-----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, Nn1aFsh3appfHG8IJq7Xj/fufhwZ+l0+egIQE7g0Ed55fEUeAbctWpkBAGgWNCYz DL6PhDl0kK3guOFbGmlqWw== 0000950109-97-004951.txt : 19970716 0000950109-97-004951.hdr.sgml : 19970716 ACCESSION NUMBER: 0000950109-97-004951 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970714 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19970715 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: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22844 FILM NUMBER: 97640405 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 8-K 1 FORM 8-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): July 15, 1997 ---------------------------- SYLVAN LEARNING SYSTEMS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 0-22844 52-1492296 -------- ---------------------- -------------------- (State of Incorporation) (Commission File Number) (IRS Employer Identification Number) 1000 Lancaster Street Baltimore, Maryland 21202 -------------------------------------------------- (Address of principal executive offices) (Zip Code) (410) 843-8000 -------------- (Registrant's telephone number) Item 5. Other Events. The supplemental consolidated financial statements of Sylvan Learning Systems, Inc. ("the Company") attached hereto as Exhibits for each of the three years in the period ended December 31, 1996 and for the quarters ended March 31, 1997 and 1996 have been restated to give retroactive effect to the Company's merger with I-R, Inc. and Independent Child Study Teams, Inc. (collectively, "Educational Inroads") on May 30, 1997. The merger was accounted for by the Company as a pooling-of-interests and, accordingly, the Company's financial statements and schedule have been restated for all periods prior to the merger to include the results of operations, financial position and cash flows of Educational Inroads. As of the date of this report, the Company has not issued financial statements for a period including the merger date and, therefore, the financial statements are considered "supplemental." Upon the issuance of financial statements for a period that includes the date of the merger, the supplemental consolidated financial statements and schedule will become the historical consolidated financial statements and schedule of the Company. Also attached hereto as Exhibits are revised Management's Discussion and Analysis of Financial Condition and Results of Operations based on the supplemental consolidated financial statements described above. SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA(1)
PARTNERSHIP AND SYLVAN PARTNERSHIP COMBINED SYLVAN ------------ ------------ --------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED THREE MONTHS DECEMBER 31, DECEMBER 31, DECEMBER 31, ENDED MARCH 31, ------------ ------------ --------------------------- ---------------- 1992 1993 1994 1995 1996 1996 1997 ------------ ------------ ------- -------- -------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues................ $33,821 $51,519 $68,748 $111,059 $181,936 $41,506 $51,944 Cost and expenses: Direct costs .......... 28,840 44,056 60,388 96,708 150,449 36,423 43,630 General and administrative expense(2)............ 5,433 6,255 4,998 6,206 8,755 2,069 2,961 Loss on impairment of assets................ -- -- -- 3,316 -- -- -- ------- ------- ------- -------- -------- ------- ------- Total expenses......... 34,273 50,311 65,386 106,230 159,204 38,492 46,591 ------- ------- ------- -------- -------- ------- ------- Operating income (loss)................. (452) 1,208 3,362 4,829 22,732 3,014 5,353 Non-operating income (expense).............. 1 (116) 224 391 363 92 (128) Interest income (expense), net......... (594) (1,290) (62) (1,440) 551 142 480 ------- ------- ------- -------- -------- ------- ------- Income (loss) from continuing operations before income taxes and extraordinary items.... (1,045) (198) 3,524 3,780 23,646 3,248 5,705 Income taxes............ (16) (7) (76) (209) (8,850) (1,469) (2,258) ------- ------- ------- -------- -------- ------- ------- Income (loss) from continuing operations before extraordinary items.................. (1,061) (205) 3,448 3,571 14,796 1,779 3,447 Discontinued operations(3): Loss from operations, net of tax............ (1,700) (375) -- -- -- -- -- Gain on disposal....... 427 580 -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Income (loss) from discontinued operations............ (1,273) 205 -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Net income (loss) before extraordinary items.... (2,334) -- 3,448 3,571 14,796 1,779 3,447 Extraordinary items(4).. -- (177) -- -- -- -- -- ------- ------- ------- -------- -------- ------- ------- Net income (loss)(6)... $(2,334) $ (177) $ 3,448 $ 3,571 $ 14,796 $ 1,779 $ 3,447 ======= ======= ======= ======== ======== ======= ======= Net income (loss) from continuing operations per share(5)........... $ (0.02) $ 0.21 $ 0.21 $ 0.59 $ 0.07 $ 0.12 ======= ======= ======== ======== ======= ======= Net income (loss) per share(5)(6)............ $ (0.01) $ 0.21 $ 0.21 $ 0.59 $ 0.07 $ 0.12 ======= ======= ======== ======== ======= ======= Weighted average shares outstanding(5)......... 12,967 16,533 17,386 24,996 24,901 27,207 ======= ======= ======== ======== ======= ======= BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents............ $ 673 $11,499 $ 4,366 $ 2,903 $ 11,198 $ 4,272 $12,789 Available-for-sale securities............. 127 1,248 2,537 30,735 16,449 22,725 10,730 Net working capital (deficit).............. (3,302) 12,665 13,166 39,407 29,603 44,580 40,228 Intangible assets and deferred contract costs.................. 149 7,000 7,932 82,849 122,932 81,173 120,948 Total assets............ 18,446 42,003 50,046 174,070 259,590 174,200 260,380 Long-term debt and capital leases......... 5,578 6,640 9,814 9,854 32,228 10,519 22,524 Stockholders' or partners' equity....... 326 24,563 32,481 137,148 180,323 141,206 201,880
- ------- (1) Prior to February 1, 1991, the Sylvan Learning Centers business was conducted by Sylvan Learning Corporation (the "Predecessor"). On February 1, 1991, the Predecessor contributed the Sylvan Learning Centers business to Sylvan KEE Systems, a Maryland general partnership (the "Partnership") in exchange for a 50% partnership interest, and Sylvan contributed its computer training software development business to the Partnership in exchange for the other 50% partnership interest. On January 26, 1993, Sylvan acquired the Predecessor and dissolved the Partnership. On September 3, 1993, Sylvan sold its computer training software development business. During 1994, Sylvan acquired by mergers all of the outstanding stock of Learning Services, Inc. ("LSI") and Loralex Corporation ("Loralex"). These companies owned and operated a total of nine Sylvan Learning Centers located in the Northeast United States and Florida. On February 17, 1995, Sylvan acquired by merger all of the outstanding stock of Remedial Education and Diagnostic Services, Inc. and READS, Inc. (collectively, "READS"), a Philadelphia-based provider of remedial, education and a variety of consulting services to school districts, county-wide educational agencies and municipalities in the Eastern United States. The READS, Loralex and LSI acquisitions have been accounted for by Sylvan as poolings-of-interests and, accordingly, Sylvan's financial statements have been restated for all periods presented to include the results of operations of READS, Loralex and LSI. Effective September 30, 1995 Sylvan acquired Drake Prometric, L.P. ("Drake"), a leading provider of computer-based certification, licensure and assessment testing. The transaction was accounted for using the purchase method of accounting, and Sylvan's results of operations from October 1, 1995 include the operations of Drake. Effective December 1, 1996, Sylvan acquired Wall Street, a European-based franchisor and operator of learning centers that teach the English language. This transaction was accounted for using the purchase method of accounting and Sylvan's results of operations from December 1, 1996 include the operations of Wall Street. Sylvan paid $4.9 million of the $20.1 million purchase price in cash and the remainder in 714,884 shares of Common Stock. On May 30, 1997, the Company consummated its acquisition by merger of all of the outstanding common stock of Educational Inroads. Educational Inroads provided contract educational services to school districts in New Jersey and several other states. The Educational Inroads acquisition has been accounted for by Sylvan as a pooling-of-interests and, accordingly, Sylvan's financial statements have been restated for all periods prior to the acquisition to include the results of operations of Educational Inroads. Educational Inroads generated revenues of $24.8 million in 1996. As of the date of this Prospectus, the Company has not issued financial statements for a period including the date the Educational Inroads acquisition was consummated, and, until that time, these restated financial statements are considered "supplemental." Upon the issuance of financial statements for a period that includes the consummation date of the Educational Inroads acquisition, the supplemental consolidated financial statements will become the historical consolidated financial statements of the Company. (2) The Company has reclassified certain operating expenses previously included in general and administrative expense to direct costs. This change has been reflected for all periods presented. (3) Represents Sylvan's computer training software development business which was sold in September 1993 and a Canadian computer training business, 80.1% of which was sold in 1992. (4) Represents the $350,000 gain on extinguishment of a $3.5 million debt to Learning Centers, Inc., and a $527,000 loss on an extinguishment of $5.0 million of notes payable to stockholders, each recorded in 1993. (5) All share and per share data have been restated to retroactively reflect a 3-for-2 stock split of the Company's common stock for stockholders of record on November 7, 1996. (6) Reducing compensation expense relating to Educational Inroads stockholders to reflect their post-acquisition contractual compensation levels and eliminating non-recurring acquisition transaction costs would result in supplemental pro forma net income and net income per share of $16,266,000 and $0.65, respectively, in 1996 and $4,017,000 and $0.14, respectively in the first quarter of 1997. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (c) 23.01 Consent of Ernst & Young LLP (d) 99.1 Management's Discussion and Analysis of Financial Condition and Results of Operations for the Quarters Ended March 31, 1996 and March 31, 1997 and for the Years Ended December 31, 1994, 1995 and 1996 99.2 Supplemental Consolidated Financial Statements and Schedule for each of the three years in the period ended December 31, 1996 (audited) 99.3 Supplemental Consolidated Financial Statements for the three months ended March 31, 1996 and March 31, 1997 (unaudited) SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: July 14, 1997 SYLVAN LEARNING SYSTEMS, INC. By: /s/ B. Lee McGee ------------------------------- B. Lee McGee, Vice President and Chief Financial Officer EX-23.01 2 EXHIBIT 23.01 Exhibit 23.01 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the following Registration Statements of our report dated July 10, 1997, with respect to the supplemental consolidated financial statements and schedule of Sylvan Learning Systems, Inc. included in the Current Report on Form 8-K dated on or about July 14, 1997. Registration Statements on Form S-3
Registration Number Date Filed - ---------------------------------------------------- 33-92014 May 8, 1995 33-92852 May 30, 1995 333-1674 February 26, 1996 333-16111 November 14, 1996 333-21261 February 6, 1997 333-26633 May 7, 1997
Registration Statements on Form S-8
Name Registration Number Date Filed - ------------------------------------------------------------------------------ 1987-1991 Employee Stock Option Plan 33-77384 April 6, 1994 1993 Director Stock Option Plan 33-77386 April 6, 1994 1993 Employee Stock Option Plan 33-77390 April 6, 1994 1993 Management Stock Option Plan 33-77388 April 6, 1994 1997 Employee Stock Purchase Plan 333-21963 February 18, 1997
/s/ ERNST & YOUNG LLP Baltimore, Maryland July 10, 1997 EX-27 3 FINANCIAL DATA SCHEDULE (YEAR)
5 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 11,198,106 16,448,759 43,004,037 (1,378,854) 4,469,577 77,485,980 43,495,994 (15,577,693) 259,589,521 47,883,047 0 0 0 239,802 180,082,791 259,589,521 181,935,961 181,935,961 0 159,203,953 0 0 1,071,323 23,646,321 (8,850,000) 14,796,321 0 0 0 14,796,321 0.60 0.59
EX-27.2 4 FINANCIAL DATA SCHEDULE (YEAR)
5 1,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 12,789 10,730 45,678 (1,339) 4,441 76,922 46,005 (17,438) 260,380 36,694 0 0 0 250 201,630 260,380 51,944 51,944 0 46,591 0 0 209 5,705 (2,258) 3,447 0 0 0 3,447 0.12 0.12
EX-99.1 5 MANAGEMENTS DISCUSSION AND ANALYSIS EXHIBIT 99.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1997 AND FOR THE THREE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996. 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 discussion and analysis below is based on the Company's Supplemental Consolidated Financial Statements and related Notes thereto included herein. OVERVIEW Sylvan generates revenues from three business segments: core educational services which primarily consist of franchise sales, royalties and Sylvan- owned Learning Center revenues; testing services, which consist of computer- based testing fees paid to Sylvan; 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 supplemental segment data for the years ended December 31, 1994, 1995 and 1996 is derived from the Company's audited supplemental consolidated financial statements.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------- --------------- 1994 1995 1996 1996 1997 ------- -------- -------- ------- ------- (IN THOUSANDS) Operating revenue: Core educational services........... $20,016 $ 26,063 $ 36,799 $ 7,213 $ 9,231 Contract educational services....... 35,067 50,430 58,186 16,493 17,574 Testing services.................... 13,665 34,566 86,951 17,800 25,139 ------- -------- -------- ------- ------- Total revenue..................... $68,748 $111,059 $181,936 $41,506 $51,944 ======= ======== ======== ======= ======= Direct costs: Core educational services........... $13,255 $ 18,675 $ 25,557 $ 5,605 $ 6,829 Contract educational services....... 33,108 47,685 53,373 15,331 16,168 Testing services.................... 14,025 30,348 71,519 15,487 20,633 ------- -------- -------- ------- ------- Total direct costs................ $60,388 $ 96,708 $150,449 $36,423 $43,630 ======= ======== ======== ======= =======
RESULTS OF OPERATIONS Comparison of results for the quarter ended March 31, 1997 and the quarter ended March 31, 1996. Revenue. Total revenues increased 25%, from $41.5 million in the first quarter of 1996 to $51.9 million in the first quarter of 1997. This increase resulted from higher revenues in all business segments -- core educational services, testing services and contract educational services. Core educational services revenues increased 28%, from $7.2 million in the first quarter of 1996 to $9.2 million in the first quarter of 1997. Franchise royalties increased $0.5 million or 19%, to $3.0 million in the first quarter of 1997 compared to the same period in 1996. This increase in franchise royalties was due to the net increase of 18 Learning Centers opened in new territories and three Learning Centers opened in existing franchise territories in the first quarter of 1997, combined with an overall 14% increase in revenues at existing Learning Centers open for more than one year as of March 31, 1997. Franchise sales fees increased to $0.7 million in the first quarter of 1997 compared to $0.2 million in the same period in 1996. In the first quarter of 1997, five franchise Learning Center licenses and a $0.5 million area development agreement were sold, compared to six franchise Learning Center licenses sold in the first quarter of 1996. The ability of Sylvan to generate fees in the future from the sale of area development agreements or franchise Learning Center licences cannot be assured. Revenues from Company-owned Learning Centers increased 44%, from $3.4 million in the first quarter of 1996 to $4.9 million in the first quarter of 1997. Of the increase, $0.9 million resulted from the acquisition of 11 Learning Centers from two franchisees during the fourth quarter of 1996. Revenue growth related to student enrollment increases at Learning Centers operating more than one year as of March 31, 1997 resulted in $0.6 million of the increase. Contract educational services revenues increased 7%, from $16.5 million in the first quarter of 1996 to $17.6 million in the first quarter of 1997. This was due to both greater volumes of training and increases in the number of public and non-public school contracts. Testing services revenues increased 41%, from $17.8 million in the first quarter of 1996 to $25.1 million in the first quarter of 1997. The increase resulted primarily from the Company's acquisition of Wall Street during the fourth quarter of 1996, increased volumes from IT, professional licensure and certification clients and increased services under the ETS contracts. Cost and Expenses. Total direct costs increased 20%, from $36.4 million in the first quarter of 1996 to $43.6 million in the first quarter of 1997 but decreased as a percentage of total revenues from 88% in the first quarter of 1996 to 84% in the first quarter of 1997. Core educational services expense increased 22% from $5.6 million to $6.8 million in the first quarter of 1997. Company-owned Learning Center services expense increased 41% from $3.0 million in the first quarter of 1996 to $4.3 million in the first quarter of 1997 but decreased as a percentage of Company-owned Learning Center services revenue from 90% in the first quarter of 1996 to 88% in the first quarter of 1997. $1.1 million of the increase related to the acquisition of 11 Learning Centers from two franchisees. The remaining increase in expenses was primarily for advertising, labor and other Learning Center expenses associated with increased enrollment. Expenses for Learning Centers operating more than one year as of March 31, 1997 accounted for $0.2 million of the increase and represented 38% of incremental same-Learning Center revenue. Contract educational services expense increased 5%, from $15.3 million in the first quarter of 1996 to $16.2 million in the first quarter of 1997 but decreased as a percentage of contract educational services revenues from 93% in the first quarter of 1996 to 92% in the first quarter of 1997. Operating expenses for PACE accounted for $0.3 million of this increase. Testing services expense increased 33%, from $15.5 million in the first quarter of 1996 to $20.6 million in the first quarter of 1997 but decreased as a percentage of testing services revenues from 87% in the first quarter of 1996 to 82% in the first quarter of 1997. The expense in the first quarter of 1996 included $1.2 million of non-recurring charges related to the Drake acquisition. Therefore, recurring expenses in the first quarter of 1996 were 80% of testing services revenues for that period. The increase in recurring testing services expense as a percentage of testing services revenues was primarily a result of increased salary and other operating costs resulting from the integration of test delivery systems and growth in business that occurred after the first quarter of 1996 and expected growth in business volumes in 1997. General and administrative expense increased 43%, from $2.1 million in the first quarter of 1996 to $3.0 million in the first quarter of 1997 and increased as a percentage of total revenues from 5% in the first quarter of 1996 to 6% in the first quarter of 1997. The increase resulted from increases in administrative staff salaries and expenses as well as increases in rent expense related to the Company's new headquarters. The Company's effective tax rate decreased from 45% in the first quarter of 1996 to 40% in the first quarter of 1997 mainly because a greater portion of the Company's earnings were generated in foreign jurisdictions having lower tax rates than the United States. Comparison of results for the year ended December 31, 1996 to the year ended December 31, 1995. Revenues. Total revenues increased 64%, from $111.1 million in 1995 to $181.9 million in 1996. This increase resulted from greater revenues in all business segments--core educational services, testing services and contract educational services. Core educational services revenues increased 41%, from $26.1 million in 1995 to $36.8 million in 1996. Franchise royalties increased 21%, from $9.2 million in 1995 to $11.2 million in 1996. This increase in franchise royalties was due to an overall 19% increase in revenues at Learning Centers that had been operating for more than one year as of December 31, 1996 combined with a net increase of 49 Learning Centers opened during 1996. Franchise sales fees increased 49%, from $2.1 million in 1995 to $3.2 million in 1996. During 1996, there were four area development agreements sold for $1.7 million and 38 franchise Learning Center licenses sold, compared to two area development agreements sold for $550,000 and 43 Learning Center licenses sold during 1995. Revenues from Company-owned Learning Centers increased 61%, from $11.5 million in 1995 to $18.5 million in 1996. Revenue growth related to increased student enrollment at Learning Centers that had been operating for more than one year as of December 31, 1996 resulted in $3.4 million, or 30%, of the increase from 1995 to 1996. Approximately $3.2 million of the revenue increase resulted from the acquisition of 11 Learning Centers from two franchisees. The opening of one new Learning Center during 1996 resulted in an additional $350,000 of revenues during 1996. Product sales increased 23%, from $3.2 million in 1995 to $3.9 million in 1996. This increase resulted from overall student enrollment increases at franchised Learning Centers. Contract educational services revenues increased 15%, from $50.4 million in 1995 to $58.2 million in 1996. Revenues from public and non-public school contracts accounted for $5.9 million of the increase, and greater revenues from PACE accounted for $1.9 million of the increase. The PACE increase primarily resulted from the fact that the acquisition, accounted for as a purchase, was effective February 28, 1995, and as such the 1995 revenues of Sylvan only reflect ten months of PACE revenues. Revenues from public and non-public school contracts executed during 1996 contributed $2.2 million to 1996 revenues. Revenues from public and non-public school contracts executed during 1995 increased by $4.6 million in 1996, primarily because a full year of revenues were generated under these contracts during 1996. Testing services revenues increased 152%, from $34.6 million in 1995 to $87.0 million in 1996. The significant increase in testing services revenues resulted primarily from the September 1995 acquisition of Drake, which provided increased revenues from IT clients. Increased services under ETS contracts, including the cost-plus international contract and the Graduate Record Exam (the "GRE"), and other professional testing revenue increases, including NASD testing, which began in February 1996, also contributed to the increase in testing services revenues. Cost and Expenses. Total direct costs increased 56%, from $96.7 million in 1995 to $150.4 million in 1996 but decreased as a percentage of total revenues from 87% in 1995 to 83% in 1996. Core educational services expense increased 37% from $18.7 million in 1995 to $25.6 million in 1996. Franchise services expense increased 11%, from $5.9 million in 1995 to $6.5 million in 1996 but decreased as a percentage of franchise royalties and sales revenues from 52% in 1995 to 46% in 1996. The increased margin in 1996 primarily related to the effects of leveraging the fixed costs of supporting this line of business over a larger revenue base. Company-owned Learning Center expense increased 55%, from $10.4 million in 1995 to $16.1 million in 1996 but decreased as a percentage of Company-owned Learning Center services revenues from 90% in 1995 to 87% in 1996. Of the increase, $3.1 million related to the acquisition of 11 Learning Centers. The remaining increase primarily resulted from advertising, labor and general overhead associated with increased enrollment at Learning Centers that had been operating prior to 1996. Contract educational services expense increased 12%, from $47.7 million in 1995 to $53.4 million in 1996 but decreased as a percentage of contract educational services revenues from 95% in 1995 to 92% in 1996. The decline in these expenses as a percentage of contract educational services revenues resulted from increased revenues without corresponding increases in overhead. Operating expenses for public and non-public school contracts increased $4.6 million during 1996, while operating expenses for PACE increased $1.1 million during the same period. The PACE increase resulted from the fact that the acquisition, accounted for as a purchase, was effective February 28, 1995, and as such the 1995 results only reflect ten months of PACE results. Testing services expense increased 136%, from $30.3 million in 1995 to $71.5 million in 1996 but decreased as a percentage of testing services revenue from 88% in 1995 to 82% in 1996. The increased expense resulted primarily from the acquisition of Drake and the increased registration and delivery costs associated with an increased volume of tests. Testing services expense in 1996 included $2.4 million of amortization of contract rights related to the Drake acquisition. Testing services expense in 1995 included $4.1 million of amortization of contract rights, imputed interest and salary termination charges related to the Drake acquisition. Excluding non-recurring charges, testing services expense, as a percentage of testing services revenues, increased from 76% in 1995 to 79% in 1996. The principal reasons for this percentage increase in 1996 are the full year of amortization of goodwill associated with the Drake acquisition and increased staffing levels required to meet the growth in business volumes that occurred during 1996 and expected growth in business activity in 1997. General and administrative expense increased 41%, from $6.2 million in 1995 to $8.8 million in 1996 but decreased as a percentage of total revenues from 6% in 1995 to 5% in 1996. The percentage decline resulted from increased revenues from all segments without corresponding increases in overhead. There was $1.4 million of net interest expense in 1995 and $0.6 million of net interest income in 1996. This change resulted primarily from the $1.1 million of interest expense imputed on the purchase of Drake and an increase in the average invested cash amounts in 1996 compared to 1995. The Company's effective tax rate increased from 6% in 1995 to 37% in 1996. This increase was primarily caused by a decrease in 1995 in the amount of the valuation allowance for deferred tax assets, consisting principally of net operating loss carryforwards. Comparison of results for the year ended December 31, 1995 to the year ended December 31, 1994. Revenues. Total revenues increased 62%, from $68.7 million in 1994 to $111.1 million in 1995. This increase resulted from higher revenues in all business segments--core educational services, testing services and contract educational services. Core educational services revenues increased 30%, from $20.0 million in 1994 to $26.1 million in 1995. Franchise royalties increased $1.3 million, or 16%, for 1995. This increase in franchise royalties was due to a net increase of 31 new Learning Centers in new territories and 15 new Learning Centers opened in existing franchise territories) in 1995, combined with an overall 14% increase in revenues at existing Learning Centers open for more than one year as of December 31, 1995. Franchise sales fees increased 70%, from $1.3 million in 1994 to $2.1 million in 1995. In 1995, there were two area development agreements sold for $0.6 million and 43 franchise Learning Center licenses sold, as compared to 31 franchise Learning Center licenses and one $0.1 million area development agreement sold in 1994. Revenues from Company-owned Learning Centers increased 34%, from $8.6 million in 1994 to $11.5 million in 1995. The increase primarily resulted from same-Learning Center revenue growth related to student enrollment increases. Product sales increased $1.0 million or 43%, to $3.2 million for 1995. Approximately $0.3 million of the increase in product sales was due to sales of new versions of math and algebra programs (which began in the second half of 1994) with the remainder resulting from overall increases in student enrollment. Contract educational services revenues increased 44%, from $35.1 million in 1994 to $50.4 million in 1995. Revenues from public and non-public school contracts increased $7.0 million in 1995. This increase was due primarily to $2.8 million in revenues from public and non-public school contracts obtained during 1995 and by a $4.2 million increase in revenues from public and non- public school contracts existing in 1994. Revenues from PACE, acquired effective February 28, 1995, accounted for $8.4 million of the increase. Testing services revenues increased 153%, from $13.7 million in 1994 to $34.6 million in 1995. Revenues from Drake, acquired as of September 30, 1995, accounted for $11.7 million of the increase and consisted primarily of revenues from IT clients. Revenues from the ETS international contract accounted for $3.7 million of the increase resulting primarily from the fact that the contract was in effect during the entire 1995 period compared to six months in 1994. During 1995, Sylvan sold the exclusive development rights for testing centers in India for $0.5 million and in the Middle East for $0.5 million. The remaining increase in testing services revenues for 1995 was attributable to a $1.7 million increase in revenues from the NCLEX test for the licensing of registered and practical nurses, which began in April 1994, $0.8 million of revenue from test development fees for ASVAB (the Armed Services Vocational Aptitude Battery tests) and other test volume increases in the GRE, PRAXIS and FAA tests. Cost and Expenses. Total direct costs increased 60%, from $60.4 million in 1994 to $96.7 million in 1995 but decreased as a percentage of total revenues from 88% in 1994 to 87% in 1995. Core educational services expense increased 41%, from $13.3 million in 1994 to $18.7 million in 1995. Franchise services expense increased 53%, from $3.8 million in 1994 to $5.9 million in 1995 and increased as a percentage of franchise royalties and sales revenues from 42% in 1994 to 52% in 1995. The reduced margin in 1995 primarily relates to increased marketing and advertising costs incurred to produce a new national advertising campaign. Company-owned Learning Center expense increased 35%, from $7.7 million in 1994 to $10.4 million in 1995 and increased as a percentage of Company-owned Learning Center services revenues from 89% in 1994 to 90% in 1995. The increased expenses were primarily advertising, labor and general overhead associated with increased Learning Center enrollment. Contract educational services expense increased 44%, from $33.1 million in 1994 to $47.7 million in 1995 and increased as a percentage of contract educational services revenues from 94% in 1994 to 95% in 1995. Operating expenses for public and non-public school contracts increased $7.1 million during 1995, while operating expenses for PACE accounted for $7.5 million of the increase during the same period. The increase in contract educational services expense as a percent of related revenues during 1995 resulted from the following factors: (i) 1994 included consulting fee revenues of $0.5 million with no associated costs; and (ii) higher total cost estimates relating to READs contracts. Testing services expense increased 116%, from $14.0 million in 1994 to $30.3 million in 1995 but decreased as a percentage of total testing service revenues from 103% in 1994 to 88% in 1995. The decrease in testing services expense as a percentage of testing services revenues was attributable to several factors, including the fixed and semi-variable nature of test delivery and registration costs included in this segment. In addition, Sylvan recognized $1.0 million of testing revenues in 1995 related to the sale of exclusive development rights for testing centers in India and the Middle East and $0.8 million of testing revenues related to the contract to develop the ASVAB test. These revenues have significantly higher margins than fees for test delivery and registration services. Testing services expense during the fourth quarter of 1995 included amortization expense of $2.1 million related to contract rights recorded upon the acquisition of Drake and $1.1 million of non-recurring interest expense imputed on the unpaid purchase price from September 30, 1995 to December 13, 1995, the closing date for the acquisition. General and administrative expense increased 24%, from $5.0 million in 1994 to $6.2 million in 1995 but decreased as a percentage of total revenues from 7% in 1994 to 6% in 1995. The percentage decline resulted from increased revenues from all segments without corresponding increases in overhead. Interest expense of $1.4 million in 1995 was primarily attributable to $1.1 million of interest expense imputed on the purchase of Drake discussed above. During 1995, Sylvan recorded a non-recurring loss on impairment of assets of $3.3 million associated with the Drake acquisition. The Drake acquisition and resulting consolidation of operations resulted in the determination that certain assets in the Sylvan division were not recoverable and, therefore, were written down to their realizable value. During 1995, the Company reduced its valuation allowance relating to deferred income tax assets by $3.1 million. Approximately $1.1 million of this reduction was recorded through the allocation of the Drake purchase price. The remaining decrease of $2.0 million reduced the Company's effective tax rate by 54%. The Company's effective tax rate in 1995 and 1994 was substantially below the U. S. statutory income tax rate of 34% due to the recognition of income tax benefits from net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $0.4 million for the first quarter of 1997 compared to $1.8 million used by operating activities in the first quarter of 1996. Cash flow from operations before working capital changes increased from $5.5 million in the first quarter of 1996 to $7.6 million in the first quarter of 1997. This increase primarily resulted from significant overall growth in income from operations before depreciation and amortization and other non-cash charges. The Company's investment in working capital has significantly reduced cash flows provided by operations, particularly as a result of the growth in accounts and notes receivable and reductions in accounts payable and accrued expenses. The increase in accounts receivable related to a 25% increase in total revenues in the first quarter of 1997 compared to the first quarter of 1996. The Company expects this trend to continue as its revenues increase. Of the $3.5 million operating cash flow reduction attributable to an increase in accounts receivable, $2.4 million was related to the ETS international testing contract and the remainder to higher accounts receivable levels in all business segments. The increase in testing services accounts receivable resulted from an increase in billings and longer collection periods under the international testing contract. The Company experiences varying collection periods for accounts receivable in its three operating divisions. 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 and governmental units. During the first quarter of 1997, the Company generated net proceeds of $6.2 million from the sale of available-for-sale securities. At March 31, 1997, the Company's portfolio of available for-sale securities had a market value equal to $10.7 million. The Company continues to incur expenditures for additions to property and equipment, which totaled $2.5 million in the first quarter 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 Testing Centers operated by the Company. Under the international ETS testing contract, the Company is reimbursed for overseas equipment expenditures as that equipment is depreciated. This reimbursement includes a financing charge over the reimbursement period. The Company has a $15.0 million unsecured revolving line of credit which either expires, or the outstanding balance of which can be converted into a two year term loan, at the option of the Company on May 31, 1998. 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 (6.84% at March 31, 1997). At March 31, 1997, the balance on the credit line was $7.2 million, and at June 30, 1997, there was no balance outstanding. During the first quarter of 1997, the Company received $0.9 million as a result of the exercise of stock options and warrants to purchase 298,608 shares of Common Stock. During the first quarter of 1997, the Company paid $4.7 million of the $4.9 million cash portion of the Wall Street purchase price. Pursuant to the Caliber Learning Network stockholders' agreement, Sylvan is obligated to lend or guarantee up to $3.0 million of debt for Caliber and anticipates investing up to an additional $8.0 million in Caliber over the next 12 to 24 months. 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 this 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 The PACE acquisition agreement requires Sylvan to make a contingent payment equal to 6.5 times PACE's 1997 earnings before interest and income taxes ("EBIT"); or, if PACE's EBIT is less than $2.7 million in 1997, the PACE shareholders may elect to have the payment calculation based on EBIT in either 1998 or 1999. Management believes it is likely that the PACE shareholders will elect to calculate the contingent payment based on PACE's 1997 EBIT. The contingent payment is payable partially in cash and partially in Common Stock. The amount of any contingent payment to the PACE shareholders 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 have generated positive cash flow from operations. The Drake acquisition agreement provides for future contingent payments based on achievement of certain specified revenue targets in 1997 and 1998 (or 1999 at election of the Drake owners). The contingent payment of up to $40.0 million, if earned, is payable at least 12.5% in cash, with the remainder in shares of Common Stock. The amount of any contingent payment will be capitalized as goodwill when paid and amortized over the remaining useful life of the goodwill as estimated when the contingent payment is paid. Based on testing services revenues generated in 1996, 357, 143 of the 1,785,714 shares of Common Stock that were placed in escrow at the closing of the acquisition have been earned and, accordingly, will be released in the third quarter of 1997. At December 31, 1996, $8.1 million of goodwill relating to the earned shares was recorded and will be amortized over the 24-year remaining life of the goodwill. EFFECTS OF INFLATION Inflation has not had a material effect on Sylvan's revenues and income from continuing operations in the past three years. Inflation is not expected to have a material future effect. QUARTERLY FLUCTUATIONS Sylvan'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 Title I or similar programs. Based on Sylvan's limited experience, revenues 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. Revenues or profits in any period will not necessarily be indicative of results in subsequent periods. EX-99.2 6 SUPPLEMENTAL CONSOLIDATED FINANCIALS EXHIBIT 99.2 SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
Page ---- Report of Independent Auditors............................................................................................. 2 Supplemental Consolidated Balance Sheets as of December 31, 1995 and December 31, 1996..................................... 3 Supplemental Consolidated Statements of Income for the years ended December 31, 1994, 1995 and 1996........................ 5 Supplemental Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996.......... 6 Supplemental Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996.................... 7 Notes to Supplemental Consolidated Financial Statements.................................................................... 8 Financial Statement Schedule: Supplemental Schedule II -- Valuation and Qualifying Accounts.............................................................. 39
Report of Independent Auditors The Board of Directors and Stockholders Sylvan Learning Systems, Inc. We have audited the supplemental consolidated balance sheets of Sylvan Learning Systems, Inc. (formed as a result of the consolidation of Sylvan Learning Systems, Inc., I-R, Inc. and Independent Child Study Teams, Inc.) as of December 31, 1996 and 1995, and the related supplemental consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the supplemental financial statement schedule listed in the index. The supplemental consolidated financial statements and schedule give retroactive effect to the merger of Sylvan Learning Systems, Inc., I-R, Inc. and Independent Child Study Teams, Inc. on May 30, 1997, which has been accounted for using the pooling-of-interests method as described in the notes to the supplemental consolidated financial statements. These supplemental financial statements and schedule are the responsibility of the management of Sylvan Learning Systems, Inc. Our responsibility is to express an opinion on these supplemental financial statements and schedule based on our audits. We did not audit the financial statements of I-R, Inc. and Independent Child Study Teams, Inc., which statements reflect combined total assets constituting 3% for 1996 and 5% for 1995 of supplemental consolidated total assets, and which reflect combined revenues constituting 14% for 1996, 21% for 1995 and 31% for 1994 of supplemental consolidated total revenues. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to data included for I-R, Inc. and Independent Child Study Teams, Inc., is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the supplemental financial statements referred to above present fairly, in all material respects, the consolidated financial position of Sylvan Learning Systems, Inc. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, after giving retroactive effect to the merger of I-R, Inc. and Independent Child Study Teams, Inc., as described in the notes to the supplemental consolidated financial statements, in conformity with generally accepted accounting principles. Also, in our opinion, the related supplemental financial statement schedule, when considered in relation to the basic supplemental financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Baltimore, Maryland July 10, 1997 2 Sylvan Learning Systems, Inc. and Subsidiaries Supplemental Consolidated Balance Sheets
December 31, December 31, 1995 1996 ---------------- -------------- (Restated - Note 1) (Restated - Note 1) Assets Current assets: Cash and cash equivalents $ 2,902,657 $ 11,198,106 Available-for-sale securities 30,734,519 16,448,759 Receivables: Accounts receivable 23,810,001 36,431,363 Costs and estimated earnings in excess of billings on uncompleted contracts 3,028,558 3,565,201 Notes receivable 1,595,478 3,007,473 ------------------------------------------ 28,434,037 43,004,037 Allowance for doubtful accounts (1,466,027) (1,378,854) ------------------------------------------ 26,968,010 41,625,183 Inventory 3,743,221 4,469,577 Deferred income taxes 1,271,925 619,553 Prepaid expenses 2,554,366 3,124,802 ---------------- -------------- Total current assets 68,174,698 77,485,980 Notes receivable, less current portion 1,968,438 562,989 Costs and estimated earnings in excess of billings on uncompleted contracts, less current portion 673,181 549,448 Property and equipment: Furniture and equipment 26,862,301 37,952,268 Leasehold improvements 2,062,033 5,543,726 ---------------- -------------- 28,924,334 43,495,994 Accumulated depreciation (9,707,469) (15,577,693) ---------------- -------------- 19,216,865 27,918,301 Intangible assets: Goodwill 74,653,356 103,986,427 Contract rights 7,857,346 13,881,337 Other 2,451,091 2,570,091 ---------------- -------------- 84,961,793 120,437,855 Accumulated amortization (4,640,450) (10,736,219) ---------------- -------------- 80,321,343 109,701,636 Deferred contract costs, net of accumulated amortization of $684,177 as of December 31, 1995 and $2,066,893 as of December 31, 1996 2,528,029 13,230,340 Investments in affiliates 182,320 3,895,602 Other investments 338,681 24,219,888 Other assets 666,706 2,025,337 ---------------- -------------- Total assets $ 174,070,261 $ 259,589,521 ================ ==============
3 Sylvan Learning Systems, Inc. and Subsidiaries Supplemental Consolidated Balance Sheets
December 31, December 31, 1995 1996 ------------------- ------------------- (Restated - Note 1) (Restated - Note 1) Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 13,642,085 $ 28,575,931 Bank lines of credit 4,600,000 1,000,000 Current portion of long-term debt 2,584,744 3,182,197 Billings in excess of costs and estimated earnings on uncompleted contracts 237,644 65,465 Due to former shareholders of Wall Street Institute -- 4,920,565 Deferred revenue 6,907,436 9,542,578 Other current liabilities 795,967 596,311 ------------- ------------- Total current liabilities 28,767,876 47,883,047 Long-term debt, less current portion 3,685,691 2,170,101 Deferred income taxes 884,612 2,338,154 Due to former shareholders of Drake -- 8,142,856 Due to former shareholders of Wall Street Institute -- 15,150,115 Due to shareholders 3,216,156 3,232,884 Other long-term liabilities 367,790 349,771 Commitments and contingent liabilities -- -- Stockholders' equity: Preferred stock, par value $.01 per share--authorized 10,000,000 shares, no shares issued and outstanding as of December 31, 1996 and 1995 -- -- Common stock, par value $.01 per share--authorized 40,000,000 shares, issued and outstanding shares of 22,344,193 as of December 31, 1995 and 23,980,215 -- -- as of December 31, 1996 223,442 239,802 Additional paid-in capital 139,785,773 168,547,097 Unrealized losses on available-for-sale securities (5,437) (11,043) Foreign currency translation adjustments 70,000 (4,131) Retained earnings (accumulated deficit) (2,925,642) 11,550,868 ------------- ------------- Total stockholders' equity 137,148,136 180,322,593 ------------- ------------- Total liabilities and stockholders' equity $ 174,070,261 $ 259,589,521 ============= =============
See accompanying notes. 4 Sylvan Learning Systems, Inc. and Subsidiaries Supplemental Consolidated Statements of Income
Years Ended December 31, ----------------------------------------------------------- 1994 1995 1996 ------------------- ------------------- ------------------- (Restated - Note 1) (Restated - Note 1) (Restated - Note 1) Revenues $ 68,747,971 $ 111,058,550 $ 181,935,961 Cost and expenses Direct costs 60,387,726 96,708,097 150,448,547 General and administrative expense 4,998,399 6,205,480 8,755,406 Loss on impairment of assets -- 3,315,541 -- ------------- -------------- -------------- Total expenses 65,386,125 106,229,118 159,203,953 ------------- -------------- -------------- Operating income 3,361,846 4,829,432 22,732,008 Other income (expense) Investment and other income 818,171 957,169 1,622,240 Interest expense (879,543) (2,396,803) (1,071,323) Gain on sale of company center 151,214 -- -- Equity in net income of unconsolidated subsidiaries 72,747 390,692 363,396 ------------- -------------- -------------- Income before income taxes 3,524,435 3,780,490 23,646,321 Income taxes (76,249) (209,159) (8,850,000) ------------- -------------- -------------- Net income $ 3,448,186 $ 3,571,331 $ 14,796,321 ============= ============== ============== Earnings per common and common equivalent share $ 0.21 $ 0.21 $ 0.60 ============= ============== ============== Earnings per common share, assuming full dilution $ 0.21 $ 0.21 $ 0.59 ============= ============== ==============
See accompanying notes. 5 Sylvan Learning Systems, Inc. and Subsidiaries Supplemental Consolidated Statements of Stockholders' Equity
Additional Unrealized Common Paid-In Gain Stock Capital (Loss) ---------------------------------------------------------- (Restated - Note 1) Balance at January 1, 1994 $ 139,859 $ 34,374,712 $ (7,254) Options and warrants exercised for purchase of 454,935 shares of common stock 4,549 3,048,194 Shares of common stock issued to ETS 1,305 1,498,695 Additional registration costs relating to 1993 stock offering (69,950) Distributions to shareholders of pooled entity Unrealized gain (loss) on available-for-sale securities (12,592) Net income for 1994 ------------- ------------- ------------- Balance at December 31, 1994 145,713 38,851,651 (19,846) Options and warrants exercised for purchase of 731,871 shares of common stock 7,319 4,210,937 Issuance of 262,446 shares of common stock in connection with the acquisition of PACE 2,624 3,158,237 Issuance of 3,928,572 shares of common stock in connection with the acquisition of Drake 39,286 49,460,714 Issuance of 2,850,000 shares of common stock, net of offering costs of $3,367,266 28,500 44,104,234 Foreign currency translation adjustment Unrealized gain (loss) on available-for-sale securities 14,409 Net income for 1995 ------------- ------------- ------------- Balance at December 31, 1995 223,442 139,785,773 (5,437) Options and warrants exercised for purchase of 661,700 shares of common stock, including income tax benefit of $1,887,006 6,617 6,991,426 Issuance of 824,000 shares of common stock in connection with the investment in Jostens Learning Corporation 8,240 21,209,760 Issuance of 116,605 shares of common stock in connection with other acquisitions 1,166 27,225 Exercise of underwriter's overallotment option to purchase 33,750 shares of common stock in connection with 1995 public stock offering 337 532,913 Foreign currency translation adjustment Unrealized gain (loss) on available-for-sale securities (5,606) Net income for 1996 ------------- ------------- ------------- Balance at December 31, 1996 $ 239,802 $ 168,547,097 $ (11,043) ============= ============= =============
Foreign Retained Currency Earnings Total Translation (Accumulated Stockholders' Adjustments Deficit) Equity ------------------- ---------------- --------------- (Restated - Note 1) Balance at January 1, 1994 $ -- $ (9,940,159) $ 24,567,158 Options and warrants exercised for purchase of 454,935 shares of common stock 3,052,743 Shares of common stock issued to ETS 1,500,000 Additional registration costs relating to 1993 stock offering (69,950) Distributions to shareholders of pooled entity (5,000) (5,000) Unrealized gain (loss) on available-for-sale securities (12,592) Net income for 1994 3,448,186 3,448,186 ------------- ------------- ------------- Balance at December 31, 1994 -- (6,496,973) 32,480,545 Options and warrants exercised for purchase of 731,871 shares of common stock 4,218,256 Issuance of 262,446 shares of common stock in connection with the acquisition of PACE 3,160,861 Issuance of 3,928,572 shares of common stock in connection with the acquisition of Drake 49,500,000 Issuance of 2,850,000 shares of common stock, net of offering costs of $3,367,266 44,132,734 Foreign currency translation adjustment 70,000 70,000 Unrealized gain (loss) on available-for-sale securities 14,409 Net income for 1995 3,571,331 3,571,331 ------------- ------------- ------------- Balance at December 31, 1995 70,000 (2,925,642) 137,148,136 Options and warrants exercised for purchase of 661,700 shares of common stock, including income tax benefit of $1,887,006 6,998,043 Issuance of 824,000 shares of common stock in connection with the investment in Jostens Learning Corporation 21,218,000 Issuance of 116,605 shares of common stock in connection with other acquisitions (319,811) (291,420) Exercise of underwriter's overallotment option to purchase 33,750 shares of common stock in connection with 1995 public stock offering 533,250 Foreign currency translation adjustment (74,131) (74,131) Unrealized gain (loss) on available-for-sale securities (5,606) Net income for 1996 14,796,321 14,796,321 ------------- ------------- ------------- Balance at December 31, 1996 $ (4,131) $ 11,550,868 $ 180,322,593 ============= ============= =============
See accompanying notes. 6 Sylvan Learning Systems, Inc. and Subsidiaries Supplemental Consolidated Statements of Cash Flows
Years Ended December 31, ---------------------------------------------------------------- 1994 1995 1996 ------------------- ------------------- ------------------- (Restated - Note 1) (Restated - Note 1) (Restated - Note 1) Operating activities Net income $ 3,448,186 $ 3,571,331 $ 14,796,321 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 3,098,383 4,112,535 5,986,025 Amortization 1,000,446 4,323,351 7,478,485 Interest imputed on purchase of Drake -- 1,125,000 -- Loss on impairment of assets -- 3,315,541 -- Provision for doubtful accounts 183,628 (42,631) 55,738 Deferred income taxes -- (387,313) 2,105,914 Equity in net income of unconsolidated subsidiaries (72,747) (390,692) (363,396) Other (268,214) -- -- Changes in operating assets and liabilities: Accounts and notes receivable (758,437) (10,780,236) (10,709,674) Cost and estimated earnings in excess of billings -- -- -- on uncompleted contracts (2,528,600) (1,021,779) (412,910) Inventory (994,685) (1,561,091) (134,483) Prepaid expenses (435,062) (1,388,445) (273,711) Other assets (545,510) (109,736) (997,608) Accounts payable and accrued expenses (1,913,622) (3,132,695) 5,406,434 Billings in excess of costs and estimated earnings on uncompleted contracts 262,208 (455,600) (233,665) Deferred revenue and other long-term liabilities 40,954 115,149 922,642 ------------ ------------ ------------ Net cash provided by (used in) operating activities 516,928 (2,707,311) 23,626,112 ------------ ------------ ------------ Investing activities Change in advances to unconsolidated subsidiaries (104,291) 287,970 (98,922) Purchase of available-for-sale securities (17,615,859) (91,759,493) (31,261,415) Proceeds from sale of available-for-sale securities 13,296,243 66,595,240 45,542,061 Investment in and advances to affiliates 5,770 (1,098) (3,247,147) Increase in other investments -- -- (2,329,874) Proceeds from sale of company-owned center 119,084 -- -- Purchase of property and equipment (8,088,810) (6,148,998) (13,580,617) Refund of deposits on equipment 31,104 -- -- Purchase of contract rights -- -- (4,890,576) Cash received upon acquisition of PACE -- 682,411 -- Cash received upon acquisition of Wall Street Institute -- -- 2,012,565 Purchase of Drake Prometric, L. P., including direct costs of acquisition, net of cash acquired -- (16,979,737) -- Cash paid for intangible assets -- (500,000) -- Expenditures for deferred contract costs and other assets (1,779,011) (801,586) (6,941,769) ------------ ------------ ------------ Net cash used in investing activities (14,135,770) (48,625,291) (14,795,694) ------------ ------------ ------------ Financing activities Payments to stockholders (109,770) (630,533) (37,604) Proceeds from exercise of options and warrants 2,982,794 4,218,256 5,111,037 Proceeds from issuance of common stock 1,500,000 44,132,734 533,250 Proceeds from issuance of long-term debt 6,944,635 346,195 154,414 Payments on long-term debt and capital lease obligations (4,532,213) (2,867,459) (2,609,866) Proceeds from bank lines of credit -- 4,600,000 200,000 Payments on bank lines of credit (300,000) -- (3,812,069) ------------ ------------ ------------ Net cash provided by (used in) financing activities 6,485,446 49,799,193 (460,838) ------------ ------------ ------------ Effects of exchange rate changes on cash -- 70,000 (74,131) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (7,133,396) (1,463,409) 8,295,449 Cash and cash equivalents at beginning of period 11,499,462 4,366,066 2,902,657 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 4,366,066 $ 2,902,657 $ 11,198,106 ============ ============ ============
See accompanying notes. 7 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 1. Basis of Presentation and Description of Business Sylvan Learning Systems, Inc. and subsidiaries (the Company) is an international provider of educational and testing services. The Company conducts operations in three separate business segments - core educational services, testing services, and contract educational services. The core educational services segment designs and delivers individualized tutorial services to school-age children and adults through a network of 620 franchised and Company-owned Sylvan Learning Centers in operation in 49 states, five Canadian provinces, Hong Kong, Guam and South Korea. In addition, in December 1996 the Company acquired Wall Street Institute International, B.V. and its commonly controlled affiliates. Wall Street and its affiliates teach the English language in non-English speaking countries in Europe and Latin America through a network of over 170 franchised and company-owned centers. The Company's testing segment ("Sylvan Prometric") administers computer-based tests for major corporations, professional associations and governmental agencies through a network of certification centers which are located throughout the world. The contract educational services segment provides educational programs to employees of large corporations, and to public and non-public school districts through contracts funded by federal Title I and state-based programs. The consolidated financial statements include the accounts of Sylvan Learning Systems, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Investments in affiliates owned more than 20%, but not in excess of 50%, and corporate joint ventures are reported using the equity method. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. As discussed in Note 3, on May 30, 1997, the Company consummated its acquisition by merger of all of the outstanding stock of I-R, Inc. and Independent Child Study Teams, Inc. (collectively, "Educational Inroads"). The acquisition has been accounted for as a pooling-of-interests and accordingly, the Company's financial statements have been restated to include the results of Educational Inroads for all periods presented. As of the date of the issuance of these financial statements, the Company has not issued financial statements for a period including the merger date. Therefore, the accompanying consolidated financial statements are considered "supplemental." Upon the issuance of financial statements for a period that includes the date of the merger, the supplemental consolidated financial statements will become the historical consolidated financial statements of the Company. 8 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 2. Accounting Policies Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Investments Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of stockholders' equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in investment income. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in investment income. Inventory Inventory, consisting primarily of computer software and educational, instructional, and marketing materials and supplies, is stated at the lower of cost (first-in, first-out) or market value. Accounting For Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of In 1995, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Statement prescribes the accounting for the impairment of long-lived assets, such as property and equipment and intangible assets, as well as the accounting for long-lived assets that are held for disposal. The initial adoption of this Statement in 1995 did not have a material impact on the reported results of operations of the Company. Property and Equipment Property and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets. 9 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 2. Accounting Policies (continued) Intangible Assets Goodwill consists of the cost in excess of fair value of the net assets of entities acquired in purchase transactions, and is amortized over the expected periods of benefit, which range from 10 to 25 years. At December 31, 1995 and 1996, accumulated amortization of goodwill is $1,110,944 and $4,803,586, respectively. Contract rights consist of the allocated cost of acquiring computer-based testing contracts in business combinations accounted for as purchases. Contract rights are being amortized using the straight-line method over the term of the related contract, which range from three months to 10 years. At December 31, 1995 and 1996, accumulated amortization of contract rights is $2,978,112 and $5,193,199, respectively. Deferred Contract Costs Deferred contract costs include costs incurred to develop computer-based tests under contractual arrangements with customers. Under these arrangements, the Company incurs certain costs related to the development of new computer-based tests on behalf of the customer in return for the right to deliver the computer- based tests and collect a testing fee from either the candidate or the sponsoring organization. These costs are capitalized and amortized over the shorter of the estimated utility period of the test or the contractual period for delivery of the test. Deferred contract costs also include payments and accruals of approximately $10,400,000 in 1996 made to non-affiliated computer-based testing centers that have entered into three-year contracts with Sylvan to deliver information technology computer-based certification tests. In accordance with the terms of these contracts, the independent testing centers have received an advance payment and will receive no additional fees upon delivery of the computer-based certification tests. These costs are being amortized over the contractual term of three years. 10 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 2. Accounting Policies (continued) Stock Options Granted to Employees The Company records compensation expense for all stock-based compensation plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. In October 1995 the Financial Accounting Standards Board issued FASB Statement No. 123, Accounting for Stock-Based Compensation, which encourages companies to recognize expense for stock-based awards based on their estimated value on the date of grant. Statement No. 123, effective for 1996, does not require companies to change their existing accounting for stock-based awards, but if the new fair value method is not adopted, pro forma income and earnings per share data should be provided in the notes to the financial statements. The Company has disclosed in Note 14, the required pro forma information as if the fair value method had been adopted. Foreign Currency Translation The financial statements of certain foreign subsidiaries that are measured in local functional currencies have been translated into U.S. dollars in accordance with FASB Statement No. 52, Foreign Currency Translation. All balance sheet accounts have been translated using the rates of exchange at the balance sheet date. Results of operations have been translated using the average rates prevailing throughout the year. Translation gains or losses resulting from the changes in exchange rates from year to year, are accumulated as a separate component of stockholders' equity. The financial statements of other foreign subsidiaries, primarily those subsidiaries providing services overseas to Educational Testing Services (see Note 18), prepare financial statements using the U.S. dollar as the functional currency. The transactions of these subsidiaries that are denominated in foreign currencies have been remeasured in U.S. dollars. Any resulting gain or loss is recorded as an adjustment of the amount due from ETS as the contract with ETS requires ETS to bear the risk of realized translation gains or losses. Reclassifications and Stock Split Certain amounts in the 1995 and 1994 consolidated financial statements have been reclassified to conform with the 1996 presentation. In October 1996, the Company declared a 3-for-2 stock split of its common stock for stockholders of record on November 7, 1996. Accordingly, all share and per share data including stock option, warrant and earnings per share information have been restated in the consolidated financial statements to retroactively reflect the stock split. 11 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 2. Accounting Policies (continued) Revenue Recognition Franchise sales fees relate to single-center and area franchise sales. Revenue related to these sales is recognized when all material services or conditions relating to the sales have been substantially performed or satisfied by the Company. For single-center franchise sales, the criteria for substantial performance include: (1) receipt of an executed franchise license agreement, (2) receipt of full payment of the franchise fee, (3) completion of requisite training by the franchisee or center director, and (4) completion of site selection assistance and site approval. Area franchise sales generally transfer to the licensee the right to develop and operate centers in a specified territory, primarily in a foreign country, and the Company's future obligations are insignificant. Area franchise fees are recognized upon the signing of the license agreement and the determination that (1) all material services or conditions relating to the sale have been satisfied and the fee is non- refundable, (2) a minimum payment of 50% of the fee is required within 90 days of the date of the agreement, and (3) the Company has the ability to estimate the collectibility of any unpaid amounts. Franchise sales fees not meeting the recognition criteria are recorded as deferred revenue if not refundable, or deposits from franchisees if refundable. Commissions paid on sales of franchises are recorded as a current asset until the corresponding revenue is recognized. Fixed price contracts with school districts receiving funds under the federal Title I program and state-based programs are accounted for using the percentage- of-completion method. Income is recognized based on the percentage of contract completion determined by the total expenses incurred to date as a percentage of total estimated expenses at the completion of the contract. Total contract income is estimated as contract revenue less total estimated costs considering the most recent cost information. Revenues from cost-plus-fee contracts are recognized on the basis of costs incurred during the period plus the fee earned. Franchise royalties are reported as revenue as the royalties are earned and become receivable, unless collection is not assured or the royalties are 90 days or more in arrears. Revenue from the sale of products to franchisees is recognized when shipped. Testing revenues are recognized upon the completion of tests. 12 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 3. Acquisitions Educational Inroads 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 (see Note 1). 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 presented are as follows:
Previously Independent Reported by Child Study the Company I-R, Inc. Teams, Inc. Combined ----------------------------------------------------- Year ended December 31, 1996 Revenues $157,116,660 $9,825,299 $14,994,002 $181,935,961 Net income $14,743,106 $31,664 $21,551 $14,796,321 Net income per share $0.60 $0.59 Year ended December 31, 1995 Revenues $ 87,990,818 $9,475,103 $13,592,629 $111,058,550 Net income $3,547,829 $16,882 $6,620 $3,571,331 Net income per share $0.21 $0.21
13 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 3. Acquisitions (continued)
Previously Independent Reported by Child Study the Company I-R, Inc. Teams, Inc. Combined ----------------------------------------------------- Year ended December 31, 1994 Revenues $47,244,063 $8,750,811 $12,753,097 $68,747,971 Net income 3,385,557 $44,053 $18,576 $3,448,186 Net income per share $0.22 $0.21
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. The following 1996 supplemental pro forma information 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. 1996 combined net income $14,796,321 Contractual reduction to be made in compensation 2,448,845 Related income taxes (at 40%) (979,538) --------------- 1,469,307 --------------- Pro forma net income after contractual reduction in compensation $16,265,628 =============== Pro forma net income per share $0.65 ===============
14 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 3. Acquisitions (continued) Wall Street Institute International, B.V. and Affiliates Effective December 1, 1996, the Company acquired substantially all of the operating net assets of Wall Street Institute International, B.V. and its commonly controlled affiliates (collectively, "WSI"). The Company and the sellers signed a definitive purchase agreement in December 1996 that provided for an effective date of the sale of December 1, 1996. The Company's control of the operations of WSI commenced at the effective date, and the Company recorded the acquisition using the purchase method of accounting on December 1, 1996. WSI is a European-based franchisor and operator of learning centers that teach the English language through a combination of computer-based and live instruction. WSI has a network of more than 170 franchised centers in operation throughout Europe and Latin America. The purchase price of WSI consisted of cash of $4,921,000, 505,364 shares of restricted common stock valued at $9,250,000, and 209,520 shares of unrestricted common stock valued at $5,900,000. The restricted stock may not be transferred by the sellers for a period of three years, unless the Company, in its sole discretion, removes the restriction. The Company must use its best efforts to register the 209,520 shares of unrestricted common stock by April 28, 1997. In the event that the Company is unable to register the common stock by April 28, 1997, the sellers are entitled to interest calculated at an increasing rate (10% to 15%) on the initial value of the common stock until such time as the unrestricted common stock is registered. If the unrestricted common stock is unregistered at any time during the period from October 28, 1997 through November 12, 1997, the sellers at their option may require the Company to repurchase the unrestricted common stock for $5,900,000, plus any unpaid interest. Of the 505,364 shares of restricted common stock issued to the sellers, 124,292 shares are held in escrow to indemnify the Company against any subsequent losses resulting from any misrepresentation or breach of certain covenants. The unrestricted common stock held in escrow will be released in varying amounts to the sellers through 2001. In connection with the acquisition of WSI, the Company in January 1997 loaned the principal stockholder of the seller $2,500,000. The loan is due in lump sum in January 2000, and bears interest payable quarterly at the rate of prime plus one percent. The loan is secured by restricted common stock of the Company with a value of $2,500,000, adjusted annually for changes in the market price of the Company's common stock. 15 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 3. Acquisitions (continued) The Company on the closing date of the acquisition entered into option agreements to purchase two franchisees of WSI, and granted the owners of these same franchisees put rights that require, in certain circumstances and at the election by the right holders, the Company to purchase the franchisees. At the Company's option it may purchase the two franchisees at any time during the period from September 1, 2001 through September 1, 2005 for an amount equal to seven times the previous fiscal years' earnings before interest and taxes, adjusted for certain defined items. The franchisees may require the Company to purchase substantially all of their net assets during the same four-year period if defined levels of operating results are met or exceeded at the end of the most recently completed fiscal year. The purchase price is payable 10% in cash and 90% in common stock, or at the Company's option, entirely in cash. The total purchase price of $21,071,000, including $1,000,000 of direct acquisition costs, was allocated as follows:
Working capital $ 2,795,000 Fixed assets 1,125,000 Other assets 329,000 Goodwill 19,852,000 ----------- 24,101,000 Less liabilities assumed: Debt 1,417,000 Deferred revenue 1,613,000 ----------- 3,030,000 ----------- $21,071,000 ===========
Goodwill is being amortized over its estimated useful life of 25 years. The cash portion of the purchase price was recorded as a current liability at December 31, 1996, and the portion of the purchase price represented by common stock has been recorded as a noncurrent liability at December 31, 1996. Upon closing of the transaction in January 1997, the Company paid the cash portion of the purchase price to the sellers of $4,921,000 and recorded the issuance of 714,884 shares of common stock to the sellers through a reduction in the noncurrent liability of $15,150,115. In December 1996, the Company recorded $172,000 of imputed interest expense related to the acquisition. The following unaudited pro forma summary presents the consolidated results of operations as if the WSI acquisition had occurred at the beginning of the respective periods presented, and does not purport to be indicative of what would have occurred had the acquisition been made at that date or of results which may occur in the future: 16 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 3. Acquisitions (continued)
Year ended December 31, 1995 1996 ------------------------ (in thousands) Revenues $124,198 $194,597 Net income $5,586 $16,935 Net income per share - fully diluted $0.30 $0.64
The PACE Group Effective February 28, 1995, the Company purchased the assets and liabilities of The PACE Group ("PACE"), a provider of educational services to corporations. The initial consideration for the acquisition was 262,446 shares of common stock having an aggregate market value of $3,160,861. The acquisition was accounted for using the purchase method of accounting. Additional contingent consideration is payable in an amount equal to 6.5 times PACE's earnings before interest and income taxes (EBIT) in 1997, determined in accordance with generally accepted accounting principles. If EBIT is less than $2.7 million in 1997, the PACE shareholders may elect to have the payment calculation based on EBIT for either calendar year 1998 or 1999. The contingent payment is payable two-thirds in cash and one-third in shares of common stock, unless the PACE shareholders determine that a smaller cash payment is desired for their income tax purposes. The Company will record any additional consideration payable to the PACE shareholders as additional goodwill, and will amortize that amount over the remaining amortization period. At February 28, 1995, goodwill of approximately $3.5 million was recorded and is being amortized over a period of 25 years. Results of operations of PACE are included in the accompanying consolidated statements of operations from March 1, 1995. For the year ended December 31, 1996, PACE EBIT was approximately $1.2 million (unaudited). Drake Prometric, L.P. Effective September 30, 1995, the Company acquired Drake Prometric, L.P. ("Drake"), a Minneapolis based provider of computer-based certification, licensure and assessment testing programs. As of that date, Drake had a network of 820 testing centers on six continents, 472 of which were located in North America and the remainder in 69 foreign countries. 17 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 3. Acquisitions (continued) The Company acquired Drake for an initial purchase price of $20.0 million in cash and 5,714,286 restricted shares of common stock (the "Initial Shares"). Of the Initial Shares, 1,785,714 shares (the "Revenue Escrow Shares") were placed in escrow and will be released to the sellers to the extent that certain revenue targets relating to portions of the combined computer-based testing business are achieved from 1996 through 1998. The sellers may receive up to an additional $40.0 million (payable 12.5% in cash and the balance in either cash or restricted shares of common stock, at the Company's option) to the extent other revenue targets relating to portions of the combined computer-based testing business are achieved in 1998 or 1999 (with the measuring year selected by the sellers). The acquisition was accounted for using the purchase method of accounting. The initial purchase price consisted of the following components, totaling $70.6 million.
Cash, net of $1,125,000 of imputed interest..................... $18,875,000 Initial Shares, excluding contingently issuable Revenue Escrow Shares (3,928,572 shares), with an estimated fair market value of $12.60 per share............................... 49,500,000 Acquisition costs............................................... 1,847,227 Accrued Drake reorganization costs.............................. 422,954 ----------- $70,645,181 ===========
The purchase price includes 714,285 shares of common stock placed in escrow to indemnify the Company for potential undisclosed liabilities, as these shares are likely to ultimately be released from escrow. The Company also accrued $422,954 of costs related to estimated Drake employee termination costs resulting from the integration of the Drake business. The purchase price was adjusted for imputed interest between the effective date and December 13, 1995, the date the Drake acquisition was consummated. This amount, calculated using a rate of 8% per annum, was $1,125,000. Approximately $4.8 million of contract rights and $69.8 million of goodwill were recorded. The contract rights are being amortized over their respective terms, and no term exceeds five years. Goodwill is being amortized over 25 years, its estimated useful life. The Company will record the contingent consideration consisting of the 1,785,714 Revenue Escrow Shares and the additional contingent payment of up to $40.0 million when the contingencies are resolved and the additional consideration is payable. Based on testing revenues earned by the Company in 1996, 20% of the Revenue Escrow Shares have been earned. These 357,143 Revenue Escrow Shares will be released to the sellers in the third quarter of 1997. At December 31, 1996, an additional $8.1 million of goodwill which relates to the earned shares was recorded which will be amortized over the remaining life of 24 years. 18 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 3. Acquisitions (continued) Remedial Education and Diagnostic Services, Inc. and READS, Inc. On February 17, 1995, the Company acquired by merger all of the outstanding stock of Remedial Education and Diagnostic Services, Inc. and READS, Inc. (collectively, "READS") in exchange for 525,108 shares of common stock. The acquisition was accounted for as a pooling of interests and accordingly, the Company's financial statements for periods prior to the merger have been restated to include the results of operations, financial position and cash flows of READS. READS is based in Philadelphia, Pennsylvania and provides remedial and education services, psychological, diagnostic and counseling services, career awareness training, and a variety of consulting services. Services are delivered under contracts with school districts, county-wide educational agencies and municipalities in the eastern United States. 4. Available-For-Sale Securities The following is a summary of available-for-sale securities (cost approximates fair value):
December 31, 1995 1996 ----------- ----------- Stock mutual fund $ 150,434 $3,646,361 U.S. Treasury bills and notes 14,210,923 3,002,398 Municipal bonds 16,373,162 9,800,000 ----------- ---------- $30,734,519 $16,448,759 =========== ===========
The Company has not had any significant realized or unrealized gains or losses on its investments during the periods presented. As of December 31, 1996, the Company has approximately $6.6 million of investments that mature in 1997, $1.8 million of investments that mature in 2004 and $8.0 million of investments that mature in 2026. These investments are classified as current as the Company expects to sell them in 1997. 19 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 5. Acquisition of Contract Rights In August 1996 the Company acquired the right to provide computer-based tests on behalf of the National Association of Securities Dealers, Inc. ("the NASD") for a period of ten years. In addition, Sylvan assumed certain lease obligations of approximately 50 testing centers previously operated by the NASD, and acquired equipment and leasehold improvements related to these leased centers. Sylvan paid the NASD $5,146,000 to acquire these rights and fixed assets, of which $4,871,832 was recorded as contract rights and $242,841 was recorded as fixed assets. In addition, as contemplated by the terms of the contract, the Company will incur in the first six months of 1997 an additional $1,395,000 of costs related to the acquisition of the contract rights from the NASD. The total contract rights recorded of $6,266,832 are being amortized over the contract life of 10 years using the straight-line method. 6. Costs and Estimated Earnings on Uncompleted Contracts Costs and estimated earnings on uncompleted fixed-price contracts and cost-plus- fee contracts are as follows:
December 31, -------------------------------------------------------- 1995 1996 --------------------------- --------------------------- Fixed Price Cost-Plus-Fee Fixed Price Cost-Plus-Fee Contracts Contracts Contracts Contracts ------------ ------------- ------------ ------------- Cost incurred on uncompleted contracts $10,108,393 $5,199,044 $13,420,902 $6,749,577 Estimated earnings 2,592,135 519,265 4,788,132 916,168 ----------- ---------- ----------- ---------- 12,700,528 5,718,309 18,209,034 7,665,745 Less: Billings to date 11,966,610 3,062,906 17,507,158 4,331,725 ----------- ---------- ----------- ---------- $ 733,918 $2,655,403 $ 701,876 $3,334,020 =========== ========== =========== ==========
Included in the accompanying consolidated balance sheets under the following captions: Cost and estimated earnings in excess of billings on uncompleted contracts $ 922,232 $2,106,326 $ 505,787 $3,059,414 Cost and estimated earnings in excess of billings on uncompleted contracts, less current portion 124,104 549,077 274,842 274,606 Billings in excess of costs and estimated earnings on uncompleted contracts (237,644) - (65,465) - Other long-term liabilities (74,774) - (13,288) - ----------- ---------- ----------- ---------- $ 733,918 $2,655,403 $ 701,876 $3,334,020 =========== ========== =========== ==========
20 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 7. Investments Investments in Affiliates At December 31, 1995, the Company's investments in affiliates consists of (i) a 50% interest in Sylvan National Advertising Committee, Inc. ("SNAC") in the amount of $97,266, which is engaged in purchasing advertising and marketing services for Sylvan Learning Centers, and (ii) a 34% interest in ADEPT Merger, Inc. ("ADEPT") in the amount of $85,054, a corporate joint venture formed to develop a computer-based examination for safe automobile driver certifications. At December 31, 1996, the Company's investments in affiliates consists of a 50% interest in SNAC ($559,584), a 10% interest in Caliber Learning Network, Inc. ($2,850,964), a corporate joint venture formed to develop distance learning programs, and a 34% interest in ADEPT ($485,054). Consolidated retained earnings at December 31, 1996 includes $644,561 related to undistributed earnings of equity method investees. Other Investments Other investments consist of non-marketable investments in common and preferred stocks of private companies in which the Company does not exercise significant influence. These investments are carried at the lower of cost or estimated net realizable value. At December 31, 1996, other investments consist primarily of a $21.9 million non-voting convertible preferred stock investment in Jostens Learning Corporation, a company that develops educational software products. 8. Bank Lines of Credit 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 issuance. The credit line and the term loan both bear interest at a floating rate equal to the 30 day London Interbank Offered Rate ("LIBOR") plus 1.15% per annum (6.68% at December 31, 1996). The balance on the credit line was $3.5 million at December 31, 1995 and no amounts were outstanding at December 31, 1996. 21 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 8. Bank Lines of Credit (continued) The Company has also entered into loan agreements with a bank that provides revolving lines of credit secured by certain assets of the Company. These lines of credit allow the Company to borrow a maximum of $1.8 million which is primarily due on demand. The lines bear interest at the bank's prime rate plus 0.25% (8.75% at December 31, 1996). The balance due on these lines of credit was $1.0 million at December 31, 1996. 9. Long-Term Debt
December 31, 1995 1996 ------------------------ Long-term debt consists of the following: Note payable to a bank, bearing interest at 1.10% over the LIBOR (6.63% at December 31, 1996). The loan is payable in monthly installments of $80,000 plus interest through May, 1999. $3,280,000 $2,320,000 Other notes payable bearing interest at rates ranging from 8% to 14%. 2,990,435 3,032,298 ---------- ---------- $6,270,435 $5,352,298 ========== ==========
Future maturities of long-term debt as of December 31, 1996 are as follows:
Years ending December 31: 1997 $3,182,197 1998 1,505,155 1999 510,851 2000 77,384 2001 54,785 Thereafter 21,926 ---------- $5,352,298 ==========
22 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 10. Due to Shareholders Due to shareholders consists of the following:
December 31, ------------------------ 1995 1996 ------------------------ Notes payable to certain shareholders, bearing interest at 12% per annum. The notes are subject to a subordination agreement with a bank related to certain lines of credit (see Note 8) and cannot be repaid prior to such bank borrowings. It is the intention of the shareholders not to require payment prior to January 1, 1998. $1,591,202 $1,753,254 Deferred salaries payable to certain management shareholders, bearing interest at 9% per annum and due on December 31, 2004. The liability is payable in monthly installments of $23,805, including interest. 1,624,954 1,479,630 ------------------------ $3,216,156 $3,232,884 ========================
11. Leases Operating Leases The Company conducts all of its operations from leased facilities. These facilities include the Company's corporate headquarters and other office locations, warehouse space, certain testing sites, and Company-owned learning centers. The terms of these leases are five years or less, with the exception of the Company's corporate headquarters, which has a lease term of ten years, and generally contain renewal options. The Company also leases certain equipment under operating leases of 36 months or less. 23 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 11. Leases (continued) Future minimum lease payments at December 31, 1996, by year and in the aggregate, under all noncancellable operating leases are as follows:
Years ending December 31: 1997 $ 5,798,967 1998 4,983,154 1999 3,952,500 2000 3,330,013 2001 2,914,455 Thereafter 9,548,518 ----------- $30,527,607 ===========
Rent expense for cancelable and noncancellable leases was $6.5 million, $4.0 million and $2.7 million for the years ended December 31, 1996, 1995 and 1994, respectively. 12. 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 ultimate outcome of the lawsuit, but believes that the ultimate resolution of the matter will not have a material effect on consolidated financial position. The Company is subject to other legal actions arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions and does not believe any settlement would materially affect the Company's financial position. 24 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 13. Fair Value of Financial Instruments The fair value of the Company's financial instruments, which consist primarily of cash and cash equivalents, accounts and notes receivable, available-for-sale investments, accounts payable, and short and long-term debt, approximate their carrying amounts reported in the consolidated balance sheets. It was not practical to estimate the fair value of the Company's other investments because of the lack of quoted market prices of the underlying equity securities and the inability to determine fair value without incurring excessive costs. Management does not believe that the value of these investments have been impaired. 14. Stock Options and Warrants Stock Options Under a non-qualified stock option plan for key employees adopted by the stockholders, the Company has outstanding stock options at December 31, 1996 to purchase 300,509 shares of common stock for $2.54 per share and options to purchase 287,947 shares of common stock for $.63 per share. All outstanding options are fully vested and expire on December 31, 1997, and no additional options may be granted under this plan. The Company also has an Employee Stock Option Plan ("the Employee Plan") which provides for the granting of stock options to purchase up to 3,200,000 shares of common stock. All options granted under the Employee Plan vest ratably over a five-year period and expire six years after date of grant. At December 31, 1996, options to purchase 2,984,917 shares of common stock have been granted under the Employee Plan. Under a Management Stock Option Plan ("Management Plan"), the Company has outstanding stock options at December 31, 1996 to purchase 163,500 shares of common stock for $11.25 per share. All outstanding options are fully vested, and expire on December 1, 2001. No additional options may be granted under the Management Plan. In March 1996, the Company established the Senior Management Stock Option Plan ("the Senior Management Plan") to replace the Management Plan. The Senior Management Plan provides for the granting of stock options to purchase up to 2,250,000 shares of common stock. At December 31, 1996, options to purchase 1,035,000 shares of common stock have been granted under the Senior Management Plan. Options granted under this plan expire ten years after the date of grant. Of this amount, options for 165,000 shares became immediately vested, with the balance vesting ratably over three years. 25 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 14. Stock Options and Warrants (continued) In October 1993 the stockholders approved the establishment of the Director Stock Option Plan ("Director Plan") for all non-employee members of the Board of Directors. Under the Director Plan, options to purchase 172,500 shares of common stock may be issued to certain members of the Board of Directors. No individual is eligible to receive more than 33,750 options under this plan and options granted under this plan expire at varying times three months after a director ceases his term on the Board. At December 31, 1996, options to purchase 168,750 shares of common stock have been granted under the Director Stock Option Plan. During 1995 the Board of Directors granted 37,500 options to the former shareholder of READS at an exercise price of $11.62 per share. These options vest ratably over a five-year period. In addition, an option to purchase an aggregate of 75,000 shares of common stock at an exercise price of $13.16 per share was granted in connection with the purchase of the rights to contracts to provide remedial education services to certain non-public schools under the federal Title I Program. All of these options are exercisable at December 31, 1996. In 1994 the Company sold 130,436 shares of restricted stock and options to purchase common stock to ETS for $1.5 million. During 1995, the Company received $2.0 million of cash as a result of the exercise by ETS of options to purchase 173,913 shares of common stock. Pursuant to the initial option agreement, upon exercise of the initial option, ETS was granted an additional one-year option to purchase 121,458 shares at an exercise price of $16.47 per share. This option was exercised on October 22, 1996. 26 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 14. Stock Options and Warrants (continued) The following table summarizes the stock option activity of the Company.
Weighted Options Options Average Outstanding Outstanding Exercisable Exercise Price - ----------- ----------- ----------- -------------- Balances at January 1, 1994 2,540,465 1,115,469 Granted 484,413 Became exercisable 515,159 Exercised (450,147) (450,147) ---------- ---------- Balance at December 31, 1994 2,574,731 1,180,481 Granted 919,083 Became exercisable 573,684 Exercised (258,663) (258,663) ---------- ---------- Balances at December 31, 1995 3,235,151 1,495,502 $ 7.69 Granted 1,847,875 $ 21.92 Became exercisable 765,823 Exercised (384,563) (384,563) $ 10.87 Forfeited (84,450) (84,450) $ 11.24 ---------- ---------- Balances at December 31, 1996 4,614,013 1,792,312 ========== ========== Weighted average exercise price at December 31, 1996 $13.06 $ 6.67 ========== ==========
Exercise prices for options outstanding as of December 31, 1996 ranged from $0.63 to $26.67 consisting of the following ranges:
Weighted Weighted Range of Options Average Options Average Weighted Average Remaining Exercise Prices Outstanding Exercise Prices Exercisable Exercise Prices Contractual Life - ---------------------------------------------------------------------------------------------------------- $0.63-$2.54 588,456 $ 1.61 588,456 $ 1.61 1.0 years $5.22-$9.12 1,416,550 $ 6.17 786,745 $ 6.11 3.2 years $10.17-$17.00 764,882 $13.23 252,111 $11.31 4.6 years $17.00-$26.67 1,844,125 $21.92 165,000 $20.33 8.1 years
27 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 14. Stock Options and Warrants (continued) Options exercised and the range of related option prices follow:
Year ended Options exercised Exercise Prices Per Share - -------------------------------------------------------------------------- 1994 450,147 $ 0.63-$7.33 1995 258,663 $0.63-$11.50 1996 384,563 $0.63-$16.47
For the years ended December 31, 1995 and 1996, pro forma net income and earnings per share information required by Statement 123 has been determined as if the Company had accounted for its stock options using the fair value method. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 1995 and 1996 respectively: risk-free interest rate of 6.00% and 6.00%, dividend yield of 0% and 0%, volatility factors of the expected market price of the Company's common stock of .428 and .399, and an expected life of granted options which varies from zero to five years depending upon the vesting period. The weighted-average grant-date fair value of options granted during 1996 was $8.33. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows:
1995 1996 ---- ---- Pro forma net income $2,674,761 $11,938,549 ========== =========== Pro forma earnings per share: Primary $ 0.16 $ 0.48 ========== =========== Fully diluted $ 0.15 $ 0.48 ========== ===========
28 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 14. Stock Options and Warrants (continued) The effect of compensation expense from stock options on 1995 pro forma net income reflects only the vesting of 1995 awards. However, 1996 pro forma net income reflects the second year of vesting of the 1995 awards and the first year of vesting of 1996 awards. Because the granted stock options vest over periods ranging from zero to five years, not until 2001 is the full effect of recognizing compensation expense for stock options representative of the possible effects on pro forma net income for future years. Stock Warrants In January 1993, the Company issued warrants to purchase 272,721 shares of Series A Convertible Preferred Stock for $4.39 per share, which approximated fair market value at the date of issuance. On December 9, 1993 in connection with the initial public offering, the warrants automatically converted into common stock warrants which allow holders to purchase 409,085 shares of common stock for $2.93 per share. During 1996 and 1995, warrants to purchase 134,499 and 235,497 shares were exercised, respectively. The remaining 39,089 warrants expire in September 1997. The Company also issued warrants to purchase 205,167 shares of common stock for $2.93 per share to the placement agent for the January 1993 preferred stock offering. Warrants to purchase 88,182 and 100,983 shares were exercised in 1996 and 1995, respectively. The remaining 16,002 warrants expire in January 1998. In July 1993 warrants to purchase 239,364 shares of common stock for $5.22 per share were issued in connection with a $5.0 million financing. Warrants to purchase 54,457, 136,728 and 4,788 shares of common stock were exercised in 1996, 1995 and 1994, respectively. The remaining 43,391 warrants expire in July 1998. 15. Impairment Loss In September 1995 the Company determined that certain assets of the testing services segment were impaired as a result of the acquisition of Drake. These assets, consisting of computer equipment, software and other assets, were impaired because of dissimilar technical requirements for Drake computer-based tests, or because their use was limited by virtue of the acquisition of similar productive assets from Drake. The amount of the impairment loss was determined by evaluating the likely sales proceeds from the disposition of the assets as compared to their book value. 29 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 16. Income Taxes Significant components of the provision for income taxes are as follows:
December 31, 1994 1995 1996 --------------------------------- Current: Federal $ - $250,334 $4,991,497 Foreign - 133,887 372,996 State 76,249 212,251 1,379,593 ------ -------- ---------- Total current 76,249 596,472 6,744,086 Deferred (benefit): Federal - (300,168) 1,773,051 State - (87,145) 332,863 ------ -------- ---------- Total deferred - (387,313) 2,105,914 ------- -------- ---------- $76,249 $209,159 $8,850,000 ======= ======== ==========
The Company uses the liability method to account for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are summarized as follows: 30 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 16. Income Taxes (continued)
December 31, 1995 1996 ------------------------- Deferred tax assets: Net operating loss carryforwards $ 3,288,617 $ 2,277,600 Loss on impairment of assets 302,729 71,601 Deferred revenue 427,574 443,618 Allowance for doubtful accounts 163,008 301,205 Amortization of intangible assets 361,537 459,040 Equity share of income from affiliates 19,499 53,841 Inventory reserve 53,050 60,094 Non-deductible reserves - 75,920 Other 9,826 133,056 ----------- ----------- Total deferred tax assets 4,625,840 3,875,975 Deferred tax liabilities: Deferred contract costs - 1,746,807 Contract rights 1,113,887 316,619 Depreciation 252,332 684,508 Amortization of software 202,157 175,183 Unbilled receivables 293,567 266,432 Prepaid expenses 86,080 106,586 Other 12,904 20,841 ----------- ----------- Total deferred tax liabilities 1,960,927 3,316,976 ----------- ----------- Net future income tax benefits 2,664,913 558,999 Valuation allowance for net deferred tax assets (2,277,600) (2,277,600) ----------- ----------- Net deferred tax assets (liabilities) $ 387,313 $(1,718,601) =========== ===========
The net operating loss carryforwards at December 31, 1996 are related to a subsidiary of the Company, and are available only to offset future taxable income of the subsidiary. These net operating loss carryforwards will begin to expire in 2007. The reconciliation of the reported income tax expense to the amount that would result by applying the U.S. federal statutory tax rates to income before income taxes is as follows: 31 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 16. Income Taxes (continued)
Year ended December 31, 1994 1995 1996 ---------- ----------- ---------- Tax expense at U.S. statutory rate $1,198,000 $ 1,285,000 $8,040,000 Permanent differences - 828,000 813,000 State income tax expense, net of federal tax effect 216,000 123,000 1,130,000 Reduction for income of pooled entities operating as S-corporations prior to date of merger (404,000) (8,000) (18,000) Tax effect of foreign income taxed at lower rate - (87,000) (704,000) Change in valuation allowance affecting tax expense (912,000) (2,026,000) - Available tax credits - - (254,000) Other (22,000) 94,000 (157,000) ---------- ----------- ---------- $ 76,000 $ 209,000 $8,850,000 ========== =========== ==========
Income before income taxes from foreign operations was $2.8 million in 1996 and $0.6 million in 1995. 17. Earnings Per Share Income per common and common equivalent share is based upon the average number of shares of common stock outstanding during each year, adjusted for the dilutive effect of common stock equivalents determined using the modified treasury stock method in 1994, and the treasury stock method in 1995 and 1996. Earnings per common share, assuming full dilution, is calculated on the same basis as the previously described primary computation, except that the computations assume that the end-of-year market price of the Company's common stock (rather than the average market price during the year) is used to determine the number of shares that would be assumed to be repurchased using the treasury stock method. As discussed in Note 3, on May 30, 1997, the Company acquired by merger Educational Inroads in exchange for 1,414,000 shares of common stock. The calculation of earnings per common share assumes that these shares had been issued and outstanding for all periods presented. 32 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 17. Earnings Per Share (continued) As described more fully in Note 3, the Company may be required to issue additional shares of common stock in future years in connection with the acquisition of PACE. The 1995 and 1996 earnings per share calculations assume that 95,693 and 88,890 shares, respectively, are issuable upon the determination of the final purchase price. These respective amounts were calculated assuming that PACE were to achieve its respective current year operating results in the year of determination. The calculation also assumes that net income is reduced by $171,000 and $630,000 as a result of the additional goodwill amortization that would have been recorded in 1995 and 1996, respectively, if the assumed contingent shares were issued on the date of acquisition. The Company may also be required to issue additional shares of common stock as a result of the Drake acquisition. The 357,143 Revenue Escrow shares to be released in April 1997 (as discussed in Note 3) are considered outstanding in 1996 for primary and fully diluted earnings per share. The remaining contingent shares are not considered in the computations since the effect on earnings per share is antidilutive in 1995 and 1996 if the conditions required for issuance of the contingent shares are assumed to have been met.
December 31, 1994 1995 1996 ---------------------------------- Per common and common equivalent share: Weighted average number of shares of common stock outstanding during the period 14,521,967 15,132,007 23,028,816 Dilutive effect of options and warrants 1,763,895 1,851,103 1,379,485 Common stock contingently issuable - 95,693 446,033 ---------- ---------- ---------- Total common and common equivalent shares of stock considered outstanding during the year 16,285,862 17,078,803 24,854,334 ========== ========== ========== Per common share, assuming full dilution 16,533,015 17,385,819 24,996,023 ========== ========== ==========
33 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 18. Major Customers and Concentration of Credit Risk The Company has an agreement with Educational Testing Services ("ETS") to be the exclusive commercial provider of ETS computer-based tests through the year 2000. In addition, in 1994 the Company entered into a ten-year contract with ETS to provide computer-based tests internationally. The international testing contract with ETS stipulates that the Company will be compensated for its services for a fee equal to approved costs plus 10 percent, and the Company recognizes revenues accordingly. Operating costs under the contract will be paid at cost plus 10 percent on a quarterly basis by ETS. Start-up costs will be paid ratably over a period not to exceed 10 years. The Company incurs financing costs to fund the contract and ETS has agreed to reimburse these costs at the prime rate of interest. Total revenues from ETS represented approximately 10.8%, 16.2% and 15.0% of consolidated revenues for the years ended December 31, 1996, 1995 and 1994, respectively. The testing business acquired upon the acquisition of Drake in September 1995 is highly concentrated with two customers. These customers contributed approximately 20% and 24% to consolidated revenues during 1996 and the fourth quarter of 1995, respectively. The Company expects the contracts with these two customers to be renewed at the expiration date of the existing contracts. The failure of these contracts to be renewed under similar terms would have a detrimental effect on future operating results and significantly impair the Company's ability to recover the remaining goodwill balance of approximately $74.0 million related to the acquisition of Drake. Financial instruments which potentially subject the Company to credit risk are investments in available-for-sale securities, accounts receivable and notes receivable. The Company maintains an allowance for losses on receivables based on the collectibility of all amounts owed. The Company generally does not require collateral for trade receivables. Notes receivable are generally collateralized by assets of the debtors. At December 31, 1996, the Company does not have any significant concentrations of credit risk. 19. Defined Contribution Retirement Plan The Company sponsors a defined contribution retirement plan under section 401(k) of the Internal Revenue Code. The provisions of this plan allow for voluntary employee contributions, subject to certain annual limitations, and discretionary Company contributions which are allocated to eligible participants based upon compensation. All employees are eligible after meeting certain service requirements. The Company made no contributions to this plan in any of the periods presented. 34 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 20. Business and Geographic Segment Information The Company's operations are classified into three primary business segments: core educational services, contract educational services and testing services. The core educational services segment involves the design and delivery of personalized tutorial services to individuals through a network of franchised and Company-owned Sylvan Learning Centers. The contract educational services segment offers educational services under contract to public and private school districts receiving funding under the federal Title I and other education programs and provides contract educational and training services on-site to employees of large corporations. The testing services segment delivers computer-based tests both domestically and internationally. 35 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 20. Business and Geographic Segment Information (continued) Summarized financial information by business segment for the years ended December 31, 1994, 1995 and 1996 is as follows:
Year ended December 31, 1994 1995 1996 ----------------------------------------------- Operating revenue: Core educational services: Franchise royalties $ 7,920,666 $ 9,222,996 $ 11,159,986 Franchise sales fees 1,255,835 2,131,990 3,183,954 Company-owned learning center revenues 8,605,254 11,520,024 18,527,854 Product sales 2,233,779 3,188,181 3,927,493 ----------- ------------ ------------ 20,015,534 26,063,191 36,799,287 Contract educational services 35,067,468 50,429,662 58,185,985 Testing services 13,664,969 34,565,697 86,950,689 ----------- ------------ ------------ Total revenue $68,747,971 $111,058,550 $181,935,961 =========== ============ ============ Direct Costs: Core educational services: Franchise services $ 3,840,575 $ 5,875,095 $ 6,531,733 Company-owned learning center 7,655,129 10,368,983 16,073,377 Product sales 1,758,857 2,431,156 2,951,771 ----------- ------------ ------------ 13,254,561 18,675,234 25,556,881 Contract educational services 33,108,499 47,684,580 53,373,185 Testing services 14,024,666 30,348,283 71,518,481 ----------- ------------ ------------ $60,387,726 $ 96,708,097 $150,448,547 =========== ============ ============ Operating income (loss): Core educational services: Franchise operations $ 4,459,645 $ 4,569,962 $ 6,573,376 Company-owned learning center 128,394 227,888 854,297 Product sales 261,615 501,541 636,519 ----------- ------------ ------------ 4,849,654 5,299,391 8,064,192 Contract educational services 1,483,168 2,111,249 3,598,274 Testing services (2,970,976) (2,581,208) 11,069,542 ----------- ------------ ------------ Total operating income $ 3,361,846 $ 4,829,432 $ 22,732,008 =========== ============ ============ Total assets: Core educational services $ 8,051,776 $ 12,863,792 $ 41,744,146 Contract educational services 13,132,055 26,568,393 27,495,706 Testing services 17,329,631 98,200,486 127,651,141 Other -- -- 26,345,435 Corporate 11,531,959 36,437,590 36,353,093 ----------- ------------ ------------ Total assets $50,045,421 $174,070,261 $259,589,521 =========== ============ ============
36 Sylvan Learning Systems, Inc. and Subsidiaries Notes to Supplemental Consolidated Financial Statements 20. Business and Geographic Segment Information (continued) Year ended December 31, 1994 1995 1996 ------------------------------------- Depreciation and amortization: Core educational services $ 591,747 $ 895,430 $ 945,968 Contract educational services 1,088,361 1,584,352 1,939,778 Testing services 2,310,947 5,601,471 9,846,889 Other -- -- 64,673 Corporate 107,774 354,633 667,202 ---------- ---------- ----------- Total depreciation and amortization $4,098,829 $8,435,886 $13,464,510 ========== ========== =========== Capital expenditures: Core educational services $ 809,080 $ 331,022 $ 888,959 Contract educational services 1,058,041 3,685,439 2,690,045 Testing services 6,221,689 1,894,847 5,937,046 Other -- -- -- Corporate -- 237,690 4,064,567 ---------- ---------- ----------- Total capital expenditures $8,088,810 $6,148,998 $13,580,617 ========== ========== ===========
There were no significant intersegment sales or transfers during the period. Operating income or loss by business segment excludes interest income and expense, earnings and losses on equity investments, and investment and other income of $162,589 in 1994, ($1,048,942) in 1995 and $914,313 in 1996. Allocated corporate expenses are applied to each segment based on each segment's percentage of total revenues. Corporate assets consist principally of cash and cash equivalents, corporate property and equipment, and other assets. The Company reports information related to geographic locations based on the location of the regional service centers, which for the years ended December 31, 1995 and 1996 is as follows:
1995 1996 ------------ ------------ Operating revenue: North America $100,373,442 $152,912,824 Europe 7,980,827 18,804,612 Asia/Pacific Rim 2,704,281 10,218,525 ------------ ------------ Total revenue $111,058,550 $181,935,961 ============ ============ Operating income: North America $ 2,886,831 $ 11,638,694 Europe 1,205,230 8,232,240 Asia/Pacific Rim 737,371 2,861,074 ------------ ------------ Total operating income $ 4,829,432 $ 22,732,008 ============ ============
37 Sylvan Learning Systems, Inc. and subsidiaries Notes to Supplemental Consolidated Financial Statements 20. Business and Geographic Segment Information (continued) 1995 1996 ------------ ------------ Identifiable assets: North America $164,447,963 $217,833,228 Europe 7,440,001 36,563,504 Asia/Pacific Rim 2,182,297 5,192,789 ------------ ------------ Total identifiable assets $174,070,261 $259,589,521 ============ ============
There were no reportable geographic segments meeting disclosure criteria for the year ended December 31, 1994. 21. Supplemental Cash Flow Information Interest payments were $0.7 million, $2.4 million and $1.0 million for the years ended December 31, 1996, 1995 and 1994, respectively. The 1995 amount includes imputed interest payments of $1.1 million related to the acquisition of Drake. Income tax payments were $4.0 million, $1.8 million and $57,000 for the years ended December 31, 1996, 1995, and 1994, respectively. 38 SUPPLEMENTAL SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------ COL A COL B COL C COL D COL E - ------------------------------------------------------------------------------------------------------------------------------------ ADDITIONS BALANCE AT --------------------------------------- BALANCE AT DESCRIPTION BEGINNING OF CHARGED TO COSTS CHARGED TO OTHER DEDUCTIONS-DESCRIBED END OF PERIOD AND EXPENSES ACCOUNTS-DESCRIBE PERIOD - ------------------------------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1996 DEDUCTED FROM ASSET ACCOUNTS: ALLOWANCE FOR DOUBTFUL ACCOUNTS $1,466,027 $280,444 $0 ($367,617) (1) $1,378,854 INVENTORY RESERVE $132,626 $70,000 $0 ($44,316) (2) $158,310 --------- ------- -- -------- --------- TOTALS $1,598,653 $350,444 $0 ($411,933) $1,537,164 ---------- -------- -- --------- ---------- YEAR ENDED DECEMBER 31, 1995 DEDUCTED FROM ASSET ACCOUNTS: ALLOWANCE FOR DOUBTFUL ACCOUNTS $490,226 $531,929 $950,000 (3) ($506,128) (1) $1,466,027 INVENTORY RESERVE $228,415 $22,615 $0 ($118,404) (2) $132,626 --------- ------- -------- -------- --------- TOTALS $718,641 $554,544 $950,000 ($624,532) $1,598,653 ---------- -------- -------- --------- ---------- YEAR ENDED DECEMBER 31, 1994 DEDUCTED FROM ASSET ACCOUNTS: ALLOWANCE FOR DOUBTFUL ACCOUNTS $626,643 $158,621 ($295,038) (1) $490,226 INVENTORY RESERVE $486,471 $20,330 ($278,386) (2) $223,415 --------- ------- -------- --------- TOTALS $1,113,114 $178,951 ($573,424) $716,641 ---------- -------- --------- ----------
(1) REDUCTION OF RESERVE DUE TO ACTUAL ACCOUNTS RECEIVABLE WRITE-OFFS. (2) REDUCTION OF RESERVE DUE TO SALES OF RESERVED INVENTORY AND CHANGES IN ESTIMATES (3) REPRESENTS THE RESERVE BALANCE ACQUIRED BY THE PURCHASE OF PACE AND DRAKE DURING 1995 AS FOLLOWS: PACE $200,000 DRAKE $750,000 39 EX-99.3 7 SUPPLEMENTAL CONSOLIDATED FINANCIALS EXHIBIT 99.3 SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1996 and MARCH 31, 1997 (UNAUDITED) ----------------------------- INDEX ----- Page No. -------- Financial Statements (Unaudited) Supplemental Balance Sheets - December 31, 1996 and March 31, 1997................................................. 2 Supplemental Statements of Income - Three months ended March 31, 1996, three months ended March 31, 1997.............. 4 Supplemental Statements of Cash Flows - Three months ended March 31, 1996, three months ended March 31, 1997.............. 5 Notes to Unaudited Supplemental Financial Statements - March 31, 1997................................................. 6 1 Sylvan Learning Systems, Inc. and Subsidiaries Supplemental Consolidated Balance Sheets ($ in thousands)
December 31, March 31, 1996 1997 ------------------- ------------------- (Restated - Note A) (Restated - Note A) (Unaudited) Assets Current assets: Cash and cash equivalents $ 11,198 $ 12,789 Available-for-sale securities 16,449 10,730 Receivables: Accounts receivable 36,431 38,023 Costs and estimated earnings in excess of billings on uncompleted contracts 3,565 3,228 Notes receivable 3,007 4,427 --------- --------- 43,003 45,678 Allowance for doubtful accounts (1,379) (1,339) --------- --------- 41,624 44,339 Inventory 4,470 4,441 Deferred income taxes 620 620 Prepaid expenses 3,125 4,003 --------- --------- Total current assets 77,486 76,922 Notes receivable, less current portion 563 1,110 Costs and estimated earnings in excess of billings on uncompleted contracts, less current portion 549 334 Property and equipment: Furniture and equipment 37,952 41,131 Leasehold improvements 5,544 4,874 --------- --------- 43,496 46,005 Accumulated depreciation (15,578) (17,438) --------- --------- 27,918 28,567 Intangible assets: Goodwill 103,986 104,005 Contract rights 13,882 13,972 Other 2,570 2,570 --------- --------- 120,438 120,547 Accumulated amortization (10,736) (12,046) --------- --------- 109,702 108,501 Deferred contract costs, net of accumulated amortization of $2,067 as of December 31, 1996 and $2,945 as of March 31, 1997 13,230 12,447 Investments in affiliates 3,896 4,747 Other investments 24,220 24,862 Other assets 2,026 2,890 ========= ========= Total assets $ 259,590 $ 260,380 ========= =========
21 Sylvan Learning Systems, Inc. and Subsidiaries Supplemental Consolidated Balance Sheets ($ in thousands)
December 31, March 31, 1996 1997 --------------------- --------------------- (Restated - Note A) (Restated - Note A) (Unaudited) Liabilities and stockholders' equity Current liabilities: Accounts payable and accrued expenses $ 28,576 $ 21,779 Bank lines of credit 1,000 - Current portion of long-term debt 3,182 3,056 Billings in excess of costs and estimated earnings on uncompleted contracts 65 989 Due to former shareholders of Wall Street Institute 4,921 250 Deferred revenue 9,543 10,109 Other current liabilities 596 511 --------- --------- Total current liabilities 47,883 36,694 Long-term debt, less current portion 2,170 9,542 Deferred income taxes 2,338 2,338 Due to former shareholders of Drake 8,143 8,143 Due to former shareholders of Wall Street Institute 15,150 - Due to shareholders 3,233 1,441 Other long-term liabilities 350 342 Commitments and contingent liabilities Stockholders' equity: Preferred stock, par value $.01 per share--authorized 10,000,000 shares, no shares issued and outstanding as of December 31, 1996 and 1995 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 24,993,707 as of March 31, 1997 240 250 Additional paid-in capital 168,547 187,551 Unrealized losses on available-for-sale securities (11) (11) Foreign currency translation adjustments (4) (358) Retained earnings 11,551 14,448 --------- --------- Total stockholders' equity 180,323 201,880 --------- --------- Total liabilities and stockholders' equity $ 259,590 $ 260,380 ========= =========
See accompanying notes. 3 Sylvan Learning Systems, Inc. and Subsidiaries Supplemental Consolidated Statements of Income (Unaudited) ($ in thousands, except per share amounts)
Three months ended March 31, ---------------------------------- 1996 1997 ------------- ------------- (Restated - Note A) (Restated - Note A) Revenues $ 41,506 $ 51,944 Cost and expenses Direct costs 36,423 43,630 General and administrative expense 2,069 2,961 ------------- ---------- Total expenses 38,492 46,591 ------------- ---------- Operating income 3,014 5,353 Other income (expense) Investment and other income 406 689 Interest expense (264) (209) Equity in net income of unconsolidated subsidiaries 92 (128) ------------- ---------- Income before income taxes 3,248 5,705 Income taxes (1,469) (2,258) ------------- ---------- Net income $ 1,779 $ 3,447 ============= ========== Earnings per common and common equivalent share $ 0.07 $ 0.12 ============= ==========
See accompanying notes. 4 Sylvan Learning Systems, Inc. and Subsidiaries Supplemental Consolidated Statements of Cash Flows (Unaudited) ($ in thousands)
Three months ended March 31, ------------------------------------------ 1996 1997 ------------------- ------------------- (Restated - Note A) (Restated - Note A) Operating activities Net income $ 2,516 $ 3,447 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation 1,287 1,860 Amortization 1,776 2,106 Provision for doubtful accounts 36 40 Equity in net income of unconsolidated subsidiaries (92) 128 Changes in operating assets and liabilities: Accounts and notes receivable (7,681) (3,522) Cost and estimated earnings in excess of billings on uncompleted contracts 654 953 Inventory (195) 29 Prepaid expenses (168) 813 Other assets (78) (902) Accounts payable and accrued expenses (1,241) (5,675) Billings in excess of costs and estimated earnings on uncompleted contracts 655 553 Other current liabilities (41) (87) Deferred revenue and other long-term liabilities 807 618 -------- -------- Net cash provided by (used in) operating activities (1,765) 361 -------- -------- Investing activities Change in advances to unconsolidated subsidiaries 35 (880) Purchase of available-for-sale securities (4,826) (4,827) Proceeds from sale of available-for-sale securities 12,833 11,045 Investment in and advances to affiliates (217) - Increase in other investments - (1,242) Proceeds from sale of equipment 11 43 Purchase of property and equipment (1,568) (2,533) Expenditures for deferred contract costs and other assets (7) (11) -------- -------- Net cash provided by investing activities 6,261 1,595 -------- -------- Financing activities Payments to stockholders - (4,671) Proceeds from exercise of options and warrants 1,022 922 Proceeds from issuance of common stock 533 - Proceeds from issuance of long-term debt 119 56 Payments on long-term debt and capital lease obligations (896) (2,932) Proceeds from bank lines of credit 216 7,164 Payments on bank lines of credit (4,100) (550) -------- -------- Net cash used in financing activities (3,106) (10) -------- -------- Effects of exchange rate changes on cash (21) (354) -------- -------- Net increase in cash and cash equivalents 1,369 1,592 Cash and cash equivalents at beginning of period 2,903 11,198 -------- -------- Cash and cash equivalents at end of period $ 4,272 $ 12,789 ======== ======== See accompanying notes.
5 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES Notes to Unaudited Supplemental Consolidated Financial Statements ($ in thousands, except per share amounts) March 31, 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 ended March 31, 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. As discussed in Note D, on May 30, 1997, the Company consummated its acquisition by merger of all of the outstanding stock of I-R, Inc. and Independent Child Study Teams, Inc. (collectively, "Educational Inroads"). The acquisition has been accounted for as a pooling-of-interests and accordingly, the Company's financial statements have been restated to include the results of Educational Inroads for all periods presented. As of the date of the issuance of these financial statements, the Company has not issued financial statements for a period including the merger date. Therefore, the accompanying consolidated financial statements are considered "supplemental." Upon the issuance of financial statements for a period that includes the date of the merger, the unaudited supplemental consolidated financial statements will become the historical unaudited consolidated financial statements of the Company. Note B - Income Taxes ------------ The tax provisions for the three month periods ended March 31, 1997 and 1996 are based on the estimated effective tax rates applicable for the full years. The Company's income tax provision of $2,258 for the three month period ended March 31, 1997 consists of federal, state, and foreign income taxes. 6 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 March 31, 1997 and 1996 was 27,207,356 and 24,901,533, 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 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 March 31, 1997 and 1996 of $0.01 and $0.01 per share, respectively. The impact of Statement 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. Note D - Acquisition ----------- 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 (see Note A). 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. 7 Combined and separate results of operations of Sylvan and Educational Inroads during the periods presented are as follows:
Previously Independent Reported by Child Study the Company I-R, Inc. Teams, Inc. Combined ----------------------------------------------------- Three months ended March 31, 1997 Revenues $ 44,850 $ 2,749 $ 4,345 $ 51,944 Net income $ 3,697 $ (125) $ (125) $ 3,447 Net income per share $ 0.14 $ 0.12 Three months ended March 31, 1996 Revenues $ 34,557 $ 2,771 $ 4,178 $ 41,506 Net income $ 1,779 $ - $ - $ 1,779 Net income per share $ 0.07 $ 0.07
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 months ended March 31, 1997 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. Combined net income for the three months ended March 31, 1997 $3,447 Contractual reduction to be made in compensation 550 Legal and transactions costs 400 Related income taxes (at 40%) (380) ---------- 570 ---------- Pro forma net income after contractual reduction in compensation and elimination of merger costs $4,017 ========== Pro forma net income per share $0.14 ==========
8 Note E - Reclassifications ----------------- Certain amounts in the 1996 financial statements have been reclassified to conform with the 1997 presentation. Note F - Subsequent Event ---------------- In March 1997, the Company and National Education Corporation "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 million termination fee required by that agreement. In connection with the failed acquisition, the Company incurred approximately $1.5 million of direct expenses. In addition, as a result of certain strategic actions taken by the Company in anticipation of the merger with NEC, certain assets of the Sylvan Prometric Division have been impaired, and an impairment loss of approximately $4 million is expected to be recorded in the second quarter of 1997. Therefore, the net effect of the termination of the NEC merger on the results of operations of the Company in the second quarter is expected to be $24.5 million. Due to the availability of sufficient capital resources, stemming in part from the receipt of the NEC termination fee, the Company made in June 1997 non- recurring expenditures totaling $22 million. These expenditures consisted of $10 million in promotional expenditures for the Sylvan Prometric Division, a $5 million advertising contribution to the Sylvan National Advertising Committee, Inc., and a $7 million contribution to a newly-formed Sylvan Foundation, which is expected to qualify as a 501(c)(3) not-for-profit foundation. Note G - Bank Loan --------- The Company has borrowed $7.2 million during the first quarter of 1997 under its revolving credit line which is described in Note 8 to the 1996 audited supplemental financial statements. 9 Note H - Stockholders' Equity -------------------- The components of stockholders' equity are as follows ($ in thousands):
Foreign Additional Unrealized Currency Total Common Paid-In Gain Translation Retained Stockholders' Stock Capital (Loss) Adjustments Earnings Equity ----- ------- ------ ----------- -------- ------ Balance at December 31, 1996 $ 240 $ 168,547 $ (11) $ (4) $ 11,551 $ 180,323 Options and warrants exercised for purchase price of 298,608 shares of common stock, including income tax benefit of $2,942 3 3,861 3,864 Issuance of 714,884 shares of common stock in connection with the acquisition of WSI 7 15,143 15,150 Distributions to shareholders of pooled entities (550) (550) Foreign currency translation adjustment (354) (354) Net income for the three months ended March 31, 1997 3,447 3,447 --------- ----------- ----------- ------------- ---------- ------------ Balance at March 31, 1997 $ 250 $ 187,551 $ (11) $ (358) $ 14,448 $ $201,880 ========= =========== =========== ============= ========== ============
Note I - 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 ultimate outcome of the lawsuit, but believes that the ultimate resolution of the matter will not have a material effect on consolidated financial position. 10 -----END PRIVACY-ENHANCED MESSAGE-----