-----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, EtkOf5oJO+kUs1sgsfcnkE4QyL25iXIumC7fERJcjmG7xUBOxCxNeg1VOCNY3o21 uRSgbJuqp+Y96Xt328sGyA== 0000928385-97-001911.txt : 19971117 0000928385-97-001911.hdr.sgml : 19971117 ACCESSION NUMBER: 0000928385-97-001911 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: 97719966 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 9/30/1997 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 SEPTEMBER 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 30,334,370 shares of Common Stock outstanding as of November 1, 1997. SYLVAN LEARNING SYSTEMS, INC. ----------------------------- INDEX -----
PAGE NO. -------- PART I. - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Balance Sheets - December 31, 1996 and September 30, 1997........................................... 3 Statements of Income - Three months ended September 30, 1996, three months ended September 30, 1997.... 5 Statements of Income - Nine months ended September 30, 1996, nine months ended September 30, 1997......................... 6 Statements of Cash Flows - Nine months ended September 30, 1996, nine months ended September 30, 1997..... 7 Notes to Unaudited Financial Statements - September 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............................... 21 SIGNATURES................................................................ 21
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30, 1996 1997 (RESTATED) (UNAUDITED) ------------ ------------- ASSETS Current assets: Cash and cash equivalents $ 11,198 $ 29,624 Available-for-sale securities 16,449 80,523 Receivables: Accounts receivable 36,431 46,819 Costs and estimated earnings in excess of billings on uncompleted contracts 3,565 3,153 Notes receivable 3,008 3,978 ------------ ------------- 43,004 53,950 Allowance for doubtful accounts (1,379) (1,465) ------------ ------------- 41,625 52,485 Inventory 4,470 5,786 Deferred income taxes 620 625 Prepaid expenses 3,125 3,255 ------------ ------------- Total current assets 77,487 172,298 Notes receivable, less current portion 563 2,668 Costs and estimated earnings in excess of billings on uncompleted contracts, less current portion 550 274 Property and equipment: Furniture and equipment 37,952 43,936 Leasehold improvements 5,544 6,883 ------------ ------------- 43,496 50,819 Accumulated depreciation (15,578) (16,145) ------------ ------------- 27,918 34,674 Intangible assets: Goodwill 103,986 104,671 Contract rights 13,881 13,973 Other 2,570 2,522 ------------ ------------- 120,437 121,166 Accumulated amortization (10,736) (15,161) ------------ ------------- 109,701 106,005 Deferred contract costs, net of accumulated amortization of $2,067 as of December 31, 1996 and $4,961 as of September 30, 1997 13,230 10,647 Investments in affiliates 3,896 10,355 Other investments 24,220 25,752 Other assets 2,025 5,943 ------------ ------------- Total assets $ 259,590 $ 368,616 ============ =============
3 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ($ IN THOUSANDS)
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (RESTATED) (UNAUDITED) Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 28,576 $ 28,538 Bank lines of credit 1,000 - Current portion of long-term debt 3,182 572 Due to former shareholders of Wall Street Institute 4,921 250 Deferred revenue 9,543 9,666 Other current liabilities 661 350 ------------- ------------- Total current liabilities 47,883 39,376 Long-term debt, less current portion 2,170 - Deferred income taxes 2,338 2,304 Due to former shareholders of Drake 8,143 - Due to former shareholders of Wall Street Institute 15,150 - Due to former shareholders of ICST & Inroads 3,233 - Other long-term liabilities 350 354 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 September 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 28,887,292 as of September 30, 1997 240 289 Additional paid-in capital 168,547 299,186 Foreign currency translation adjustments (4) (779) Unrealized holding losses on available for sale securities (11) - Retained earnings 11,551 27,886 ------------- ------------- Total stockholders' equity 180,323 326,582 ------------- ------------- Total liabilities and stockholders' equity $ 259,590 $ 368,616 ============= =============
See accompanying notes 4 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30, ----------------------- 1996 1997 ----------- ----------- (Unaudited) (Unaudited) (Restated) Revenues $ 41,482 $ 58,464 Cost and expenses: Direct costs 32,141 44,013 General and administrative expenses 2,332 3,664 ----------- ----------- Total expenses 34,473 47,677 ----------- ----------- Operating income 7,009 10,787 Investment income 232 1,267 Interest expense (198) (13) Equity in net income (loss) of unconsolidated subsidiaries 196 (461) ----------- ----------- Income before income taxes 7,239 11,580 Income taxes (2,897) (4,053) ----------- ----------- Net income $ 4,342 $ 7,527 =========== =========== Per common and common equivalent share Net income $ 0.17 $ 0.25 =========== ===========
See accompanying notes. 5 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, --------------------------- 1996 1997 ----------- ----------- (Unaudited) (Unaudited) (Restated) Revenues $ 130,196 $ 168,003 Cost and expenses: Direct costs 108,281 149,573 General and administrative expenses 7,308 16,538 Loss on impairment of assets - 4,000 ----------- ----------- Total expenses 115,589 170,111 ----------- ----------- Operating income (loss) 14,607 (2,108) Investment income 974 2,819 Income, net of transaction costs for termination of acquisition - 28,500 Interest expense (637) (426) Equity in net income (loss) of unconsolidated subsidiaries 449 (848) ----------- ----------- Income before income taxes 15,393 27,937 Income taxes (6,240) (10,268) ----------- ----------- Net income $ 9,153 $ 17,669 =========== =========== Per common and common equivalent share Net income $ 0.36 $ 0.61 =========== ===========
See accompanying notes. 6 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS ($ IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30, ---------------------------------- 1996 1997 ----------- ---------- (Unaudited) (Unaudited) (Restated) OPERATING ACTIVITIES Net income $ 9,153 $ 17,669 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 3,941 5,588 Amortization 5,287 7,319 Non-cash issuance of common stock - 18,500 Loss on impairment of assets - 4,000 Provision for doubtful accounts 159 179 Deferred income taxes - (34) Equity in net loss (income) of unconsolidated subsidiaries (450) 848 Changes in operating assets and liabilities: Accounts and notes receivable (4,752) (13,557) Cost and estimated earnings in excess of billings on uncompleted contracts - 688 Inventory (251) (1,317) Prepaid expenses (532) (221) Other assets (1,149) (2,406) Accounts payable and accrued expenses 1,581 (1,384) Billings in excess of costs and estimated earnings on uncompleted contracts (251) 46 Other current liabilities (342) - Deferred revenue and other long-term liabilities 261 203 --------- ---------- Net cash provided by operating activities 12,655 36,121 --------- ---------- INVESTING ACTIVITIES Purchase of available-for-sale securities (30,243) (75,269) Proceeds from sale of available-for-sale securities 44,571 11,194 Increase in investments in and advances to affiliates - (6,907) Increase in other investments - (1,870) Purchase of property and equipment (5,256) (17,787) Proceeds from sale of property and equipment 116 1,254 Contract termination fee paid to Drake Authorized Testing Centers (4,433) - Purchase of contract rights (4,872) - Cash paid for intangible assets - (665) Expenditures for deferred contract costs and other assets (3,244) (1,671) --------- ---------- Net cash used in investing activities (3,361) (91,721) --------- ---------- FINANCING ACTIVITIES Payments to former shareholders of WSI - (4,671) Payments to former shareholders of Pace - (369) Proceeds from exercise of options and warrants 2,171 12,304 Proceeds from issuance of long term debt 338 - Proceeds from issuance of common stock 440 73,430 Payments on long-term debt and capital lease obligations (2,452) (4,893) Paydown of line of credit (3,500) (1,000) --------- ---------- Net cash provided by (used in) financing activities (3,003) 74,801 --------- ---------- Effects of exchange rate changes on cash (164) (775) --------- ---------- Net increase in cash and cash equivalents 6,127 18,426 Cash and cash equivalents at beginning of period 2,903 11,198 --------- ---------- Cash and cash equivalents at end of period $ 9,030 $ 29,624 ========= =========
See accompanying notes. 7 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SEPTEMBER 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 nine months ended September 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 nine month periods ended September 30, 1997 and 1996 are based on the estimated effective tax rates applicable for the full years. The Company's income tax provision of $10,268 for the nine month period ended September 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 September 30, 1997 and 1996 was 29,360,284 and 25,115,151, respectively. The weighted average number of shares used for the nine month periods ended September 30, 1997 and 1996 was 27,780,887 and 25,038,781, 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 September 30, 1997 and 1996 of $0.01 and $0.02 per share, respectively and for the nine month periods ended September 30, 1997 and 1996 of $0.03 and $0.03, respectively. The impact of Statement 128 on the calculation of fully diluted earnings per share for these periods is not expected to be material. NOTE D - RECLASSIFICATIONS ----------------- Certain amounts in the 1996 financial statements have been reclassified to conform with the 1997 presentation. NOTE E - ACQUISITIONS ------------ On May 30, 1997, the Company acquired by merger all of the outstanding stock of I-R, Inc. and Independent Child Study Teams, Inc. (collectively, "Educational Inroads") in exchange for 1,414,000 shares of common stock. I-R, Inc. and Independent Child Study Teams, Inc. were commonly owned by two shareholders. The acquisition was accounted for as a pooling-of-interests and accordingly, the Company's consolidated financial statements for periods prior to the merger have been restated to include the combined results of operations, financial position and cash flows of Educational Inroads. Educational Inroads provides remedial and special education services to public and non-public school systems, with current contracts in New Jersey, Maryland, Louisiana, Washington, D.C. and other school districts. Combined and separate results of operations of Sylvan and Educational Inroads during the periods prior to the acquisition are as follows: 9
Sylvan Independent Learning Child Study Systems, Inc. I-R, Inc. Teams, Inc. Combined ------------- ------------- ------------- ------------- ($ in thousands, except per share amounts) THREE MONTHS ENDED SEPTEMBER 30, 1996 Revenues $ 38,685 $ 1,453 $ 1,344 $ 41,482 Net income $ 4,342 $ -- $ -- $ 4,342 Net income per share $ 0.18 $ 0.17 NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenues $ 112,812 $ 7,124 $ 10,260 $ 130,196 Net income $ 9,153 $ -- $ -- $ 9,153 Net income per share $ 0.38 $ 0.36
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 $187,500, and it is expected that the aggregate duties and responsibilities of these two individuals will not be diminished to the extent that other costs will be incurred. In addition, both Sylvan and Educational Inroads incurred legal and transaction costs which are non-recurring in nature. The following supplemental pro forma information for the three-month and nine- month periods ended September 30, 1997 and 1996 is presented solely as a result of the changed circumstances that exist following the consummation of the merger, and is necessary to realistically assess the impact of the combination.
Three months ended Nine months ended September 30, September 30, 1996 1997 1996 1997 ----------- ----------- ----------- ----------- ($ in thousands, except per share amounts) Combined net income $ 4,342 $ 7,527 $ 9,153 $ 17,669 Contractual reduction to be made in (611) -- 858 800 compensation Legal and transactions costs -- -- -- 400 Related income taxes (at 40%) 244 -- (343) (480) ----------- ----------- ----------- ----------- (367) -- 515 720 ----------- ----------- ----------- ----------- Pro forma net income after contractual reduction in compensation $ 3,975 $ 7,527 $ 9,668 $ 18,389 =========== =========== =========== =========== Pro forma net income per share $ 0.16 $ 0.25 $ 0.38 $ 0.64 =========== =========== =========== ===========
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 1,121,530 shares of common stock, including income tax benefit of 12,951 $8,342 11 12,940 Issuance of 357,143 Revenue Escrow Shares of common stock in connection with the acquisition of Drake 4 8,139 8,143 Issuance of 714,884 shares of 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 common stock to NAC 2 4,998 5,000 Issuance of 2,062,292 shares of common stock in secondary stock offering - net of offering costs 20 73,410 73,430 Forgiveness of debt of former shareholders of Educational Inroads 2,811 2,811 Distributions to former shareholders of Educational Inroads (1,334) (1,334) Foreign currency translation adjustment (775) (775) Unrealized holding gain 11 11 Net income for the nine months ended September 30 1997 17,669 17,669 ----------- ----------- ----------- ----------- ----------- ------------- Balance at September 30, 1997 $ 289 $ 299,186 $ 0 $ (779) $ 27,886 $ 326,582 =========== =========== =========== =========== =========== =============
11 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 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 the third quarter of 1997, the Company completed a secondary stock offering and issued 2,062,292 shares of its Common Stock for net proceeds of $73.4 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 12 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. 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 nine month periods ended September 30, 1996 and 1997 is derived from the Company's consolidated financial statements.
Three Months Nine Months Ended September 30, Ended September 30, ------------------- ------------------- 1996 1997 1996 1997 ------- ------- ------- ------- (In thousands) Operating Revenue: Core educational services...... $ 9,850 $11,207 $ 25,107 $ 31,192 Contract educational services.. 8,563 9,917 40,962 45,817 Testing services............... 23,069 37,340 64,127 90,994 ------- ------- -------- -------- Total revenue............... $41,482 $58,464 $130,196 $168,003 ======= ======= ======== ======== Direct costs: Core educational services...... $ 6,742 $ 7,749 $ 17,607 $ 27,185 Contract educational services.. 7,954 7,855 38,002 39,736 Testing services............... 17,445 28,409 52,672 82,652 ------- ------- -------- -------- Total direct costs.......... $32,141 $44,013 $108,281 $149,573 ======= ======= ======== ========
13 RESULTS OF OPERATIONS Comparison of results for the quarter and nine months ended September 30, 1997 to results for the quarter and nine months ended September 30, 1996. Revenue. Total revenues increased by $17.0 million, or 41% to $58.5 million for the quarter ended September 30, 1997 and increased by $37.8 million or 29%, to $168.0 million for the nine months ended September 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 $1.4 million, or 14%, to $11.2 million during the third quarter of 1997 and by $6.1 million, or 24%, to $31.2 million for the first nine months of 1997 compared to the comparable 1996 periods. Franchise royalties increased by $300,000, or 9.0%, to $3.4 million for the quarter ended September 30, 1997 and by $1.4 million, or 16%, to $10.0 million for the first nine months of 1997 compared to the comparable 1996 periods. This increase in franchise royalties was due to the net increase of 41 new Centers in new territories and 11 new satellite Centers (Centers operating within existing franchise territories) opened during the first nine months of 1997, combined with an overall 12% increase in revenues at existing Learning Centers open for more than one year. Franchise sales fees increased $500,000 to $1.0 million for the quarter ended September 30, 1997 and increased $1.3 million to $2.2 million for the first nine months of 1997, compared to the same periods in 1996. For the nine months ended September 30, 1997, there were 32 franchise Center licenses and three area development agreements totaling $1.1 million sold, compared to 22 franchise Center licenses and two area development agreements totaling $530,000 sold in the first nine months of 1996. Revenue from Company-owned Learning Centers increased by $500,000, or 10%, to $5.9 million during the third quarter of 1997 and by $3.5 million, or 28%, to $16.3 million during the first nine months of 1997 compared to the comparable periods in 1996. Substantially all of this increase for the third quarter and $1.7 million of the increase for the nine month period was generated from the acquisition of eight centers which occurred after September 30, 1996. The remaining increase in revenues for the nine month period related to increased student enrollments in centers which existed in both nine month periods. Contract educational services revenue increased by $1.4 million, or 16%, to $9.9 million for the quarter ended September 30, 1997, and by $4.9 million, or 12%, to $45.8 million for the nine months ended September 30, 1997. Revenue from Public/Non-public school contracts decreased by $300,000 for the quarter ended September 30, 1997, and increased by $600,000 for the nine months ended September 30, 1997. Revenue from PACE training services increased by $1.7 million for the quarter ended September 30, 1997, and increased $4.3 million for the nine months ended September 30, 1997, 14 primarily the result of services provided to new customers. Revenue from Public/Non-public school contracts decreased for the quarter ended September 30, 1997 compared to the 1996 quarter primarily due to revenues earned from one time summer contracts in the 1996 period. Revenue from Public/Non-public school contracts increased for the nine months ended September 30, 1997 compared to the 1996 period, as a result of expansion of services to existing districts and contracts obtained with new districts after September 30, 1996 partially offset by the reduction due to the one time 1996 contracts discussed above. Testing services revenue increased by $14.3 million or 62% to $37.3 million during the third quarter of 1997 and by $26.9 million, or 42% to $91.0 million during the first nine months of 1997 compared to the same periods in 1996. The increase in testing services revenue for the third quarter and nine months ended September 30, 1997 resulted mainly from increased services under Educational Testing Service (ETS) contracts, which included the cost-plus international contract, GRE, TOEFL and PRAXIS, and certain volume-based pricing adjustments. In addition, the Wall Street Institute International, B.V. and its commonly controlled affiliates (collectively, "WSI"), which the Company acquired during the fourth quarter 1996, and increased testing services by the Armed Services Vocational Aptitude Battery (ASVAB) contributed to the increased revenues. Cost and Expenses. Total direct costs increased 37% from $32.1 million in the third quarter of 1996 to $44.0 million in the third quarter of 1997 but decreased as a percentage of total revenues from 77% in the third quarter of 1996 to 75% in the third quarter of 1997. Total direct costs increased 38% from $108.3 million in the first nine months of 1996 to $149.6 million in the first nine months of 1997 and increased as a percentage of total revenues from 83% in the 1996 period to 89% 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 80% for the nine months ended September 30, 1997. Core educational services expenses increased by $1.0 million to $7.7 million, or 69% of core educational services revenue for the quarter ended September 30, 1997, compared to $6.7 million or 68% of core educational services revenue for the quarter ended September 30, 1996. Core educational services expenses increased by $9.6 million to $27.2 million, or 87% of core educational services revenue for the nine months ended September 30, 1997, compared to $17.6 million or 70% of core educational services revenue for the nine months ended September 30, 1996. Included in core educational services expense for the nine month 1997 period 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. Excluding these non- recurring charges, total core educational services expenses as a percentage of core educational services revenue would be 71% for the nine months ended September 30, 1997. 15 Company-owned Learning Center expenses increased 12%, from $4.4 million in the third quarter of 1996 to $5.0 million in the third quarter of 1997. Company- owned Learning Center expenses increased 28%, from $10.8 million for the first nine months of 1996 to $13.7 million for the first nine months of 1997. $600,000 of the third quarter expense increase and $1.5 million of the year to date increase relates to the acquisition of eight Centers from three franchisees. The remaining 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 increased from 82% of revenues to 84% of revenues for the third quarter, but held constant at 84% of revenue for the nine month period ended September 30, 1997 compared to the same period in 1996. Contract educational services expense decreased by $100,000 to $7.9 million, or 79% of contract educational services revenue for the quarter ended September 30, 1997, compared to $8.0 million or 93% of contract services revenue for the third quarter of 1996, and increased by $1.7 million to $39.8 million, or 87% of contract educational services revenue during the nine months ended September 30, 1997, compared to $38.0 million or 93% of contract educational services revenue during the first nine months of 1996. The decrease in contract educational services expense as a percentage of revenue for the quarter and nine month period ended September 30, 1997 versus the comparable periods of 1996 is the result of increased profit margins for PACE and Public/Non-public school contract services in 1997, as well as a higher mix of revenue from PACE contracts in 1997 which generate a higher profit margin than Public/Non-public school contract services. Testing services expenses for the third quarter of 1997 increased by $11.0 million to $28.4 million, or 76% of total testing services revenue, compared to $17.4 million, or 76% of total testing services revenue for the third quarter of 1996. Testing services expense for the first nine months of 1997 increased by $30.0 million to $82.7 million, or 91% of total testing revenue, compared to $52.7 million, or 82% of total testing services revenue for the same period in 1996. During the first nine months of 1997, the increase in testing services expenses as a percentage of testing services revenues was predominantly a result of the marketing expenditures and contributions of $10 million after the breakup of the NEC acquisition. The 1996 expenses include $2.4 million of non-recurring charges related to the Drake acquisition, incurred during the first and second quarter of 1996. Therefore, the recurring expenses as a percentage of total testing services revenue for the first nine months for 1997 and 1996 were 80% and 78%, respectively. This increase in recurring expenses as a percentage of testing services revenue was primarily due to lower margins on higher revenues earned on the cost-plus ETS International contract and by increased salary and other operating costs resulting from the expected growth in business volumes in 1997, offset in part by revenue increases from volume-based pricing adjustments in the 1997 third quarter. 16 General and administrative expenses increased by $1.3 million to $3.7 million during the third quarter of 1997 compared to the third quarter of 1996 but remained at 6% of revenue. General and administrative expenses increased by $9.2 million to $16.5 million during the first nine months of 1997 compared to the same period in 1996 and increased as a percentage of revenue from 6% to 10%. Included in general and administrative expenses for the nine months ended September 30, 1997 is a non-recurring expense 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 nine months ended September 30, 1997. The expenses did not decrease as a percentage of revenues as a result of increased administrative staff, leased space costs 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, net of $1.5 million of transaction costs, is included as a separate component of non-operating income. The Company's effective tax rate has decreased from 41% during the first nine months of 1996 to 37% during the first nine 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 $36.1 million for the nine months ended September 30, 1997 as compared to $12.7 million provided in the comparable period of 1996. Cash flow from operations before working capital changes increased from $18.1 million in the 1996 period to $54.1 million in the 1997 period, primarily as a result of the $30.0 million in cash received from the NEC break up fee offset by the $1.5 million of transaction costs paid and the $3.0 million cash payment to a non-profit corporation formed to fund the Sylvan Prometric division marketing programs, 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 29% for the nine months ended September 30, 1997 compared to the same period in 1996. Specifically, of the $13.6 million operating cash flow reduction attributable to an increase in accounts and notes receivable, $6.8 million is attributable to increased revenues in the testing services business segment, $2.6 million of which represents amounts owed the Company 17 by the former shareholders of an acquired entity secured by the Company's stock held in escrow 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 the core educational services and contract educational services 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 nine months of 1997, the Company used a portion of the proceeds of the secondary stock offering to purchase a net of $64.1 million of available for sale securities. The Company continues to incur expenditures for additions to property and equipment, which totaled $17.8 million in the first nine 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 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 (6.81% at September 30, 1997). The Company had no outstanding balance on the credit line at September 30, 1997. During the first nine months of 1997, the Company received $12.3 million as a result of the exercise of stock options and warrants to purchase 1,121,530 shares of Common Stock. During the first nine months of 1997, the Company paid $4.7 million for the purchase of WSI. In the third quarter of 1997, the Company completed a secondary stock offering and issued 2,062,292 shares of its Common Stock for net proceeds of $73.4 million after underwriting costs and expenses. Also, in connection with this offering, 453,888 options 18 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. 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 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 19 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. 20 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 third quarter of 1997, the Company filed a report on Form 8-K, dated July 15, 1997, with respect to the filing of restated audited financial statements for the years ended December 31, 1994, 1995 and 1996 and restated unaudited financial statements for the three months ended March 31, 1996 and 1997 related to 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: November 13, 1997 /s/ B. Lee McGee ---------------------------- B. Lee McGee, Vice President and Chief Financial Officer 21 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------------- ----------------------- 1996 1997 1996 1997 -------------------------- ----------------------- PRIMARY: AVERAGE SHARES OUTSTANDING 22,768,240 27,702,811 27,715,552 26,164,157 DILUTIVE EFFECT OF STOCK OPTIONS - Based on the treasury stock method using the average market price. 2,249,726 1,343,173 2,226,044 1,172,682 COMMON STOCK CONTINGENTLY ISSUABLE 97,185 165,364 97,185 165,364 ----------- ----------- ----------- ----------- TOTAL 25,115,151 29,211,348 25,038,781 27,502,203 =========== =========== =========== =========== NET INCOME $ 4,342 $ 7,527 $ 9,153 $ 17,669 CONTINGENT GOODWILL AMORTIZATION FOR ACQUISITIONS 77 237 230 710 ----------- ----------- ----------- ----------- SUPPLEMENTAL NET INCOME $ 4,265 $ 7,290 $ 8,923 $ 16,959 =========== =========== =========== =========== PER SHARE AMOUNTS $ 0.17 $ 0.25 $ 0.36 $ 0.62 =========== =========== =========== =========== FULLY DILUTED: AVERAGE SHARES OUTSTANDING 22,768,240 27,702,812 22,715,554 26,164,157 DILUTIVE EFFECT OF STOCK OPTIONS - Based on the treasury stock method using the average market price. 2,378,976 1,492,108 2,362,088 1,451,366 COMMON STOCK CONTINGENTLY ISSUABLE 97,185 165,364 97,185 165,364 ----------- ----------- ----------- ----------- TOTAL 25,244,401 29,360,284 25,174,827 27,780,887 =========== =========== =========== =========== NET INCOME $ 4,342 $ 7,527 $ 9,153 $ 17,669 CONTINGENT GOODWILL AMORTIZATION FOR ACQUISITIONS 77 237 230 710 ----------- ----------- ----------- ----------- SUPPLEMENTAL NET INCOME $ 4,265 $ 7,290 $ 8,923 $ 16,959 =========== =========== =========== =========== PER SHARE AMOUNTS $ 0.17 $ 0.25 $ 0.35 $ 0.61 =========== =========== =========== ===========
EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 9-MOS DEC-31-1997 DEC-31-1997 JUL-01-1997 JAN-01-1997 SEP-30-1997 SEP-30-1997 29,624 29,624 80,523 80,523 53,950 53,950 1,465 1,465 5,786 5,786 172,298 172,298 50,819 50,819 16,145 16,145 368,616 368,616 39,376 39,376 0 0 0 0 0 0 289 289 326,293 326,293 368,616 368,616 0 0 58,464 168,003 0 0 47,677 170,111 0 0 0 0 13 426 11,580 27,937 4,053 10,268 0 0 0 0 0 0 0 0 7,527 17,669 0.25 0.61 0 0
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