-----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, Rof2JAQXzrOymPE9+cMIkcKwi9TCNYkwAs9PtcvlLKcpWniFLlQbwjWoSmpLPxFF BKKiwa4NOy+yr9h/uhwfXA== 0000928385-97-001355.txt : 19970815 0000928385-97-001355.hdr.sgml : 19970815 ACCESSION NUMBER: 0000928385-97-001355 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97662439 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the quarter ended JUNE 30, 1997 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 27,696,431 shares of Common Stock outstanding as of August 1, 1997. SYLVAN LEARNING SYSTEMS, INC. ----------------------------- INDEX -----
Page No. -------- PART I. - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Balance Sheets - December 31, 1996 and June 30, 1997............................. 3 Statements of Income - Three months ended June 30, 1996, three months ended June 30, 1997...................................... 5 Statements of Income - Six months ended June 30, 1996, six months ended June 30, 1997...................................... 6 Statements of Cash Flows - Six months ended June 30, 1996, six months ended June 30, 1997...................................... 7 Notes to Unaudited Financial Statements - June 30, 1997............................. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 13 PART II. - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ........... 20 SIGNATURES .......................................... 20
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ---------------------------- Sylvan Learning Systems, Inc. and Subsidiaries Consolidated Balance Sheets ($ in thousands)
December 31, June 30, 1996 1997 -------------- ------------ (Restated) (Unaudited) Assets Current assets: Cash and cash equivalents $ 11,198 $ 29,883 Available-for-sale securities 16,449 10,081 Receivables: Accounts receivable 36,431 39,415 Costs and estimated earnings in excess of billings on uncompleted contracts 3,565 2,190 Notes receivable 3,008 5,003 -------------- ------------ 43,004 46,608 Allowance for doubtful accounts (1,379) (1,510) -------------- ------------ 41,625 45,098 Inventory 4,470 4,985 Deferred income taxes 620 620 Prepaid expenses 3,125 2,277 -------------- ------------ Total current assets 77,487 92,944 Notes receivable, less current portion 563 2,876 Costs and estimated earnings in excess of billings on uncompleted contracts, less current portion 550 327 Property and equipment: Furniture and equipment 37,952 37,065 Leasehold improvements 5,544 5,690 -------------- ------------ 43,496 42,755 Accumulated depreciation (15,578) (14,485) -------------- ------------ 27,918 28,270 Intangible assets: Goodwill 103,986 104,560 Contract rights 13,881 13,973 Other 2,570 2,522 -------------- ------------ 120,437 121,055 Accumulated amortization (10,736) (13,490) -------------- ------------ 109,701 107,565 Deferred contract costs, net of accumulated amortization of $2,067 as of December 31, 1996 and $3,898 as of June 30, 1997 13,230 11,466 Investments in affiliates 3,896 6,172 Other investments 24,220 25,438 Other assets 2,025 3,771 -------------- ------------ Total assets $ 259,590 $ 278,829 ============= ============
3 Sylvan Learning Systems, Inc. and Subsidiaries Consolidated Balance Sheets ($ in thousands)
December 31, June 30, 1996 1997 ------------ ------------ (Restated) (Unaudited) Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 28,576 $ 25,002 Bank lines of credit 1,000 - Current portion of long-term debt 3,182 764 Billings in excess of costs and estimated earnings on uncompleted contracts 65 922 Due to former shareholders of Wall Street Institute 4,921 250 Deferred revenue 9,543 10,199 Other current liabilities 596 438 --------- --------- Total current liabilities 47,883 37,575 Long-term debt, less current portion 2,170 - Deferred income taxes 2,338 1,628 Due to former shareholders of Drake 8,143 6,128 Due to former shareholders of Wall Street Institute 15,150 - Due to former shareholders of ICST & Inroads 3,233 - Other long-term liabilities 350 248 Stockholders' equity: Preferred stock, par value $.01 per share--authorized 10,000,000 shares, no shares were issued and outstanding as of December 31, 1996 and June 30, 1997 - - Common stock, par value $.01 per share--authorized 40,000,000 shares, issued and outstanding shares of 23,980,215 as of December 31, 1996 and 25,894,977 as of June 30, 1997 240 259 Additional paid-in capital 168,547 211,675 Foreign currency translation adjustments (4) (377) Unrealized holding losses on available for sale securities (11) - Retained earnings 11,551 21,693 --------- --------- Total stockholders' equity 180,323 233,250 --------- --------- Total liabilities and stockholders' equity $ 259,590 $ 278,829 ========= =========
See accompanying notes 4 Sylvan Learning Systems, Inc. and Subsidiaries Consolidated Statements of Income ($ in thousands, except per share amounts)
Three months ended June 30, ----------------------- 1996 1997 ----------- ----------- (Unaudited) (Unaudited) (Restated) Revenues $ 47,212 $ 57,597 Cost and expenses: Direct costs 39,721 61,931 General and administrative expenses 2,907 9,913 Loss on impairment of assets - 4,000 -------- -------- Total expenses 42,628 75,844 -------- -------- Operating income 4,584 (18,247) Investment income 346 889 Income, net of transaction costs for termination of acquisition - 28,500 Interest expense (185) (231) Equity in net income (loss) of unconsolidated subsidiaries 161 (259) -------- -------- Income before income taxes 4,906 10,652 Income taxes (1,874) (3,957) -------- -------- Net income $ 3,032 $ 6,695 ======== ======== Per common and common equivalent share Net income $ 0.12 $ 0.24 ======== ========
See accompanying notes. 5 Sylvan Learning Systems, Inc. and Subsidiaries Consolidated Statements of Income ($ in thousands, except per share amounts)
Six months ended June 30, ------------------------- 1996 1997 ----------- ----------- (Unaudited) (Unaudited) (Restated) Revenues $ 88,717 $ 109,540 Cost and expenses: Direct costs 76,142 105,560 General and administrative expenses 4,976 12,874 Loss on impairment of assets - 4,000 ----------- ----------- Total expenses 81,118 122,434 ----------- ----------- Operating income 7,599 (12,894) Investment income 742 1,551 Income, net of transaction costs for termination of acquisition - 28,500 Interest expense (440) (413) Equity in net income (loss) of unconsolidated subsidiaries 253 (387) ----------- ----------- Income before income taxes 8,154 16,357 Income taxes (3,343) (6,215) Net income $ 4,811 $ 10,142 =========== =========== Per common and common equivalent share Net income $0.19 $0.36 =========== ===========
See accompanying notes. 6 Sylvan Learning Systems, Inc. and Subsidiaries Consolidated Statements of Cash Flows ($ in thousands)
Six months ended June 30, ---------------------------- 1996 1997 ---------------------------- (Unaudited) (Unaudited) (Restated) Operating activities Net income $ 4,811 $ 10,142 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,590 3,927 Amortization 3,755 4,585 Non-cash issuance of common stock - 18,500 Loss on impairment of assets - 4,000 Provision for doubtful accounts 60 165 Deferred income taxes - (710) Equity in net loss (income) of unconsolidated subsidiaries (253) 387 Changes in operating assets and liabilities: Accounts and notes receivable (5,621) (7,326) Cost and estimated earnings in excess of billings on uncompleted contracts (854) 1,598 Inventory (375) (515) Prepaid expenses (640) 756 Other assets (189) (229) Accounts payable and accrued expenses 4,181 (5,358) Billings in excess of costs and estimated earnings on uncompleted contracts (312) 871 Other current liabilities (28) - Deferred revenue and other long-term liabilities 881 628 ---------- ---------- Net cash provided by operating activities 8,006 31,421 ---------- ---------- Investing activities Purchase of available-for-sale securities (12,819) (4,828) Proceeds from sale of available-for-sale securities 24,973 11,195 Increase in investments in and advances to affiliates (26) (2,663) Increase in other investments - (1,556) Purchase of property and equipment (3,044) (9,322) Proceeds from sale of property and equipment 46 1,254 Contract termination fee paid to Drake Authorized Testing Centers (4,178) - Purchase of contract rights (4,774) - Cash paid for intangible assets - (554) Expenditures for deferred contract costs and other assets (186) (1,428) ---------- ---------- Net cash used in investing activities (8) (7,902) ---------- ---------- Financing activities Payments to former shareholders of WSI - (4,670) Payments to former shareholders of Pace - (158) Proceeds from exercise of options and warrants 2,214 6,265 Proceeds from issuance of common stock 440 - Payments on long-term debt and capital lease obligations (2,628) (4,898) Paydown of line of credit (3,500) (1,000) ---------- ---------- Net cash used in financing activities (3,474) (4,461) ---------- ---------- Effects of exchange rate changes on cash (38) (373) ---------- ---------- Net increase in cash and cash equivalents 4,486 18,685 Cash and cash equivalents at beginning of period 2,903 11,198 ---------- ---------- Cash and cash equivalents at end of period $ 7,389 $ 29,883 ========== ==========
See accompanying notes. 7 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE 30, 1997 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 and six months ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. 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, 1996. NOTE B - INCOME TAXES ------------ The tax provisions for the six month periods ended June 30, 1997 and 1996 are based on the estimated effective tax rates applicable for the full years. The Company's income tax provision of $6,215 for the six month period ended June 30, 1997 consists of federal, state, and foreign income taxes. NOTE C - EARNINGS PER SHARE ------------------ Earnings 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 average number of shares used for the three months ended June 30, 1997 and 1996 was 27,125,406 and 25,153,317, respectively. The weighted average number of shares used for the six month periods ended June 30, 1997 and 1996 was 27,063,919 and 25,005,742, 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). In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which is required to be adopted on December 31, 1997. At 8 that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in an increase in primary earnings per share for the quarters ended June 30, 1997 and 1996 of $0.01 and $0.01 per share, respectively and for the six month periods ended June 30, 1997 and 1996 of $0.02 and $0.02, respectively. The impact of Statement 128 on the calculation of fully diluted earnings per share for these periods is not expected to be material. NOTE D - RECLASSIFICATIONS ----------------- Certain amounts in the 1996 financial statements have been reclassified to conform with the 1997 presentation. NOTE E - ACQUISITIONS ------------ On May 30, 1997, the Company acquired by merger all of the outstanding stock of I-R, Inc. and Independent Child Study Teams, Inc. (collectively, "Educational Inroads") in exchange for 1,414,000 shares of common stock. I-R, Inc. and Independent Child Study Teams, Inc. were commonly owned by two shareholders. The acquisition was accounted for as a pooling-of-interests and accordingly, the Company's consolidated financial statements for periods prior to the merger have been restated to include the combined results of operations, financial position and cash flows of Educational Inroads. Educational Inroads provides remedial and special education services to public and non-public school systems, with current contracts in New Jersey, Maryland, Louisiana, Washington, D.C. and other school districts. Combined and separate results of operations of Sylvan and Educational Inroads during the periods prior to the acquisition are as follows: 9
Sylvan Independent Learning Child Study Systems, Inc. I-R, Inc. Teams, Inc. Combined ----------------------------------------------------- ($ in thousands, except per share amounts) THREE MONTHS ENDED JUNE 30, 1996 Revenues $39,570 $2,902 $4,740 $47,212 Net income $ 3,032 $ -- $ -- $ 3,032 Net income per share $ 0.19 $ 0.12 SIX MONTHS ENDED JUNE 30, 1996 Revenues $74,127 $5,673 $8,917 $88,717 Net income $ 4,811 $ -- $ -- $ 4,811 Net income per share $ 0.30 $ 0.19
The results of operations of Educational Inroads for each of the periods presented includes significant officers' salaries for the two owners. In connection with the merger, these two individuals have contracted for annual compensation totaling $187,500, and it is expected that the aggregate duties and responsibilities of these two individuals will not be diminished to the extent that other costs will be incurred. In addition, both Sylvan and Educational Inroads incurred legal and transaction costs which are non-recurring in nature. The following supplemental pro forma information for the three-month and six- month periods ended June 30, 1997 and 1996 is presented solely as a result of the changed circumstances that will exist following the consummation of the merger, and is necessary to realistically assess the impact of the combination.
Three months ended June 30, Six months ended June 30, 1996 1997 1996 1997 ----------------------------------------------------------- ($ in thousands, except per share amounts) Combined net income $3,032 $6,695 $4,811 $10,141 Contractual reduction to be made in 966 250 1,469 800 compensation Legal and transactions costs -- -- -- 400 Related income taxes (at 40%) (386) (100) (588) (480) ----------------------------------------------------------- 580 150 881 720 ----------------------------------------------------------- Pro forma net income after contractual reduction in compensation $3,612 $6,845 $5,692 $10,861 =========================================================== Pro forma net income per share $0.14 $0.25 $0.22 $0.39 ===========================================================
10 NOTE F - STOCKHOLDERS' EQUITY -------------------- The components of stockholders' equity are as follows ($ in thousands):
Foreign Additional Unrealized Currency Total Common Paid-In Holding Translation Retained Stockholders' Stock Capital Losses Adjustments Earnings Equity ------ ---------- ----------- ------------ --------- ------------- Balance at January 1, 1997 (Restated) $240 $168,547 $(11) $ (4) $11,551 $180,323 Options and warrants exercised for purchase of 549,941 shares of common stock, including income tax benefit of $5,675 5 9,789 9,794 Issuance of 714,884 shares of restricted common stock in connection with the acquisition of WSI 7 14,846 14,853 Issuance of 269,118 shares of restricted common stock in connection with the creation of Sylvan Learning Foundation 3 6,497 6,500 Issuance of 205,882 shares of common stock to ITT 2 6,998 7,000 Issuance of 176,470 shares of restricted common stock to NAC 2 4,998 5,000 Foreign currency translation adjustment (373) (373) Unrealized gains on available for sale investments 11 11 Net income for the six months ended June 30 1997 10,142 10,142 ------ ---------- ----------- ------------ --------- ------------- Balance at June 30, 1997 $259 $211,675 $ 0 $(377) $21,693 $233,250 ====== ========== =========== ============ ========= =============
In the second quarter of 1997, Sylvan made certain cash expenditures and Common Stock contributions resulting in an aggregate expense to the Company of approximately $21.5 million. The $21.5 million of recorded expense was attributable to Sylvan's contributions of (i) approximately $3.0 million in cash and Common Stock valued at $7.0 million to a nonprofit special purpose corporation whose sole purpose is to fund promotional and channel support programs for the Information Technology training and testing business (which contribution was recorded as a direct cost of the Testing services division), (ii) Common Stock valued at $5.0 million to a non-profit special purpose corporation whose sole purpose is to develop and fund advertising programs for the Sylvan Learning Centers (which contribution was recorded as a direct cost of the Core 11 Educational services division) and (iii) Common Stock valued at $6.5 million to Sylvan Learning Foundation, Inc., a newly-formed, non-profit foundation formed to promote various educational pursuits (which contribution was recorded as a general and administrative expense). In August 1997, the Company completed a secondary stock offering and issued 1,612,292 shares of its Common Stock for net proceeds of $57.5 million after underwriting costs and expenses. Also, in connection with this offering, 453,888 options and warrants to purchase the Company's Common Stock were exercised, resulting in $1.5 million of proceeds to the Company. NOTE G - CONTINGENCIES ------------- On November 18, 1996, ACT, Inc. filed suit against the Company alleging that the Company violated federal antitrust laws and committed various state law torts in connection with the operations of its computer-based testing operations and in obtaining a testing services contract from the NASD. The Company believes the grounds of the lawsuit are without merit and intends to defend the lawsuit vigorously. Management is unable to predict the outcome of the lawsuit, but believes that the ultimate resolution of the matter will not have a material effect on consolidated financial position. NOTE H - IMPAIRMENT LOSS --------------- In May of 1997 the Company determined that certain assets of the Testing Division were impaired as a result of certain strategic changes that were made as a result of pursuing the National Education Corporation acquisition. During and after the acquisition negotiations with NEC, the Company developed certain plans that resulted in required changes in both software systems and hardware currently utilized in the Testing division's network of centers. The plans continue to be valid for the Company even after the NEC acquisition was terminated. The impaired assets, consisting of computer equipment and software, are impaired as a result of changes in the technical requirements and specifications of certain computer hardware and software. The amount of the impairment loss was determined by evaluating the likely sales proceeds from the disposition of the assets compared to their book value. The Company determined that it was unlikely that the net cash proceeds from the sale of any assets would be significant, and therefore recorded an impairment loss equal to the net book value of the assets of $4.0 million. 12 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 PACE and Drake 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. 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, 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. 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 contract educational services, which consist of revenues attributable to providing supplemental and remedial education services to public and non-public schools and major corporations. The following selected segment data for the quarter and six month periods ended June 30, 1996 and 1997 is derived from the Company's consolidated financial statements.
Three Months Six Months Ended June 30, Ended June 30, ---------------- ----------------- 1996 1997 1996 1997 ------- ------- ------- -------- (In thousands) Operating Revenue: Core educational services...... $ 8,045 $10,755 $15,257 $ 19,985 Contract educational services.. 15,908 18,326 32,401 35,900 Testing services............... 23,259 28,516 41,059 53,655 ------- ------- ------- -------- Total revenue............... $47,212 $57,597 $88,717 $109,540 ======= ======= ======= ======== Direct costs: Core educational services...... $ 5,263 $12,607 $10,867 $ 19,436 Contract educational services.. 14,717 15,713 30,048 31,881 Testing services............... 19,741 33,611 35,227 54,243 ------- ------- ------- -------- Total direct costs.......... $39,721 $61,931 $76,142 $105,560 ======= ======= ======= ========
RESULTS OF OPERATIONS Comparison of results for the quarter and six months ended June 30, 1997 to results for the quarter and six months ended June 30, 1996. 13 Revenue. Total revenues increased by $10.4 million, or 22% to $57.6 million for the quarter ended June 30, 1997 and increased by $20.8 million or 23%, to $109.5 million for the six months ended June 30, 1997 compared to the same periods in 1996. 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 $2.7 million, or 34%, to $10.8 million during the second quarter of 1997 and by $4.7 million, or 31%, to $20.0 million for the first six months of 1997 compared to the comparable 1996 periods. Franchise royalties increased by $600,000, or 21.0%, for the quarter ended June 30, 1997 and by $1.1 million, or 20%, to $6.6 million for the first six months of 1997 compared to the comparable 1996 periods. This increase in franchise royalties was due to the net increase of 25 new Centers in new territories and 9 new satellite Centers (Centers operating within existing franchise territories) opened during the first six months of 1997, combined with an overall 14% increase in revenues at existing Learning Centers open for more than one year. Franchise sales fees increased $400,000 to $500,000 for the quarter ended June 30, 1997 and increased $865,000 to $1.2 million for the first six months of 1997, compared to the same periods in 1996. For the six months ended June 30, 1997, there were 19 franchise Center licenses and a $500,000 area development agreement sold, compared to nine franchise Center licenses sold in the first six months of 1996. Revenue from Company-owned Learning Centers increased $1.5 million, or 38%, to $5.6 million during the second quarter of 1997 and by $3.0 million, or 41%, to $10.4 million during the first six months of 1997 compared to the comparable periods in 1996. The acquisition of thirteen Centers from four franchisees which occurred during the last twelve months accounted for $1.1 million, or 73% of the revenue increase for the quarter ended June 30, 1997 and $2.0 million, or 67% of the increase for the first six months of 1997, compared to the comparable 1996 periods. Revenue growth related to student enrollment increases for Centers operating for more than one year as of June 30, 1997 resulted in $400,000, or 27%, of the increase for the quarter ended June 30, 1997 and $1 million, or 33%, of the increase for the first six months of 1997 compared to the comparable 1996 periods. Contract educational services revenue increased by $2.4 million, or 15%, to $18.3 million for the quarter ended June 30, 1997, and by $3.5 million, or 11%, to $35.9 million for the six months ended June 30, 1997. The revenue increase results from contracts with new customers. Testing services revenue increased by $5.3 million, or 23% to $28.5 million during the second quarter of 1997 and by $12.6 million, or 31%, to $53.7 million during the first six months of 1997 compared to the same periods in 1996. The increase in testing services revenues resulted primarily from the Company's acquisition of the Wall Street Institute International, B.V. and its commonly controlled affiliates (collectively, 14 "WSI") during the fourth quarter of 1996, increased volumes worldwide from Information Technology and professional licensure and certification clients and increased volumes and services under the Educational Testing Service domestic and international contracts. Cost and Expenses. Total direct costs increased 56% from $39.7 million in the second quarter of 1996 to $61.9 million in the second quarter of 1997 and increased as a percentage of total revenues from 84% in the second quarter of 1996 to 108% in the second quarter of 1997, as a result of non-recurring costs of $21.5 million being included in direct costs for the second quarter of 1997, as discussed below. Total direct costs increased 39% from $76.1 million in the first six months of 1996 to $105.6 million in the first six months of 1997 and increased as a percentage of total revenues from 86% in the 1996 period to 96% in the 1997 period, as a result of the non-recurring expenses discussed below. Excluding the non-recurring expenses, total direct costs as a percentage of total revenues would be 70% and 77% for the second quarter and six months ended June 30, 1997, respectively. Core educational services expense increased 140% from $5.3 million to $12.6 million in the second quarter of 1997. Core educational services expense increased 79% from $10.9 million to $19.4 million in the first six months of 1997. Included in core educational services expense for the second quarter and six month 1997 periods is a non-recurring $5.0 million contribution of the Company's Common Stock to a non-profit corporation whose sole purpose is to develop and fund advertising programs for the Sylvan Learning Centers. Company- owned Learning Center expenses increased 36%, from $3.3 million in the second quarter of 1996 to $4.5 million in the second quarter of 1997 but decreased as a percentage of Company-owned Learning Center revenues from 82% in the second quarter of 1996 to 80% in the second quarter of 1997. Company-owned Learning Center expenses increased 39%, from $6.3 million for the first six months of 1996 to $8.8 million for the first six months of 1997 but decreased as a percentage of Company-owned Learning Center revenues from 85% for the first six months of 1996 to 84% for the first six months of 1997. $900,000 of the second quarter expense increase and $1.8 million of the year to date increase relates to the acquisition of thirteen Centers from four franchisees. The remaining increase in expenses was primarily related to advertising and labor associated with increases in Center enrollment Contract educational services expense increased 7%, from $14.7 million in the second quarter of 1996 to $15.7 million in the second quarter of 1997 but decreased as a percentage of contract educational services revenues from 93% in the second quarter of 1996 to 86% in the second quarter of 1997. Contract educational services expense increased 6%, from 30.0 million for the first six months of 1996 to $31.9 million for the first six months of 1997 but decreased as a percentage of contract educational services revenues from 93% for the first six months of 1996 to 89% for the first six months of 1997. The decrease in contract educational services expense as a percentage of revenue for the quarter and six month period ended June 30, 1997 versus the comparable periods 15 of 1996 is the result of leveraging the fixed costs for PACE and Public/nonpublic School services against revenue growth in 1997. Testing services expense increased 70%, from $19.7 million in the second quarter of 1996 to $33.6 million in the second quarter of 1997 and increased as a percentage of testing services revenues from 85% in the first quarter of 1996 to 118% in the first quarter of 1997. Testing services expense increased 54%, from $35.2 million for the first six months of 1996 to $54.2 million for the first six months of 1997 and increased as a percentage of testing services revenues from 86% for the first six months of 1996 to 101% for the first six months of 1997. The 1997 expenses for both the three month and six month periods included a $10.0 million non-recurring expense from cash and Common Stock contributed to an independent marketing fund to be used for development of the information technology testing business. The 1996 expenses included $1.2 million and $2.4 million of non-recurring expenses related to the Drake acquisition, incurred in the second quarter and first six-months of 1996, respectively. Excluding the 1997 and the 1996 non-recurring expenses, expenses as a percentage of total testing services revenue were 83% and 80% for the second quarter of 1997 and 1996, respectively, and 82% and 80% for the first six months of 1997 and 1996, respectively. The increase in testing services expense as a percentage of testing services revenues was primarily a result of increased salary and other operating costs resulting from the expected growth in business volumes in 1997. General and administrative expenses increased by $7.0 million to $9.9 million during the second quarter of 1997 compared to the second quarter of 1996 and increased as a percentage of revenue from 6% to 17%. General and administrative expenses increased by $7.9 million to $12.9 million during the first six months of 1997 compared to the same period in 1996 and increased as a percentage of revenue from 6% to 12%. Included in general and administrative expenses for both the second quarter and six months ended June 30, 1997 are non- recurring expenses related to a contribution of the Company's Common Stock valued at $6.5 million to Sylvan Learning Foundation, Inc., a nonprofit foundation formed to promote various educational pursuits. Excluding this non- recurring expense, general and administrative expenses are 6% of total revenues for both the quarter and six months ended June 30, 1997 compared to 6% for the quarter and six months ended June 30, 1996. The expenses did not decrease as a percentage of revenues as a result of increased administrative staff and leased space and other expenses which were added to support the growth in the Company's three divisions. In March 1997, the Company and National Education Corporation ("NEC") executed a definitive agreement pursuant to which the Company was to acquire NEC. In May 1997, NEC accepted a competing offer which resulted in the termination of NEC's agreement with the Company. As a result, NEC paid the Company a $30 million termination fee, which has been recorded, net of $1.5 million of transaction costs, as a separate component of non-operating income. 16 The Company's effective tax rate has decreased from 41% during the first six months of 1996 to 38% during the first six months of 1997 mainly due to the effect of higher earnings levels in certain lower tax jurisdictions. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $31.4 million for the six months ended June 30, 1997 as compared to $8.0 million provided in the comparable period of 1996. Cash flow from operations before working capital changes increased from $13.4 million in the 1996 period to $41.0 million in the 1997 period, primarily as a result of non-cash issuances of common stock totaling $18.5 million, the $4.0 million loss on impairment of assets as well as significant overall growth in income from 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 and reductions in accounts payable and accrued expenses. The increase in accounts and notes receivable relates to an overall increase in revenue of 23% for the six months ended June 30, 1997 compared to the same period in 1996. Specifically, of the $7.3 million operating cash flow reduction attributable to an increase in accounts and notes receivable, $1.8 million is related to a note receivable resulting from the Education Inroads transaction that will be paid prior to December 31, 1997 and $2.0 million represents a loan for the development of WSI in Italy and Germany secured by the Company's stock and a call option, not expected to be exercised for 3 to 5 years, to purchase the business. The remainder results from revenue growth and higher accounts receivable levels in all business segments. 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 six months of 1997, the Company sold a net of $6.4 million of available for sale securities, the proceeds of which were used to reduce accounts payable and accrued expenses by $5.4 million. The Company continues to incur expenditures for additions to property and equipment, which totaled $9.3 million in the first six months of 1997. 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 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 17 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 (6.87% at June 30, 1997). The Company had no outstanding balance on the credit line at June 30, 1997. During the first six months of 1997, the Company received $6.3 million as a result of the exercise of stock options and warrants to purchase 549,941 shares of Common Stock. During the first six months of 1997, the Company paid $4.7 million for the purchase of WSI. In August 1997, the Company completed a secondary stock offering and issued 1,612,292 shares of its Common Stock for net proceeds of $57.5 million after underwriting costs and expenses. Also, in connection with this offering, 453,888 options and warrants to purchase the Company's Common Stock were exercised, resulting in $1.5 million of proceeds to the Company. The proceeds of the offering will be used for general corporate purposes, which may include funding selected future acquisitions. In March 1997, the Company and NEC executed a definitive agreement pursuant to which Sylvan was to acquire NEC. In May 1997, NEC accepted the offer of Harcourt General, Inc. to acquire all of the stock of NEC, resulting in the termination of its agreement with the Company and the payment by NEC to the Company of the $30.0 million termination fee required by that agreement. In connection with the terminated acquisition, the Company incurred approximately $1.5 million of direct expenses. Therefore, the termination fee resulted in a $28.5 million net positive impact on the Company's cash resources in the second quarter of 1997. Subsequent to receipt of the termination fee, Sylvan invested $3.0 million in cash in a non profit corporation formed to fund the Sylvan Prometric division marketing programs. The Company believes that the remaining cash from the termination fee, the net proceeds of the secondary stock offering and cash provided by operations and other available financial 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 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 18 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) 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 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. 19 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (A) EXHIBITS: The following exhibits are included herein: (11) Statement re: Computation of Per Share Earnings (B) REPORTS ON FORM 8-K During the second quarter of 1997, the Company filed a report on Form 8- K/A dated April 4, 1997 with respect to the filing of the WSI audited financial statements; a report on Form 8-K/A dated April 9, 1997, with respect to the filing of WSI pro forma financial statements; a report on Form 8-K dated April 29, 1997, with respect to the Educational Inroads acquisition; a report on Form 8-K/A dated May 20, 1997, with respect to the termination of the NEC acquisition; and a report on Form 8-K dated June 11, 1997, with respect to the consummation of the Educational Inroads acquisition. SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized. Sylvan Learning Systems, Inc. Date: August 13, 1997 /s/ B. Lee McGee ---------------------------- B. Lee McGee, Vice President and Chief Financial Officer 20 EX-11 2 EXHIBIT 11 EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS SYLVAN LEARNING SYSTEMS, INC. ($ in thousands, except per share amounts)
QUARTERS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------------ ----------------------- 1996 1997 1996 1997 ------------------------ ----------------------- PRIMARY: AVERAGE SHARES OUTSTANDING 22,734,650 25,455,500 22,689,460 25,397,101 DILUTIVE EFFECT OF STOCK OPTIONS - Based on the treasury stock method using the average market price. 2,352,861 1,436,714 2,250,475 1,400,304 COMMON STOCK CONTINGENTLY ISSUABLE 65,806 173,385 65,806 173,385 ------------------------ ----------------------- TOTAL 25,153,317 27,065,599 25,005,741 26,970,790 NET INCOME $3,032 $6,695 $4,811 $10,142 CONTINGENT GOODWILL AMORTIZATION FOR ACQUISITIONS $50 $192 $99 $384 ------------------------ ----------------------- SUPPLEMENTAL NET INCOME $2,982 $6,503 $4,712 $9,758 PER SHARE AMOUNTS $0.12 $0.24 $0.19 $0.36 FULLY DILUTED: AVERAGE SHARES OUTSTANDING 22,734,650 25,455,500 22,689,460 25,397,101 DILUTIVE EFFECT OF STOCK OPTIONS - Based on the treasury stock method using the market price at the end of the year. 2,352,861 1,496,521 2,333,840 1,493,433 COMMON STOCK CONTINGENTLY ISSUABLE 65,806 173,385 65,806 173,385 ------------------------ ----------------------- TOTAL 25,153,317 27,125,406 25,089,106 27,063,919 NET INCOME $3,032 $6,695 $4,811 $10,142 CONTINGENT GOODWILL AMORTIZATION FOR ACQUISITIONS $50 $192 $99 $384 ------------------------ ----------------------- SUPPLEMENTAL NET INCOME $2,982 $6,503 $4,712 $9,758 PER SHARE AMOUNTS $0.12 $0.24 $0.19 $0.36
EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS DEC-31-1997 DEC-31-1997 APR-01-1997 JAN-01-1997 JUN-30-1997 JUN-30-1997 29,883 29,883 10,081 10,081 46,608 46,608 1,510 1,510 4,985 4,985 92,944 92,944 42,755 42,755 14,485 14,485 278,829 278,829 37,575 37,575 0 0 259 259 0 0 0 0 232,991 232,991 278,829 278,829 0 0 57,597 109,540 0 0 75,844 122,434 0 0 0 0 231 413 10,652 16,357 3,957 6,215 6,695 10,142 0 0 0 0 0 0 0 0 .24 .36 0 0
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