operations and allows the Company to borrow a maximum of $7.5 million in 1996 and $10.0 million from January 1997 through the expiration date in March 1998. These credit lines bear interest at a floating rate equal to the 30 day London Interbank Offered Rate ("LIBOR") plus 1.95% per annum. During the three months ended March 31, 1996, both the domestic and international credit lines were paid off in their entirety. NOTE E - EARNINGS PER SHARE ------------------ Earning per common and common equivalent share is computed using the weighted average number of common and common equivalent shares outstanding during each period presented. The weighted 8 average number of shares used for the three months ended March 31, 1996 and 1995 was 15,738,281 and 10,133, 216, respectively. The difference between the number of shares used to determine earnings per common and common equivalent share and earnings per common share assuming full dilution is immaterial. Common stock equivalents consist of stock options and warrants (using the treasury stock method). NOTE F - CONTINGENT MATTERS ------------------ During 1993, the Company committed to purchase and license instructional learning system software from a company (the "Seller") to be used in the Company's contract education sites and to be sold to its franchised Sylvan Learning Centers. The agreement requires the acquisition of a minimum of $4.0 million of courseware in CD ROM format. As of March 31, 1996, the Company had paid for and accepted delivery of $3.0 million in courseware. Prior to August 31, 1996 the Company is required to place a minimum order of $1.0 million. As stipulated in the contract, management currently intends to offset the commitment for future orders against certain obligations the Seller may have to the Company as described below. In 1993, the Company purchased from the Seller the rights to certain testing contracts and agreed to pay the Seller a royalty equal to 27% of the excess contract revenues earned by August 31, 1997 over $7.4 million. Conversely, the Seller agreed to pay the Company a reverse royalty equal to 27% of any revenue deficiency under $7.4 million that may occur by August 31, 1997. An installment payment of no more than $1 million is payable to the Company under the reverse royalty agreement in October 1996 in the event that revenues are less than $5.5 million, with any remaining amount due in October 1997 based on the August 31, 1997 calculation. The Company expects, based on the amount of revenue earned on these contracts through March 31, 1996 and projections of additional revenues through August 31, 1996, that the Seller will owe the Company approximately $1 million in October 1996. No amounts have been recorded related to the royalty arrangement at March 31, 1996. 9 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, amounts payable to or by the Company in connection with a 1993 software agreement, the Company's contingent payment obligations relating to the PACE and Drake acquisitions, future capital requirements 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 pursuant to certain testing contracts acquired in connection with the 1993 software agreement and revenues earned by the Company's PACE and Drake 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 the 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. The Company generates revenue from three business segments: core educational services which primarily consists of franchise sales, royalties, and Company-owned Learning Center revenue; testing services, which consists of computer-based testing fees paid to the Company primarily by test administrators; and contract educational services, which consists of revenue attributable to providing supplemental and remedial education services to school districts and major corporations. RESULTS OF OPERATIONS Comparison of results for the quarter ended March 31, 1996 to results for the quarter ended March 31, 1995. Revenue. Total revenues increased by $17.6 million, or 103% to $34.6 million for the quarter ended March 31, 1996 compared to the same period in 1995. 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 $1.4 million, or 24%, to $7.2 million during the first quarter of 1996. Franchise royalties increased $398,000 or 19%, for the quarter ended March 31, 1996. This increase in franchise royalties was due to the net increase of 14 new Centers in new territories and one new satellite Center (Centers operating within existing franchise territories) opened in the quarter ended March 31, 1996, combined with an overall 16% increase in revenues at existing Learning Centers open for more than one year. Franchise sales fees decreased $161,000 to $212,000 for the quarter ended March 31, 1996, compared to the same period in 1995. For the quarter ended March 31, 1996, there were six franchise Center licenses sold, compared to three franchise Center licenses sold and a $270,000 area development agreement sold in the first quarter of 1995. Revenue from Company-owned Learning Centers increased $907,000, or 37%, to $3.4 million during the first quarter of 1996. Same center revenue growth related to student enrollment increases resulted in $726,000, or 29%, of the increase. The remainder of the increase resulted from the net effect of opening four new centers after March 31, 1995 and closing two existing centers prior to the first quarter of 1996. This net increase of two new centers resulted in an additional $181,000 of revenue during the first quarter of 1996. Product sales increased $256,000, or 30%, to $1.1 million in the first quarter of 1996 due to overall student enrollment increases at franchised centers. Testing services revenue increased $12.6 million, or 238% to $17.8 million during the first quarter of 1996, compared to the same period in 1995. Testing service revenues accounted for 52% of total revenues for the quarter ended March 31, 1996, compared to 31% in the first quarter of 1995. The significant increase in testing services revenues resulted primarily from the acquisition of Drake which provided increased revenues from Information Technology (IT) clients. Increased services under the cost-plus Educational Testing Service (ETS) international contract and the implementation 10 of a management contract with the National Association of Security Dealers, Inc. ("NASD") in the first quarter of 1996 also contributed to the increase in testing services revenues. Effective March 1, 1996 the Company entered into a management contract with the NASD to operate their testing centers delivering computer-based testing to securities brokers and dealers. The management contract continues through August 30, 1996 at which time most NASD testing centers could be closed if it is cost beneficial. The Company has a 10 year contract to provide testing for the NASD. Contract educational services revenue increased $3.6 million, or 61%, to $9.5 million for the quarter ended March 31, 1996. Revenue from Public and Non- public school contracts increased $2.3 million for the quarter ended March 31, 1996. Revenue from PACE accounted for $1.3 million of the increase for the first quarter of 1996. The PACE increases result from the fact that the acquisition, accounted for as a purchase, was effective February 28, 1995. Revenue from Public and Non-public school contracts obtained after March 31, 1995 contributed $2.7 million of the $2.3 million increase for the first quarter of 1996. Revenue from existing Public and Non-public school contracts decreased by $400,000 for the first quarter of 1996, primarily related to reduced Public and Non-public school funding available at certain schools. Cost and Expenses. Company-owned Learning Center expenses increased $778,000, to $3.0 million, or 90% of total Company-owned Learning Center services revenue in the first quarter of 1996, compared to $2.3 million, or 92% of total Company- owned Learning Center services revenue in the first quarter of 1995. The increased expenses were primarily advertising and labor associated with increased center enrollment. Same center expenses accounted for $573,000 of the increase, and represent 79% of incremental same center revenues. The net addition of two new Company-owned Learning Centers increased expenses $205,000, or 113% of the revenue of new centers. Testing services expense for the first quarter of 1996 increased $10.5 million, to $15.2 million, or 85% of total testing services revenue, compared to $4.6 million or 88% of total testing services revenue for the first quarter of 1995. The increase resulted primarily from the acquisition of Drake and the increased registration and delivery costs associated with additional volumes of tests. The decrease in testing services expense as a percentage of revenues was primarily a result of lower management costs associated with the Company-owned testing centers and the benefit of some overhead expenses related to the development of new programs being reimbursed by third parties. Contract educational services expense increased $3.1 million to $8.3 million, or 87% of contract educational services revenue during the first quarter of 1996, compared to $5.2 million or 88% of contract educational services revenue in the first quarter of 1995. Operating expenses for Public and Non-public schools increased $1.9 million, while operating expenses for PACE increased $1.2 million for the first quarter of 1996. The PACE increase results from the fact that the acquisition, accounted for as a purchase, was effective February 28, 1995. General and administrative expenses increased $1.4 million, or 47%, to $4.3 million during the first quarter of 1996 compared to the first quarter of 1995, but decreased as a percentage of revenue from 17% to 12%. This percentage decline resulted from increased revenues primarily from 11 franchise royalties, franchise sales, testing services and contract and Company- owned Learning Center services without corresponding increases in administrative staff salaries and expenses. LIQUIDITY AND CAPITAL RESOURCES Cash used in operating activities was $2.8 million for the three months ended March 31, 1996 as compared to $1.5 million in the comparable period of 1995. Cash flow from operations before working capital changes increased from $2.5 million in the 1995 period to $4.6 million in the 1996 period, primarily as a result of significant overall growth in Company operations before considering non-cash charges, which primarily consist of depreciation and amortization. The Company's investment in working capital has significantly reduced cash flow, particularly as a result of the growth in accounts receivable. This increase in accounts receivable relates to an overall increase in revenue of 103%. Specifically, of the $7.5 million operating cash flow reduction attributable to an increase in accounts receivable, $2.4 million related to the Company's expanding testing contracts, $3.0 million related to ETS domestic and international testing contracts and $1.6 million related to new and expanded Public and Non-public school contracts. The increase in testing receivables resulted from higher domestic testing volumes and a significant increase in billings under international testing contracts. Public and Non-public school accounts receivable have increased due to increased billings for new contracts obtained since the first quarter of 1995. The average collection period for accounts receivable has been approximately 60 days. 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. During the first quarter of 1996, the Company sold a net of $8.2 million of available for sale securities, the proceeds of which were used primarily to pay off the outstanding line of credit borrowings of $3.5 million, to reduce accounts payable and accrued expenses by $1.4 million, and to fund the purchases of property and equipment of $1.5 million as described below. The Company continues to incur expenditures for additions to property and equipment, which totaled $1.5 million in the first quarter of 1996. These additions primarily consist of furniture and equipment for general business expansion, including expenditures for new Public and Non-public school classrooms and equipment needed for overseas testing centers operated by the Company. Under the international testing contract with ETS, the Company is reimbursed for overseas equipment expenditures as the equipment is depreciated. This reimbursement includes a financing charge over the reimbursement period. The Company may spend up to $2 million over the next 18 months to develop licensing and certification tests under contracts with various testing organizations. The Company has entered into two loan agreements with a bank, (hereinafter the "domestic credit line" and the "international credit line") that provide revolving lines of credit secured by accounts receivable balances. The domestic credit line, which is secured principally by accounts receivable arising from U.S. operations, allows the Company to borrow a maximum of $2.5 million, and expires in May 1996 but is expected to be renewed under at least the same terms. The domestic credit line had no outstanding borrowings at March 31, 1996. The international credit line is secured 12 principally by accounts receivable arising from international testing operations and allows the Company to borrow a maximum of $7.5 million in 1996 and $10.0 million from January 1997 through the expiration date in March 1998. The international credit line had no outstanding borrowings at March 31, 1996. These credit lines bear interest at a floating rate equal to the 30 day London Interbank Offered Rate ("LIBOR") plus 1.95% per annum. During the first quarter of 1996, the Company received $1.0 million of cash as a result of the exercise of stock options and warrants to purchase 180,488 shares of Common Stock. The Company paid the NASD $4.7 million in early April 1996 pursuant to an asset transfer agreement related to the management of the NASD testing centers and the acquisition of contract rights to provide testing based on a ten year contract with the NASD. The assets transferred by the NASD consisted mainly of computer equipment in the NASD testing centers. 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. The Company continues to review other companies in the education or computer-based testing industries for potential acquisitions. The Company is not currently in any acquisition negotiations. Additional capital resources may be necessary to acquire and thereafter operate additional businesses. CONTINGENT MATTERS During 1993, the Company committed to purchase and license instructional learning system software from a company (the "Seller") to be used in the Company's contract education sites and to be sold to its franchised Sylvan Learning Centers. The agreement requires the acquisition of a minimum of $4.0 million of courseware in CD ROM format. As of March 31, 1996, the Company had paid for and accepted delivery of $3.0 million in courseware. Prior to August 31, 1996, the Company is required to place a minimum order of $1.0 million. As stipulated in the contract, management currently intends to offset the commitment for future orders against certain obligations the Seller may have to the Company as described below. In 1993 the Company purchased from the Seller the rights to certain testing contracts and agreed to pay the Seller a royalty equal to 27% of the excess contract revenues earned through August 31, 1997 over $7.4 million. Conversely, the Seller agreed to pay the Company a reverse royalty equal to 27% of any revenue deficiency below $7.4 million through August 31, 1997. An installment payment of no more than $1 million is payable by the Seller in October 1996 to the Company under the reverse royalty agreement in the event that revenues are less than $5.5 million through August 31, 1996, with any remaining amount due in October 1997 based on the August 31, 1997 calculation. The Company expects, based on the amount of revenue earned on these contracts through March 31, 1996 and projections of additional revenues through August 31, 1996, that the Seller will owe the Company approximately $1 million in October 1996. No amounts have been recorded related to the royalty arrangement at March 31, 1996. 13 In connection with the PACE acquisition, the Company will be required to make a contingent payment equal to 6.5 times PACE's 1997 earnings before interest and income taxes ("EBIT"). If PACE's EBIT is less than $2.7 million for 1997, the PACE shareholders may elect to have the payment calculation based on EBIT for either calendar year 1998 or 1999. The contingent payment is payable partially in cash and partially in Common Stock. The amount of any contingent payment to the PACE Stockholders will be capitalized as goodwill when paid and 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 agreement with Drake provides for future contingent payments based on achievement of certain specified revenue targets between 1997 and 1998 (or 1999 at election of the Sellers). The contingent payments of up to $40 million, if earned, are payable 12.5% in cash (or more at the discretion of the Company) with the remainder in shares of the common stock. The amount of any contingent payments will be capitalized as goodwill when paid and amortized over the remaining estimated recovery period. 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. 14 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (A) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the three months ended March 31, 1996. 15 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, 1996 /s/B. Lee McGee -------------------------------- B. Lee McGee Chief Financial Officer 16 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM * FORM 10-Q MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS 3-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 MAR-31-1995 MAR-31-1996 2,528,865 3,843,936 30,379,065 22,172,652 25,190,746 32,243,484 (1,466,027) (1,469,201) 3,639,392 3,781,129 63,486,772 64,130,063 21,522,241 23,003,514 (6,142,009) (7,206,400) 165,406,671 164,609,471 25,169,926 21,410,938 0 0 0 0 0 0 139,534 141,564 136,324,297 139,630,620 165,406,671 164,609,471 17,003,256 34,557,152 17,003,256 34,557,152 0 0 15,630,023 31,689,506 0 0 0 0 130,547 107,783 1,393,986 3,247,926 (111,555) (1,469,000) 1,282,431 1,778,926 0 0 0 0 0 0 1,282,431 1,778,926 .13 .11 .13 .11
-----END PRIVACY-ENHANCED MESSAGE-----