UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarter ended JUNE 30, 2001 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from __________ to __________.
COMMISSION FILE NUMBER 0-22844
-------
SYLVAN LEARNING SYSTEMS, INC.
-----------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1492296
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1001 FLEET STREET, BALTIMORE, MARYLAND 21202
-------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410)843-8000
-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/. No / /.
The registrant had 38,525,286 shares of Common Stock outstanding as of August 6,
2001.
SYLVAN LEARNING SYSTEMS, INC.
INDEX
PAGE NO.
--------
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2001 and
December 31, 2000.................................... 3
Consolidated Statements of Operations - Three months ended
June 30, 2001 and June 30, 2000...................... 5
Consolidated Statements of Operations - Six months ended
June 30, 2001 and June 30, 2000...................... 6
Consolidated Statements of Cash Flows - Six months ended June
30, 2001 and June 30, 20007........................... 7
Notes to Consolidated Financial Statements - June 30, 2001 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 17
Item 3. Quantitative and Qualitative Disclosure of Market Risk.... 26
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders....... 28
Item 6. Exhibits and Reports on Form 8-K.......................... 29
SIGNATURES......................................................... 29
2
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
--------------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 92,251 $ 116,490
Available-for-sale securities 89,419 202,077
Receivables:
Accounts receivable 60,255 68,468
Costs and estimated earnings in excess of billings on
uncompleted contracts - 2,613
Notes receivable from tuition financing 9,127 7,489
Other notes receivable 10,953 13,317
Other receivables 13,339 15,549
----------------- -------------------
93,674 107,436
Allowance for doubtful accounts ( 7,542) (5,554)
----------------- -------------------
86,132 101,882
Inventory 6,691 5,832
Deferred income taxes 4,083 3,936
Prepaid expenses and other current assets 21,020 20,955
----------------- -------------------
Total current assets 299,596 451,172
Notes receivable from tuition financing, less current portion 10,458 8,313
Other notes receivable, less current portion 4,792 2,378
Property and equipment:
Land and buildings 91,577 94,151
Furniture, computer equipment and software 106,668 94,249
Leasehold improvements 30,850 22,407
----------------- -------------------
229,095 210,807
Accumulated depreciation (50,438) (38,965)
----------------- -------------------
178,657 171,842
Intangible assets:
Goodwill 293,888 296,422
Other 4,753 2,611
----------------- -------------------
298,641 299,033
Accumulated amortization (26,386) (21,078)
----------------- -------------------
272,255 277,955
Investments in and advances to affiliates 64,664 57,999
Other investments 25,601 25,935
Deferred costs, net of accumulated amortization of $2,510
and $1,969 at June 30, 2001 and December 31, 2000, respectively 7,970 7,200
Other assets 15,989 14,169
----------------- -------------------
Total assets $879,982 $1,016,963
================= ===================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
2001 2000
------------------ ------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 17,127 $ 20,108
Accrued expenses 56,151 40,452
Income taxes payable 3,151 119,511
Current portion of long-term debt 13,271 20,292
Due to shareholders of acquired companies 16,511 40,195
Deferred revenue 37,785 42,483
Other current liabilities 14,406 10,673
------------------ ------------------
Total current liabilities 158,402 293,714
Long-term debt, less current portion 127,368 128,575
Deferred income taxes 3,112 4,824
Other long-term liabilities 9,971 3,707
------------------ ------------------
Total liabilities 298,853 430,820
Minority interest 56,795 32,880
Stockholders' equity:
Preferred stock, par value $0.01 per share - - authorized 10,000 shares, no
shares issued and outstanding as of
June 30, 2001 and December 31, 2000 - -
Common stock, par value $0.01 per share - - authorized
90,000 shares, issued and outstanding shares of 38,060
as of June 30, 2001 and 37,278 as of December 31, 2000 381 373
Additional paid-in capital 216,349 205,343
Retained earnings 335,214 360,232
Accumulated other comprehensive loss (27,610) (12,685)
------------------ ------------------
Total stockholders' equity 524,334 553,263
------------------ ------------------
Total liabilities and stockholders' equity $879,982 $1,016,963
================== ==================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30,
2001 2000
(Restated)
-------------------------------------------
(Unaudited)
REVENUES $130,395 $82,226
COST AND EXPENSES
Direct costs 106,334 69,395
Sylvan Ventures operating costs 6,890 3,207
General and administrative expenses 5,901 4,566
---------------- ---------------
Total expenses 119,125 77,168
---------------- ---------------
Operating income 11,270 5,058
OTHER INCOME (EXPENSE)
Investment and other income 1,737 6,825
Interest expense (2,434) (752)
Sylvan Ventures investment losses (238) -
Loss on investment (14,231) -
Equity in net loss of affiliates:
Sylvan Ventures (15,588) (829)
Other (137) (282)
---------------- ---------------
(15,725) (1,111)
Minority interest in consolidated subsidiaries:
Sylvan Ventures 1,805 -
Other (2,600) (315)
---------------- ---------------
(795) (315)
---------------- ---------------
Income (loss) from continuing operations before income taxes (20,416) 9,705
Income tax benefit (expense) 6,982 (3,080)
---------------- ---------------
Income (loss) from continuing operations (13,434) 6,625
Loss from discontinued operations, net of income tax expense
of $0 in 2000 - (1,956)
---------------- ---------------
Net income (loss) $ (13,434) $4,669
================ ===============
Earnings (loss) per common share, basic:
Income (loss) from continuing operations $(0.35) $0.15
Net income (loss) $(0.35) $0.10
Earnings (loss) per common share, diluted:
Income (loss) from continuing operations $(0.35) $0.14
Net income (loss) $(0.35) $0.10
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30,
2001 2000
(Restated)
-------------------------------------------
(Unaudited)
REVENUES $250,841 $157,766
COST AND EXPENSES
Direct costs 214,408 133,823
Sylvan Ventures operating costs 12,467 4,589
General and administrative expenses 11,887 9,367
-------------- -------------
Total expenses 238,762 147,779
-------------- -------------
Operating income 12,079 9,987
OTHER INCOME (EXPENSE)
Investment and other income 5,064 9,644
Interest expense (4,663) (2,670)
Sylvan Ventures investment losses (638) -
Loss on investment (14,231) -
Equity in net loss of affiliates:
Sylvan Ventures (35,374) (1,109)
Other (263) (878)
-------------- -------------
(35,637) (1,987)
Minority interest in consolidated subsidiaries:
Sylvan Ventures 3,096 -
Other (4,020) (1,067)
-------------- -------------
(924) (1,067)
-------------- -------------
Income (loss) from continuing operations before income taxes (38,950) 13,907
Income tax benefit (expense) 13,932 (3,873)
-------------- -------------
Income (loss) from continuing operations (25,018) 10,034
Loss from discontinued operations, net of income tax expense - (5,824)
of $163 in 2000
Gain on disposal of discontinued operations, net of income tax
expense of $136,762 in 2000 - 288,454
-------------- -------------
Net income (loss) $(25,018) $292,664
============== =============
Earnings (loss) per common share, basic:
Income (loss) from continuing operations $(0.66) $0.21
Net income (loss) $(0.66) $6.10
Earnings (loss) per common share, diluted:
Income (loss) from continuing operations $(0.66) $0.21
Net income (loss) $(0.66) $6.01
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
2001 2000
------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ (25,018) $ 292,664
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation 12,081 10,106
Amortization 6,395 6,489
Gain on disposal of discontinued operations - (288,454)
Deferred income taxes (190) 370
Loss on investments 14,869 -
Equity in net loss of affiliates 35,637 2,475
Minority interest in income of consolidated subsidiary 924 1,067
Other non-cash items 835 196
Changes in operating assets and liabilities:
Receivables 13,526 (10,408)
Tuition loans, net (3,784) (2,679)
Inventory, prepaid and other current assets (2,165) 2,637
Payables and accrued expenses 167 (16,241)
Income taxes payable (112,440) 16,273
Deferred revenue and other current liabilities (8,878) (23,020)
------------ -----------
Net cash used in operating activities (68,041) (8,525)
------------ -----------
INVESTING ACTIVITIES
Purchase of available-for-sale securities (108,045) (58,006)
Proceeds from sale or maturity of available-for-sale securities 219,759 1,272
Investment in and advances to affiliates and other investments (36,576) (20,942)
Purchase of property and equipment (28,292) (13,706)
Proceeds from sale of Prometric, net of closing costs - 710,312
Cash paid for acquired businesses, net of cash received (3,005) (22,164)
Payment of contingent consideration for prior period acquisitions (25,145) (19,323)
Expenditures for deferred costs (2,085) (2,393)
Increase in other assets (730) (1,369)
------------ -----------
Net cash provided by investing activities 15,881 573,681
------------ -----------
FINANCING ACTIVITIES
Proceeds from exercise of options and warrants 6,958 263
Proceeds from issuance of common stock - 723
Repurchases of common stock - (139,957)
Proceeds from issuance of debt 9,600 130,752
Payments on debt (9,412) (161,555)
Cash received from minority members of Sylvan Ventures 21,899 9,302
Decrease in other long-term liabilities 699 -
------------ -----------
Net cash provided by (used in) financing activities 29,744 (160,472)
------------ -----------
Effect of subsidiary year-end change on cash and cash - (2,565)
equivalents
Effect of exchange rate changes on cash (1,823) (1,288)
------------ -----------
Net increase (decrease) in cash and cash equivalents (24,239) 400,831
Cash and cash equivalents at beginning of period 116,490 20,410
------------ -----------
Cash and cash equivalents at end of period $ 92,251 $ 421,241
============ ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
7
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, 2001
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month and six month periods ended
June 30, 2001 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2001. The traditional semester programs in the
education industry, with a summer break, result in unusually large seasonality
in the operating results of Sylvan Learning Systems, Inc. ("the Company"). The
consolidated balance sheet at December 31, 2000 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the audited
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2000.
Certain amounts previously reported for 2000 have been reclassified to conform
with the 2001 presentation. The accompanying consolidated statements of
operations have been restated to reflect the discontinued operations
discussed in Note 3.
NOTE 2 - NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which was adopted
effective January 1, 2001. Because of the Company's minimal use of derivatives,
the adoption of the new standard did not have any effect on the Company's
consolidated financial position and results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, BUSINESS COMBINATIONS, and No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS. Under Statement No. 141, the
pooling-of-interests method of accounting has been eliminated for all business
combinations except for qualifying business combinations that were initiated
prior to July 1, 2001. Statement No. 141 also includes new criteria to recognize
intangible assets separately from goodwill, and is effective for any business
combination accounted for by the purchase method that is completed after June
30, 2001. Under Statement No. 142, goodwill will no longer be amortized but will
be subject to annual impairment tests for fiscal years beginning after December
15, 2001. Other intangible assets will continue to be amortized over their
useful lives. The Company will apply the new rules on accounting for goodwill
and other intangible assets beginning in the first quarter of 2002. The Company
will perform the first of the required impairment tests of goodwill as of
January 1, 2002 and has not yet determined what the effect of these tests will
be on the earnings and financial position of the Company. The Company has
estimated that the impact of the non-amortization provisions of the Statements
will be a decrease in amortization expense of approximately $21,200 in 2002
including approximately $8,700 related to the amortization of Sylvan Ventures
equity method investments.
8
NOTE 3 - DISCONTINUED OPERATIONS
On October 6, 2000, the Company sold its English Language immersion business,
Aspect, ("Aspect") for $19,794 in cash. The gain on the disposition recognized
in the year ended December 31, 2000 was $22,353, which includes an income tax
benefit of $3,047. The Company has estimated the domestic and foreign income
taxes resulting from the sale based on the expected allocation of proceeds to
subsidiaries that are parties to the transaction and the tax laws of the
jurisdictions in which these subsidiaries operate, assuming that undistributed
gains outside the United States will be reinvested outside the United States.
On March 3, 2000, the Company sold its computer-based testing division, Sylvan
Prometric ("Prometric") for approximately $775,000 in cash. The gain on the
disposition recognized in the year ended December 31, 2000 was approximately
$288,454, net of income taxes of $136,762. The final proceeds from the sale may
change based on contractual provisions that provide for certain adjustments to
the sale price, including an adjustment for changes in working capital of
Prometric between November 30, 1999 and March 3, 2000. The Company and the buyer
have not completed the process required to provide for a final settlement of the
sale proceeds. However, management believes that any future adjustments will be
immaterial to the Company's financial position and results of operations. The
Company has estimated the domestic and foreign income taxes resulting from the
sale based on the expected allocation of proceeds to subsidiaries that are a
party to the transaction and the tax laws of the jurisdictions in which these
subsidiaries operate, assuming that undistributed gains outside the United
States will be reinvested outside the United States.
Summarized operating information of the Company's discontinued operations,
including both Prometric and Aspect for the period owned in 2000, was as
follows:
Three months ended Six months ended
June 30, 2000 June 30, 2000
------------------ ------------------
Revenues $10,263 $57,918
----------------- -----------------
Loss before income taxes (1,956) (5,661)
Income tax expense - (163)
----------------- -----------------
Net loss $(1,956) $ (5,824)
================= =================
Included in loss from discontinued operations for the three and six month
periods ended June 30, 2000 is an allocation of corporate interest expense of
$45 and $723, respectively, based upon a percentage of the net equity investment
in discontinued operations to the net equity of the Company including the
discontinued operations.
NOTE 4 - INVESTMENTS
FORMATION OF SYLVAN VENTURES
The Sylvan Ventures segment was established during the first quarter of 2000 to
invest in and develop companies with emerging technology solutions for the
education and training marketplace ("portfolio companies"). On June 30, 2000,
affiliates of Apollo Management L.P. ("Apollo") and certain members of Sylvan's
management ("management investors") joined the Company to form Sylvan Ventures,
LLC, with total committed funds of $400,000. Of the $400,000 commitment, the
Company has committed $285,000, including investments in portfolio companies
valued at $65,000; Apollo has committed $100,000; and the management investors
have committed $15,000.
9
NOTE 4 - INVESTMENTS (CONTINUED)
Upon formation, Sylvan Ventures issued common membership interests to Sylvan and
the management investors and preferred membership interests to Apollo.
Additionally, Sylvan Ventures authorized the granting of plan membership profit
interests to members of management that entitle the recipients to receive an
aggregate allocation of up to 20% of any cumulative net profits. As of June 30,
2001, plan membership profit interests have been granted to management for an
aggregate allocation of approximately 15% of the cumulative net profits upon the
occurrence of any profits interest event.
In 2000, the membership agreement provided for the allocation of net losses to
the common and preferred members on a pro rata basis, subject to certain
limitations. Beginning January 1, 2001, net losses are being allocated on a pro
rata basis only to the common membership interest holders until their capital
account balances have been reduced to zero, at which time any losses will be
allocated to Apollo until its capital account balance has been reduced to zero.
Thereafter, any losses will be allocated on a pro rata basis to all membership
interest holders. Any profits earned after January 1, 2001 will first be
allocated to Apollo until it has recovered its 2000 allocated losses and then to
the common membership interest holders to recover previously allocated losses.
After all previously allocated losses have been recovered through profit
allocations, any additional net profits will be allocated on a pro rata basis to
all interest holders, including the plan membership profit interest holders. The
preferred members also maintain a preferred position relating to cash
distribution provisions of the membership agreement.
CONSOLIDATED INVESTMENTS
eSylvan, Inc. ("eSylvan") is a start-up organization formed to distribute the
Company's learning center tutoring product to students at home via computer.
Sylvan Ventures owns 85% of the common stock of eSylvan. eSylvan had not
generated significant revenue through June 30, 2001, and its operating expenses
have been included in the 2001 and 2000 consolidated statement of operations as
a component of Sylvan Ventures' operating costs. Sylvan Ventures has committed
additional funding of $6,666 as of June 30, 2001 for eSylvan development and
operating costs in 2001. During 2001, eSylvan issued common stock representing a
15% ownership interest to franchisees of Sylvan Learning Centers to more fully
leverage the relationship between center-based and online tutoring.
INVESTMENT IN AFFILIATES (EQUITY METHOD INVESTMENTS):
The Company's investment in and advances to affiliates consist of investments in
and loans to companies in the initial or early stages of development. These
companies are frequently illiquid or experiencing cash flow deficits from
operations. Further, investments are generally unsecured and subordinated to the
claims of other creditors. Accordingly, the Company's investments in and
advances to affiliates are subject to a high degree of investment and credit
risk. The Company has made estimates of the recoverability of loans and advances
to its affiliates, and due to the inherent uncertainty of the operations of
these affiliates, it is reasonably possible that these estimates may change in
the near term.
10
NOTE 4 - INVESTMENTS (CONTINUED)
Investments in and advances to affiliates consist principally of investments in
common stock and preferred stock, as follows as of June 30, 2001 and December
31, 2000, respectively:
JUNE 30, OWNERSHIP DECEMBER 31, 2000 OWNERSHIP
2001 INTEREST INTEREST
------------------ ------------------ --------------------- -----------------
Walden E-Learning, Inc. $32,415 41% $ - -
Chancery Software Limited 11,350 42% 14,224 42%
Classwell Learning Group, Inc. 8,819 42% 13,045 42%
Caliber Learning Network, Inc. - 35% 15,123 34%
HigherMarkets, Inc. 3,029 31% 6,694 31%
iLearning, Inc. 3,358 27% 5,568 29%
Mindsurf, Inc. 455 47% 1,109 47%
EdVerify, Inc. 2,382 33% - -
Other 2,856 - 2,236 -
------------------ ---------------------
Total $64,664 $57,999
================== =====================
The Company's equity in net losses related to the investments in affiliates for
the three month and six month periods ended June 30, 2001 was $15,725 and
$35,637, respectively. At June 30, 2001, the difference between the carrying
amount of equity method investments and the amount of underlying equity in net
assets of these investments was $35,284. This amount is being amortized for each
investment primarily over a three-year period as a component of the Company's
allocable share of income or loss. For the three month and six month periods
ended June 30, 2001, equity in net loss of affiliates includes amortization of
$2,174 and $4,979, respectively. Under the provisions of Statement No. 142 (see
Note 2), this goodwill related to equity method investments will no longer be
amortized, effective January 1, 2002.
Sylvan Ventures has committed additional funding of $13,300 to Mindsurf, Inc.
("Mindsurf") if specified performance targets are achieved.
The tables below include summarized financial data and results of operations of
those affiliates in which Sylvan Ventures had an equity method investment.
JUNE 30, DECEMBER 31,
2001 2000
-------------------- --------------------
Current assets $45,538 $44,420
Other assets 74,772 67,191
Current liabilities 45,166 37,902
Long-term and other liabilities 24,700 7,149
Redeemable convertible preferred stock 88,232 77,643
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -------------------------------------------
2001 2000 2001 2000
----------------- ----------------- ------------------ -------------------
Net sales $ 16,022 $ 6,079 $ 26,645 $ 11,150
Gross profit 11,725 4,458 18,478 7,439
Net loss (31,423) (6,845) (60,502) (14,143)
11
NOTE 4 - INVESTMENTS (CONTINUED)
LOSS ON INVESTMENT
The loss on investment was prompted by the Caliber Learning Network, Inc.
("Caliber") filing for Chapter 11 bankruptcy protection on June 15, 2001. The
Sylvan Ventures investment in Caliber of $2,931 was reduced to $0 upon recording
its allocable share of losses related to Caliber prior to the bankruptcy
proceedings, which is included in "Equity in net loss of affiliates".
Additionally, the Company recorded a loss on investment of $14,231 in the three
month period ended June 30, 2001. This charge consists of the reserve for notes
receivable and advances to Caliber of $7,497 as well as the accrual of a $6,734
estimated liability relating to the Company's guarantee of certain
non-cancelable Caliber lease obligations and other Caliber related liabilities
incurred by the Company. Due to the uncertainties surrounding the bankruptcy
proceedings and the ultimate settlement of Caliber's lease and other
liabilities, it is reasonably possible that the Company's loss estimate may
change prior to finalization.
NOTE 5 - DUE TO SHAREHOLDERS OF ACQUIRED COMPANIES
Due to shareholders of acquired companies consists of the following amounts
payable in cash:
JUNE 30, DECEMBER 31,
2001 2000
--------------------- --------------------
Amounts payable to former shareholders of Canter $ - $13,145
Amounts payable to former shareholders of Les Roches 561 -
Amounts payable to former shareholders of Prometric 3,050 3,050
Amounts payable to former shareholders of WSI franchises 900 12,000
Amounts payable to former shareholders of UDLA 12,000 12,000
--------------------- --------------------
$16,511 $40,195
===================== ====================
NOTE 6 - INCOME TAXES
The tax provisions for the six month periods ended June 30, 2001 and 2000 were
based on the estimated effective tax rates applicable for the full years, after
giving effect to significant unusual items related specifically to the interim
periods. The Company's income tax provisions for all periods consist of federal,
state, and foreign income taxes. The Company's overall effective tax rate from
continuing operations was 36% for the six months ended June 30, 2001. This rate
represents the blended rate computed after taking into account the impact of
Sylvan Ventures on the Company's results. Due to the volatility of Sylvan
Ventures' income and losses, the Company's overall rate may fluctuate from
quarter to quarter. However, on a full year basis, the Company estimates that
the effective income tax rate for the continuing operations results of the
Company, prior to Sylvan Ventures, and Sylvan Ventures' for the year ended
December 31, 2001 will be 34% and 35%, respectively. Fluctuations in the
magnitude and timing of the tax impact of Sylvan Ventures' financial results may
cause the Company's consolidated effective tax rate to vary substantially from
the statutory rate.
The Company's effective tax rate from continuing operations in 2000 was
significantly affected by its inability to utilize tax benefits from certain
investment losses of Sylvan Ventures, the impact of minority interests and the
timing of recognition of corporate level tax benefits from subsidiary losses.
Because of these factors, the 2000 effective tax rate varied substantially from
the statutory rate.
At June 30, 2001, undistributed earnings from continuing operations of non-U.S.
subsidiaries totaled $77,100. Deferred tax liabilities have not been recognized
for these undistributed earnings because it is management's intention to
reinvest such undistributed earnings outside of the U.S. If all undistributed
earnings were remitted to the U.S., the amount of incremental U.S. federal
income taxes, net of foreign tax credits, would be approximately $21,900.
12
NOTE 7 - STOCKHOLDERS' EQUITY
The components of stockholders' equity are as follows:
ADDITIONAL RETAINED ACCUMULATED OTHER TOTAL
COMMON PAID-IN EARNINGS COMPREHENSIVE LOSS STOCKHOLDERS'
STOCK CAPITAL EQUITY
------------- -------------- -------------- ------------------- -------------------
Balance at December 31, 2000 $373 $205,343 $360,232 $(12,685) $553,263
Options exercised for purchase of
762 shares of common stock,
including income tax benefit of
$3,485 8 10,435 10,443
Other equity activity 571 571
Comprehensive income (loss):
Net loss for the six months
ended June 30, 2001 (25,018) (25,018)
Unrealized loss on available-
for-sale securities (204) (204)
Foreign currency translation
adjustment (14,721) (14,721)
--------------------
Total comprehensive loss (39,943)
------------- -------------- -------------- -------------------- -------------------
Balance at June 30, 2001 $381 $216,349 $335,214 $(27,610) $524,334
============= ============== ============== ==================== ===================
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of related tax, are as
follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 2000 2001 2000
----------------- ---------------- --------------- -------------
Net income (loss) $(13,434) $4,669 $(25,018) $292,664
Unrealized loss on available-for-sale securities (227) (4,304) (204) (5,728)
Foreign currency translation adjustment (4,423) (2,578) (14,721) (6,066)
----------------- ---------------- --------------- -------------
Comprehensive income (loss) $(18,084) $(2,213) $(39,943) $280,870
================= ================ =============== =============
13
NOTE 9 - EARNINGS (LOSS) PER SHARE
The following table summarizes the computations of basic and diluted earnings
(loss) per common share:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
------------- ------------- --------------- -------------
Numerator used in basic and diluted
earnings (loss) per common share:
Income (loss) from continuing operations $ (13,434) $ 6,625 $(25,018) $ 10,034
Loss from discontinued operations, net of tax - (1,956) - (5,824)
Gain on disposal of discontinued operations,
net of tax - - - 288,454
------------- ------------- --------------- -------------
Net income (loss) $ (13,434) $ 4,669 $(25,018) $292,664
============= ============= =============== =============
Denominator:
Weighted average common shares outstanding 37,877 45,110 37,665 47,955
Net effect of dilutive stock options based on treasury
stock method using average market price - 645 - 707
Effect of convertible debentures - 70 - 35
------------- ------------- --------------- -------------
Weighted average common shares outstanding and
additional dilution from common stock equivalents 37,877 45,825 37,665 48,697
============= ============= =============== =============
Earnings (loss) per common share, basic:
Income (loss) from continuing operations $(0.35) $0.15 $(0.66) $0.21
Loss from discontinued operations, net of tax - (0.05) - (0.12)
Gain on disposal of discontinued operations,
net of tax - - - 6.01
------------- ------------- --------------- -------------
Net income (loss) $(0.35) $0.10 $(0.66) $6.10
============= ============= =============== =============
Earnings (loss) per common share, diluted:
Income (loss) from continuing operations $(0.35) $0.14 $(0.66) $0.21
Loss from discontinued operations, net of tax - (0.04) - (0.12)
Gain on disposal of discontinued operations,
net of tax - - - 5.92
------------- ------------- --------------- -------------
Net income (loss) $(0.35) $0.10 $(0.66) $6.01
============= ============= =============== =============
Stock options and the convertible debentures were not dilutive for the three
month and six month periods ended June 30, 2001 as the Company reported a net
loss from continuing operations.
NOTE 10 - 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 National Association of
Securities Dealers ("NASD"). The trial court has granted the Company's motion
for summary judgement and ACT, Inc. has filed its appeal of the decision to
the U.S. Court of Appeals for the Eighth Circuit. Management is unable to
predict the ultimate outcome of the appeal, but believes that the ultimate
resolution of the matter will not have a material effect on the Company's
consolidated financial position.
On November 18, 1998, James Jinsoo and Christine Choi filed suit against the
Company seeking damages and recission under the Development Agreement they had
entered into for Korea in 1995 and which had been terminated by the Company due
to their default under the Development Agreement. The dispute was submitted to
arbitration pursuant to the terms of the Agreement. On July 10, 2001 the
arbitration panel found in favor of the Company on all substantive issues raised
by the Chois. The only amount the arbitrators awarded to the Chois was $108,
which had been paid in fees and expenses for the arbitration.
14
NOTE 10 - CONTINGENCIES (CONTINUED)
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.
NOTE 11 - BUSINESS SEGMENT INFORMATION
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------
2001 2000 2001 2000
----------------- ------------------ --------------- --------------
Operating revenues:
Sylvan Learning Centers $ 30,918 $26,084 $ 58,760 $ 48,743
Sylvan Education Solutions 34,229 30,108 60,999 56,053
Sylvan English Language Instruction 12,492 12,129 25,508 24,564
Sylvan International Universities 52,756 13,905 105,574 28,406
Sylvan Ventures - - - -
----------------- ------------------ --------------- --------------
$130,395 $82,226 $250,841 $157,766
================= ================== =============== ==============
Segment profit (loss):
Sylvan Learning Centers $ 8,967 $ 6,429 $ 14,657 $11,431
Sylvan Education Solutions 7,748 5,913 9,422 7,780
Sylvan English Language Instruction 373 385 1,061 1,942
Sylvan International Universities 6,973 104 11,292 2,789
Sylvan Ventures (22,716) (4,036) (48,479) (5,698)
----------------- ------------------ --------------- --------------
$ 1,345 $ 8,795 $(12,047) $ 18,244
================= ================== ================ ==============
JUNE 30, DECEMBER 31,
Segment assets: 2001 2000
------------------ -----------------
Sylvan Learning Centers $ 91,746 $ 84,895
Sylvan Education Solutions 111,937 120,756
Sylvan English Language Instruction 127,460 135,857
Sylvan International Universities 246,506 239,166
Sylvan Ventures 84,259 82,006
------------------ -----------------
$661,908 $662,680
================== =================
Segment profit (loss) is calculated as net operating profit (loss) for operating
segments. Segment profit for Sylvan Ventures is calculated as the sum of the
operating costs, net investment gain (loss) and equity in net loss of
affiliates. There are no significant inter-company sales or transfers. The
following table reconciles the reported information on segment profit (loss) to
income (loss) from continuing operations before income taxes reported in the
consolidated statements of operations:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- ---------------
Total profit (loss) for reportable segments $ 1,345 $ 8,795 $(12,047) $18,244
Corporate general and administrative expense (5,901) (4,566) (11,887) (9,367)
Other income (expense) and minority interest, net (15,860) 5,476 (15,016) 5,030
--------------- -------------- -------------- ---------------
Income (loss) from continuing operations before
income taxes $(20,416) $ 9,705 $(38,950) $13,907
=============== ============== ============== ===============
15
NOTE 11 - BUSINESS SEGMENT INFORMATION (CONTINUED)
In July 2001, the Company's management announced the creation of an Online
Higher Education business unit focused on broadening the Company's presence and
reach in the sector of post-secondary and adult continuing education delivered
through distance learning. Concurrent with the creation of this new business
unit, the Company intends to reorganize its business segments. The new Online
Higher Education business unit will encompass Canter and Associates, Sylvan
Teacher Institute and the Company's related business interests in the
post-secondary distance learning marketplace. The Company anticipates that the
reorganization of its segments will be substantially complete in the third
quarter of 2001, at which time all segment information will be restated to
conform to the new presentation.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Sylvan Learning Systems, Inc. ("the Company" or "Sylvan"), generates revenues
from four business segments: Sylvan Learning Centers, which earns primarily
franchise royalties, franchise sales fees and Company-owned Learning Center
revenues; Sylvan Education Solutions, which earns revenues from providing
supplemental remedial education services to public and non-public schools as
well as providing teacher training services; Sylvan English Language
Instruction, which earns primarily franchise royalties, company-owned center
revenue and franchise sales fees; and Sylvan International Universities, which
earns tuition and dormitory fees paid by the students of Universidad Europea de
Madrid CEES ("UEM"), Swiss Hotel Association Hotel Management School Les Roches
("Les Roches"), Universidad del Valle de Mexico ("UVM") and Universidad de Las
Americas ("UDLA"). A fifth segment, Sylvan Ventures, invests in and develops
companies to bring technology solutions to the education and training
marketplace. Sylvan Ventures has not generated revenues since its inception in
2000, but costs have been incurred to oversee and develop the investments.
The following table sets forth the percentage relationships of operating
revenues and direct costs for each business segment, as well as certain income
statement line items expressed as a percentage of total revenues for the periods
indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2001 2000 2001 2000
--------------- --------------- ----------------- ---------------
Revenues:
Sylvan Learning Centers 24% 32% 23% 31%
Sylvan Education Solutions 26% 36% 24% 35%
Sylvan English Language Instruction 10% 15% 10% 16%
Sylvan International Universities 40% 17% 43% 18%
--------------- --------------- ----------------- ---------------
Total revenues 100% 100% 100% 100%
Direct costs:
Sylvan Learning Centers 17% 24% 18% 24%
Sylvan Education Solutions 20% 29% 20% 31%
Sylvan English Language Instruction 9% 14% 10% 14%
Sylvan International Universities 35% 17% 37% 16%
--------------- --------------- ----------------- ---------------
Total direct costs 81% 84% 85% 85%
General and administrative expenses 5% 6% 5% 6%
Sylvan Ventures operating costs 5% 4% 5% 3%
--------------- --------------- ----------------- ---------------
Operating income 9% 6% 5% 6%
Non-operating (expense) income (including
equity in net loss of Ventures affiliates) (24%) 6% (21%) 2%
--------------- --------------- ----------------- ---------------
Income (loss) from continuing operations (15%) 12% (16%) 8%
Income tax benefit (expense) 5% (4%) 6% (2%)
--------------- --------------- ----------------- ---------------
Income (loss) from continuing operations (10%) 8% (10%) 6%
================ =============== ================== ===============
RESULTS OF OPERATIONS
Sylvan is a leading international provider of educational services to families
and schools. The Company provides lifelong educational services through five
separate business segments. The Sylvan Learning Centers segment designs and
delivers individualized tutorial programs to school age children through
franchised and Company-owned Learning Centers. This segment also includes the
operations of Schulerhilfe, a major provider of tutoring services in Germany.
The Sylvan Education Solutions segment principally provides educational programs
to students of public and non-public school districts through
17
contracts funded by Title 1 and state-based programs. This segment also provides
professional development and graduate degree programs to teachers through the
Canter and Associates. The Sylvan English Language Instruction segment consists
of the operations of Wall Street Institute, Kft., ("WSI"), a European-based
franchiser and operator of learning centers that teach the English language in a
post-secondary market. Sylvan International Universities segment owns or
maintains controlling interests in four private, for-profit universities located
in Spain, Switzerland, Mexico and Chile. The Company's newest segment, Sylvan
Ventures, invests in and develops companies that are creating emerging
technology solutions for the education marketplace.
Consistent with the stated goal of focusing resources and management's efforts
on the core business of educational services, and in order to fund expansion of
technology applications in educational and training services, the Company
consummated the sale of Prometric, a computer-based testing business, and Aspect
Language Schools, B.V. ("Aspect"), an English Language immersion business in
2000. Unless specifically noted, all discussion of financial results excludes
the results of Prometric and Aspect except as disclosed as discontinued
operations.
In July 2001, the Company's management announced the creation of an Online
Higher Education business unit focused on broadening the Company's presence and
reach in the sector of post-secondary and adult continuing education delivered
through distance learning. Concurrent with the creation of this new business
unit, the Company intends to reorganize its business segments. The new Online
Higher Education business unit will encompass Canter and Associates, Sylvan
Teacher Institute and the Company's related business interests in the
post-secondary distance learning marketplace. The Company anticipates that the
reorganization of its segments will be substantially complete in the third
quarter of 2001, at which time all segment information will be restated to
conform to the new presentation.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2001 TO RESULTS FOR
THE THREE MONTHS ENDED JUNE 30, 2000.
REVENUES. Total revenues from continuing operations increased by $48.2 million,
or 59%, to $130 million for the three months ended June 30, 2001 (the "2001
fiscal quarter") from $82.2 million for the three months ended June 30, 2000
(the "2000 fiscal quarter"). Included in the total revenues from continuing
operations for the 2001 fiscal quarter were $37.6 million of revenues from Les
Roches, UVM and UDLA, which were acquired in the third and fourth quarters of
2000. Total revenues from continuing operations increased 13%, excluding the
increase due to the Les Roches, UVM and UDLA acquisitions.
SYLVAN LEARNING CENTERS revenue increased by $4.8 million, or 19%, to
$30.9 million for the 2001 fiscal quarter compared to the 2000 fiscal quarter.
Franchise royalties increased by $0.9 million, or 16%, in 2001 as a result of a
net increase of 36 new centers opened after June 30, 2000, and a 10% increase in
same center revenue. Revenues from Company-owned learning centers increased $2.2
million, or 17%, to $15.0 million during the 2001 fiscal quarter. Same center
revenues increased 9%, or $1.2 million, with the remaining revenue increase of
$1.0 million generated from five Company-owned centers acquired from franchise
owners and a net of four new centers opened during the past year. In May of
2000, the Company acquired Ivy West, an SAT preparation company based in
California. The acquisition of Ivy West resulted in increased revenue of $1.5
million for the 2001 fiscal quarter. International revenues, primarily
Schulerhilfe, increased by $0.2 million, or 4% in the 2001 fiscal quarter
compared to the 2000 fiscal quarter. Operating revenue for Learning Centers
represents 24% of total revenues from continuing operations of the Company for
the 2001 fiscal quarter.
SYLVAN EDUCATION SOLUTIONS revenue increased by $4.1 million, or 14% to
$34.2 million for the 2001 fiscal quarter compared to the 2000 fiscal quarter.
Sylvan at School revenue increased by $2.0 million or 11% to $20.9 million in
the 2001 fiscal quarter compared to the 2000 fiscal quarter due to increased
school contracts and growth in the Career Starters business. Canter
teacher-training revenue increased by $2.1
18
million or 19% to $13.3 million in the 2001 fiscal quarter compared to the 2000
fiscal quarter. The Canter revenue increase is due to greater product demand,
particularly the distance learning masters program. Operating revenue for Sylvan
Education Solutions represents 26% of total revenues from continuing operations
of the Company for the 2001 fiscal quarter.
SYLVAN ENGLISH LANGUAGE INSTRUCTION revenue increased $0.4 million to
$12.5 million in the 2001 fiscal quarter from $12.1 million in the 2000 fiscal
quarter. The revenue increase comes almost entirely from tuition revenues in
existing Company-owned centers and from the acquisition of three centers in
Argentina. Operating revenue for Sylvan English Language Instruction represents
10% of total revenues from continuing operations of the Company for the 2001
fiscal quarter.
SYLVAN INTERNATIONAL UNIVERSITIES revenue for the 2001 fiscal quarter
increased $38.9 million, or 279%, to $52.8 million, compared to the 2000 fiscal
quarter. International Universities revenue increased $37.6 million due to the
acquisitions of controlling interests of Les Roches, UVM and UDLA, which
occurred in the third and fourth quarters of 2000 and are, therefore, not
included in revenue for the 2000 fiscal quarter. Revenue growth at UEM was $1.2
million, or 9%, to $15.1 million in the 2001 fiscal quarter as a result of
increases in enrollment, increased tuition and the expansion of programs
offered. Operating revenue for Sylvan International Universities represents 40%
of total revenues from continuing operations of the Company for the 2001 fiscal
quarter.
DIRECT COSTS. Total direct costs of revenues excluding Sylvan Ventures
increased $36.9 million, or 53%, to $106.3 million for the 2001 fiscal
quarter from $69.4 million for the 2000 fiscal quarter. Included in direct
costs in the 2001 fiscal quarter were $31.7 million of costs of Les Roches,
UVM and UDLA, which were acquired in the third and fourth quarters of 2000.
Total direct costs increased $5.2 million, or 8%, excluding the costs related
to Les Roches, UVM and UDLA. Direct costs as a percentage of total revenues
decreased to 81% in the 2001 fiscal quarter from 84% in the 2000 fiscal
quarter. This decrease in direct costs as a percentage of revenues is
primarily due to margin improvements in the Learning Centers, Education
Solutions and UEM businesses. Direct costs in these divisions were
effectively controlled to produce margin improvement in this period of strong
revenue increases.
SYLVAN LEARNING CENTERS expenses increased $2.3 million to $22.0
million, or 71% of Learning Centers revenue for the 2001 fiscal quarter,
compared to $19.7 million, or 75% of Learning Centers revenue for the 2000
fiscal quarter. Approximately $1.9 million of the 2001 fiscal quarter increase
relates to expenses incurred in Company-owned learning centers due to the
acquisition of franchised learning centers and costs associated with higher
revenues at existing company-owned centers. The acquisition of Ivy West resulted
in $1.1 million of increased cost during the 2001 fiscal quarter. The remaining
$0.7 million cost decrease for the 2001 fiscal quarter relates to lower
franchise support costs compared to the 2000 fiscal quarter. The decrease in
expenses as a percentage of revenues for the 2001 fiscal quarter is primarily
due to the increase to franchise royalties due to system-wide expansion
combined with effective management of franchise related expenses.
SYLVAN EDUCATION SOLUTIONS expenses increased by $2.3 million to $26.5
million, or 77% of Sylvan Education Solutions revenue for the 2001 fiscal
quarter, compared to $24.2 million or 80% of Sylvan Education Solutions revenue
for the 2000 fiscal quarter. The decrease in expenses as a percentage of revenue
for 2001 fiscal quarter is primarily due to the increase in higher margin
products sold during the 2001 fiscal quarter, as compared to the 2000 fiscal
quarter. These higher margin products include Canter's distance learning masters
programs and Career Starters' business expansion.
19
SYLVAN ENGLISH LANGUAGE INSTRUCTION expenses increased $0.3 million to
$12.1 million or 97% of WSI revenues for the 2001 fiscal quarter compared to
$11.8 million or 97% of Sylvan English Language Instruction revenues for the
2000 fiscal quarter. Expenses in the 2001 fiscal quarter have been maintained at
2000 fiscal quarter levels despite increasing overhead costs related to the
internal expansion of the international network of centers through controlling
expenses in the operating centers.
SYLVAN INTERNATIONAL UNIVERSITIES expenses increased by $32.0 million
to $45.8 million, or 87% of Sylvan International Universities revenue for the
2001 fiscal quarter, compared to $13.8 million or 99% of Sylvan International
Universities revenue for the 2000 fiscal quarter. This increase in expenses is
primarily due to the acquisition of controlling interests of Les Roches, UVM and
UDLA in the third and fourth quarters of 2000. The decrease in expenses as a
percentage of revenue for the 2001 fiscal quarter is primarily due to improved
operating margin performance at UEM, high margins at Les Roches and UDLA, strong
operating performance at UVM and management's efforts to control divisional
overhead costs while expanding the university network.
OTHER EXPENSES. General and administrative expenses increased by $1.3 million in
the 2001 fiscal quarter compared to the 2000 fiscal quarter. The increase was
primarily due to a decrease in the allocation to third parties of certain
administrative costs in 2001 and the additional costs of overseeing the
international expansion of the Company. General and administrative expenses
decreased to 5% of total revenues in the 2001 fiscal quarter, compared to 6% of
revenues in the 2000 fiscal quarter due to cost controls and the strong revenue
expansion in the 2001 fiscal quarter.
Sylvan Ventures operating costs increased by $3.7 million to
$6.9 million for the 2001 fiscal quarter, compared to $3.2 million for the 2000
fiscal quarter. Operating costs of eSylvan, a subsidiary of Sylvan Ventures,
increased $1.2 million to $3.6 million for the 2001 fiscal quarter compared
to the 2000 fiscal quarter. This increase is primarily due to increased
expenses needed to advance the development of eSylvan's Internet-based
tutoring service. Sylvan Ventures increased management expenses by $2.5
million to $3.3 million for the 2001 fiscal quarter primarily due to
increased costs associated with the research, evaluation and management of an
increased number of companies in the Sylvan Ventures portfolio in the 2001
fiscal quarter compared to the 2000 fiscal quarter.
Sylvan Ventures equity in net losses of affiliates increased by $14.8
million to $15.6 million for the 2001 fiscal quarter, compared to $0.8 million
for the 2000 fiscal quarter primarily due to the increased amount of investments
in the Sylvan Ventures' portfolio in the 2001 fiscal quarter. These losses
relate to Sylvan Ventures' share of operating losses generated by the early
stage enterprises in the investment portfolio and the amortization of the
difference between the initial carrying amount of equity method investments and
the underlying equity in net assets of these investments at the time of
purchase. Minority interests' share of Sylvan Ventures losses totaled $1.8
million for the 2001 fiscal quarter.
The loss on investment was prompted by the Caliber Learning Network,
Inc. ("Caliber") filing for Chapter 11 bankruptcy protection on June 15, 2001.
The Sylvan Ventures investment in Caliber of $2.9 million was reduced to $0 upon
recording its allocable share of losses related to Caliber prior to the
bankruptcy proceedings, which is included in "Equity in net loss of affiliates".
Additionally, the Company recorded a loss on investment of $14.2 million in the
2001 fiscal quarter. This charge consists of the reserve for notes receivable
and advances to Caliber of $7.5 million as well as the accrual of a $6.7 million
estimated liability relating to the Company's guarantee of certain
non-cancelable Caliber lease obligations and other Caliber related liabilities
incurred by the Company. Due to the uncertainties surrounding the bankruptcy
proceedings and the ultimate settlement of Caliber's lease and other
liabilities, it is reasonably possible that the Company's loss estimate may
change prior to finalization.
Other non-operating items decreased by $8.9 million for the 2001 fiscal
quarter compared to the 2000 fiscal quarter. The decrease is primarily
attributable to a decrease in interest income of $5.1 million, an increase in
interest expense of $1.7 million and an increase in minority interest expense of
$2.3 million. The increased minority interest expense results from the strong
operating performance of the Universities in which Sylvan International
Universities maintains a controlling interest.
20
The Company's effective tax rate from continuing operations was 34% for
the 2001 fiscal quarter. This reported effective income tax rate from continuing
operations differs from the U.S. federal statutory tax rate due to the impact of
state income taxes, minority interests, foreign income taxed at lower rates and
the inability to utilize tax benefits from certain investment losses of Sylvan
Ventures. On a full year basis, the Company estimates that its effective income
tax rate for the Company (excluding Sylvan Ventures) and Sylvan Ventures
continuing operations for the year ended December 31, 2001 will be 34% and 35%
respectively.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from continuing operations
decreased by $20.1 million, to a loss of $13.4 million for the 2001 fiscal
quarter. The decrease is primarily the result of the loss on the investment in
and advances to Caliber of $14.2 million and additional Sylvan Ventures related
costs and investment losses, which increased $18.5 million in the 2001 fiscal
quarter compared to the 2000 fiscal quarter, which offset favorable operating
income increases of $9.9 million.
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2001 TO RESULTS FOR THE
SIX MONTHS ENDED JUNE 30, 2000
REVENUES. Total revenues from continuing operations increased by $93.1 million,
or 59%, to $250.8 million for the six months ended June 30, 2001 (the "2001
fiscal six month period") from $157.8 million for the six months ended June 30,
2000 (the "2000 fiscal six month period"). Included in the total revenues from
continuing operations for the 2001 fiscal six month period were $74.4 million of
revenues from Les Roches, UVM and UDLA, which were acquired in the third and
fourth quarters of 2000. Total revenues from continuing operations increased
12%, excluding the increase due to the Les Roches, UVM and UDLA acquisitions.
SYLVAN LEARNING CENTERS revenue increased by $10.0 million, or 21%, to
$58.8 million for the 2001 fiscal six month period compared to the 2000 fiscal
six month period. Franchise royalties increased by $1.8 million, or 17%, during
the 2001 fiscal six month period as a result of a net increase of 36 new centers
opened after June 30, 2000, and a 10% increase in same center revenue. Revenues
from Company-owned learning centers increased $3.9 million, or 16%, to $27.8
million during the 2001 fiscal six month period. Same center revenues increased
8%, or $2.0 million, with the remaining revenue increase of $1.9 million
generated from five Company-owned centers acquired from franchise owners and a
net of four new centers opened during the year. The acquisition of Ivy West
resulted in increased revenue of $3.5 million for the 2001 fiscal six month
period. International revenues, primarily Schulerhilfe, increased by $0.3
million or 4% over the 2000 fiscal six month period. Operating revenue for
Learning Centers represents 23% of total revenues from continuing operations of
the Company for the 2001 fiscal six month period.
SYLVAN EDUCATION SOLUTIONS revenue increased by $4.9 million, or 9% to
$61.0 million for the 2001 fiscal six month period compared to the 2000 fiscal
six month period. Sylvan at School revenue increased $3.0 or 8% over the 2000
fiscal six month period due to new contracts and a continued high renewal rate
of existing contracts. Canter teacher-training revenue increased $1.9 million to
$18.4 million during the 2001 fiscal six month period compared to the 2000
fiscal six month period. Canter's revenue increase is due to greater demand for
its products, particularly the distance learning masters program. Operating
revenue for Sylvan Education Solutions represents 24% of total revenues from
continuing operations of the Company for the 2001 fiscal six month period.
SYLVAN ENGLISH LANGUAGE INSTRUCTION revenue increased $0.9 million to
$25.5 million for the 2001 fiscal six month period from $24.6 million in the
2000 fiscal six month period. The revenue increase comes almost entirely from
increased tuition revenues in existing Company-owned centers and from the
acquisition of three centers in Argentina. Operating revenue for Sylvan English
Language Instruction represents 10% of total revenues from continuing operations
of the Company for the 2001 fiscal six month period.
21
SYLVAN INTERNATIONAL UNIVERSITIES revenue for the 2001 fiscal six month
period increased $77.2 million, or 272 %, to $105.6 million, compared to the
2000 fiscal six month period. International Universities revenue increased $74.4
million due to the acquisitions of controlling interests of Les Roches, UVM and
UDLA, which occurred in the third and fourth quarters of 2000 and are,
therefore, not included in revenue for the 2000 fiscal six month period. Revenue
growth at UEM of $2.8 million, or 10% to $31.2 million for the 2001 six month
period resulted from increased enrollment, new program offerings and tuition
increases. Operating revenue for Sylvan International Universities represents
43% of total revenues from continuing operations of the Company for the 2001
fiscal six month period.
DIRECT COSTS. Total direct costs of revenues excluding Sylvan Ventures increased
$80.6 million, or 60%, to $214.4 million for the 2001 fiscal six month period
from $133.8 million for the 2000 fiscal six month period. Included in direct
costs in the 2001 fiscal six month period were $65.7 million of costs of Les
Roches, UVM and UDLA, which were acquired in the third and fourth quarters of
2000. Total direct costs increased $14.9 million, or 11%, excluding the costs
related to Les Roches, UVM and UDLA. Direct costs as a percentage of total
revenues were 85% in the 2001 fiscal six month period consistent with the 2000
fiscal six month period.
SYLVAN LEARNING CENTERS expenses increased $6.8 million to $44.1
million, or 75% of Learning Centers revenue for the 2001 fiscal six month
period, compared to $37.3 million, or 77% of Learning Centers revenue for the
2000 fiscal six month period. Approximately $3.6 million of the increase for the
2001 fiscal six month period relates to expenses incurred in Company-owned
learning centers due to the acquisition of franchised learning centers and costs
associated with higher revenues at existing Company-owned centers. The
acquisition of Ivy West resulted in $2.8 million of increased cost during 2001
fiscal six month period. The remaining $0.4 million cost relates to increased
franchise support costs compared to the 2000 fiscal six month period. The
decrease in expenses as a percentage of revenue for the 2001 fiscal six month
period is primarily due to increased franchise royalties due to system-wide
expansion combined with effective management of franchise related expenses.
SYLVAN EDUCATION SOLUTIONS expenses increased by $3.3 million to $51.6
million, or 85% of Sylvan Education Solutions revenue for the 2001 fiscal six
month period, compared to $48.3 million or 86% of Sylvan Education Solutions
revenue for the 2000 fiscal six month period. The decrease in expenses as a
percentage of revenue for the 2001 fiscal six month period is primarily due to
the increase in higher margin products sold during the 2001 fiscal six month
period, as compared to the 2000 fiscal six month period. These higher margin
products include Canter's distance learning masters program and Career
Starters' business expansion.
SYLVAN ENGLISH LANGUAGE INSTRUCTION expenses increased $1.9 million to
$24.4 million or 96% of WSI revenues for the 2001 fiscal six month period
compared to $22.6 million or 92% of WSI revenues for the 2000 fiscal six month
period. The increase in expenses as a percentage of revenue is primarily the
result of increasing overhead costs related to the internal expansion of the
international network of centers and the start up costs associated with the
opening of new centers during the 2001 fiscal six month period.
SYLVAN INTERNATIONAL UNIVERSITIES expenses increased by $68.7 million
to $94.3 million, or 89% of Sylvan International Universities revenue for the
2001 fiscal six month period, compared to $25.6 million or 90% of Sylvan
International Universities revenue for the 2000 fiscal six month period. This
increase is primarily due to the acquisition of controlling interests of Les
Roches, UVM and UDLA in the third and fourth quarters of 2000. The decrease in
expenses as a percentage of revenue for the 2001 six month period is primarily
due to improved UEM margins and high margins at Les Roches.
OTHER EXPENSES. General and administrative expenses increased by $2.5 million in
the 2001 fiscal six month period compared to the 2000 fiscal six month period.
The increase was primarily due to a decrease in the allocation to third parties
of certain administrative costs in 2001 and the additional costs of directing
the international expansion of the Company. General and administrative expenses
decreased to 5% of total
22
revenues in the 2001 fiscal six month period compared to 6% of revenues in the
2000 fiscal six month period due to cost controls and the strong revenue
expansion in the 2001 fiscal six month period.
Sylvan Ventures operating costs increased by $7.9 million to
$12.5 million for the 2001 fiscal six month period compared to $4.6 million
for the 2000 fiscal six month period. Operating costs of eSylvan, a subsidiary
of Sylvan Ventures, increased $3.8 million to $7.2 million for the 2001
fiscal six month period. This increase is primarily due to increased
expenses needed to advance the development of eSylvan's Internet-based
tutoring service. Sylvan Ventures increased management expenses of
$4.1 million to $5.3 million for the 2001 fiscal six month period compared to
the 2000 fiscal six month period primarily due to increased costs associated
with the research, evaluation and management of an increased number of companies
in the Sylvan Ventures portfolio in the 2001 fiscal six month period compared
to the 2000 fiscal six month period.
Sylvan Ventures equity in net losses of affiliates increased by $34.3
million to $35.4 million for the 2001 fiscal six month period compared to $1.1
million for the 2000 fiscal six month period primarily due to the increased
amount of investments in the Sylvan Ventures' portfolio in the 2001 fiscal six
month period. These losses relate to Sylvan Ventures' share of operating losses
generated by the early stage enterprises in the investment portfolio and the
amortization of the difference between the initial carrying amount of equity
method investments and the underlying equity in net assets of these investments
at the time of purchase. Sylvan Ventures investment losses of $0.6 million
consisted of impairment charges related to portfolio investments. Minority
interests' share of Sylvan Ventures losses totaled $3.1 million for the 2001
fiscal six month period.
The loss on investment was prompted by the Caliber Learning Network,
Inc. ("Caliber") filing for Chapter 11 bankruptcy protection on June 15, 2001.
The Sylvan Ventures investment in Caliber of $2.9 million was reduced to $0 upon
recording its allocable share of losses related to Caliber prior to the
bankruptcy proceedings, which is included in "Equity in net loss of affiliates".
Additionally, the Company recorded a loss on investment of $14.2 million in the
2001 fiscal six month period. This charge consists of the reserve for notes
receivable and advances to Caliber of $7.5 million as well as the accrual of a
$6.7 million estimated liability relating to the Company's guarantee of certain
non-cancelable Caliber lease obligations and other Caliber related liabilities
incurred by the Company. Due to the uncertainties surrounding the bankruptcy
proceedings and the ultimate settlement of Caliber's lease and other
liabilities, it is reasonably possible that the Company's loss estimate may
change prior to finalization.
Other non-operating items decreased by $8.9 million for the 2001 fiscal
six month period compared to the 2000 fiscal six month period. The decrease is
largely attributable to a decrease in interest income of $4.6 million, an
increase in interest expense of $2.0 million and an increase in minority
interest expense of $3.0 million. The increased minority interest expense is
generated from strong operating performance of the Universities which SIU
maintains a controlling interest.
The Company's effective tax rate from continuing operations was 36% for
the 2001 fiscal six month period. This reported effective income tax rate from
continuing operations differs from the U.S. federal statutory tax rate due to
the impact of state income taxes, minority interests, foreign income taxed at
lower rates and the inability to utilize tax benefits from certain investment
losses of Sylvan Ventures. On a full year basis, the Company estimates that its
effective income tax rate for the Company (excluding Sylvan Ventures) and Sylvan
Ventures continuing operations for the year ended December 31, 2001 will be 34%
and 35% respectively.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from continuing operations
decreased by $35.1 million, to a loss of $25.0 million for the 2001 fiscal six
month period. The decrease is primarily the result of the loss on the investment
in and advances to Caliber of $14.2 million and additional Sylvan Ventures'
related costs and investment losses, which increased $42.0 million in the 2001
fiscal six month period compared to the 2000 fiscal six month period, which
offset operating income increases of $10.0 million.
23
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations was $68.0 million for the 2001 fiscal six month
period, a decrease of $59.5 million as compared to the 2000 fiscal six month
period. The reported net loss of $25.0 million was offset by significant
non-cash items such as depreciation and amortization charges ($18.5 million) and
equity in net loss of affiliates, primarily of Sylvan Ventures ($35.6 million).
Working capital related decreases in liquidity of $113.6 million consisted
primarily of income tax payments resulting from the sale of Prometric in the
first quarter of 2000, which were not payable until 2001.
Cash provided by investing activities was $15.9 million for the 2001
fiscal six month period compared to cash provided by investing activities of
$573.7 million for the 2000 fiscal six month. The 2001 investment activity was
primarily the result of net proceeds from the sale of available-for-sale
securities ($111.7 million) partially offset by increases in investments in and
advances to affiliates primarily related to Sylvan Ventures ($36.6 million),
purchases of property and equipment ($28.3 million), the payment of contingent
consideration for prior acquisitions ($25.1 million) and net cash paid for
acquired businesses ($3.0 million). The significant investing proceeds received
in the 2000 fiscal six month period related primarily to the sale of the
Prometric division ($710.3 million). At June 30, 2001, the Company has accrued
obligations payable in cash of $16.5 million related to contingent consideration
for certain prior acquisitions. The amounts are expected to be paid later in
2001.
Cash provided by financing activities was $29.7 million in the 2001
fiscal six month period compared to cash used in financing activities of $160.5
million in the 2000 fiscal six month period. The 2001 financing activity related
primarily to cash received from the minority interest members of Sylvan Ventures
($21.9 million) and proceeds from the exercise of options ($7.0 million). Cash
used by financing activities of $160.5 million in the 2000 fiscal six month
period related primarily to the net repayment of the Company's borrowings ($30.8
million) and the repurchase of shares of its common stock ($140.0 million),
offset by cash received from the minority interest partners in Sylvan Ventures
($9.3 million).
The Company anticipates that cash flow from operations, available cash
and existing credit facilities, will be sufficient to meet its operating
requirements, including the expansion of its existing business, funding
International University acquisitions, payment of contingent consideration and
funding of Sylvan Ventures investments and operating costs. Sylvan Ventures has
outstanding commitments to provide certain additional funding totaling $43.0
million to certain portfolio companies. The Company continues to examine
opportunities in the educational services industry for potential synergistic
acquisitions.
EURO CONVERSION
On January 1, 1999, certain countries of the European Union established
fixed conversion rates between their existing currencies and one common
currency, the Euro. The Euro is now traded on currency exchanges and may be used
in business transactions. The Company encountered no difficulties related to the
initial adoption of the Euro in 1999. Beginning in January 2002, new
Euro-denominated currencies will be issued and the existing currencies will be
withdrawn from circulation. The Company is currently evaluating the systems and
business issues raised by the euro conversion. These issues include the need to
adapt computer and other business systems and equipment and the competitive
impact of cross-border transparency. At present, management does not believe the
Euro conversion will have a material impact on the Company's financial condition
or results of operations.
24
CONTINGENT MATTERS
In connection with the Company's acquisition of Les Roches, variable
amounts of contingent consideration are payable to the seller if specified
levels of earnings are achieved in 2001 and 2002. The Company will record the
contingent consideration when the contingencies are resolved and the additional
consideration is payable.
In connection with the Company's acquisition of UDLA, variable amounts
of contingent consideration are payable to the seller in 2006 and 2007 if
specified levels of earnings are achieved in 2004, 2005 and 2006. The Company
will record the contingent consideration when the contingencies are resolved and
the additional consideration is payable.
The Company has entered into agreements with certain franchisees of
Sylvan Learning Centers and Wall Street Institute that allow the franchisees to
require that the Company repurchase the centers at a predetermined multiple of
operating results if specified operating results thresholds are achieved. When
the Company can assess the likelihood of this repurchase right being exercised
and the amount of the related commitment to purchase the center, such obligation
will be disclosed.
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 effect in the foreseeable future.
SEASONALITY IN RESULTS OF OPERATIONS
The Company experiences seasonality in results of operations primarily
as a result of changes in the level of student enrollments and the timing of
semester cycles, particularly in the International Universities segment. Timing
of semester breaks at the International Universities results in the most
favorable operating performance being achieved in the second and fourth quarters
of the year. Other factors that impact the seasonality of operating results
include: timing of contracts funded under Title I, timing of summer vacations,
timing of franchise license fees and the timing of Sylvan Ventures' development
costs. Revenues and profits in any period will not necessarily be indicative of
results in subsequent periods.
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS, INCLUDING BUT NOT
LIMITED TO, STATEMENTS REGARDING THE COMPANY'S CONTINGENT PAYMENT OBLIGATIONS
RELATING TO 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. POLITICAL, ECONOMIC, CURRENCY, TAX, REGULATORY, TECHNOLOGICAL,
COMPETITIVE AND OTHER FACTORS DESCRIBED IN THE COMPANY'S REPORTS FILED FROM TIME
TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION COULD CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS.
THE COMPANY CAUTIONS READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD
LOOKING STATEMENTS, WHICH STATEMENTS ARE MADE PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995 AND, AS SUCH, SPEAK ONLY AS OF THE DATE MADE.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or
to future cash flows that may result from the changes in the price of financial
instruments. The Company is exposed to financial market risks, including changes
in foreign currency exchange rates, interest rates and investment values. The
Company occasionally uses derivative financial instruments to protect against
adverse currency movements related to significant foreign acquisitions. Exposure
to market risks related to operating activities is managed through the Company's
regular operating and financing activities.
FOREIGN CURRENCY RISK
The Company derives approximately 55% of its revenues from continuing
operations from customers outside the United States. This business is transacted
through a network of international subsidiaries, generally in the local currency
that is considered the functional currency of that foreign subsidiary. Expenses
are also incurred in the foreign currencies to match revenues earned and
minimize the Company's exchange rate exposure to operating margins. A
hypothetical 10% adverse change in average annual foreign currency exchange
rates would increase net loss and decrease cash flows for the fiscal six month
period 2001 by $0.9 million. The Company generally views its investment in the
majority of its foreign subsidiaries as long-term. The effects of a change in
foreign currency exchange rates on the Company's net investment in foreign
subsidiaries are reflected in other comprehensive income (loss). A 10%
depreciation in functional currencies relative to the U.S. dollar would result
in a decrease in consolidated stockholders' equity at June 30, 2001 of
approximately $26.1 million.
INTEREST RATE RISK
The Company holds its cash and cash equivalents in high quality
short-term fixed income securities. Consequently, the fair value of the
Company's cash and cash equivalents would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due to the
short-term nature of the Company's portfolio. The Company's long-term revolving
credit facility bears interest at variable rates, and the fair value of this
instrument is not significantly affected by changes in market interest rates.
The Company's convertible debentures bear interest at 5%, which presently
approximates the market rate and therefore the fair value approximates the
recorded value of this liability. A 100 basis point decrease in interest rates
would reduce net interest income for the 2001 fiscal six month period by $0.7
million.
INVESTMENT RISK
The Company's investment portfolio contains debt securities that mature
within one year. A hypothetical 10% adverse change in the fair value of the debt
securities would not materially adversely effect earnings or cash flows because
of the Company's ability to hold the debt securities until maturity.
In addition to the debt securities, the Company also has an investment
portfolio that consists of direct investment positions in education technology
companies through Sylvan Ventures as well as short-term investments in
available-for-sale debt and equity securities. The Company's investment
portfolio is exposed to risks arising from changes in these investment values.
The Company's investment portfolio includes a number of holdings of
non-publicly traded companies in the educational services industry. The Company
accounts for these investments using either the cost method (cost less
impairment, if any) or the equity method of accounting. Equity method
investments are specifically excluded from the scope of this disclosure.
Non-public investments where the Company owns less than a 20% interest are
subject to fluctuations in market value, but their current illiquidity reduces
the exposure to pure market risk while resulting in risk that the Company may
not be able to liquidate these investments in a timely manner.
26
The Company is exposed to equity price risks on equity securities
included in the portfolio of investments entered into for the promotion of
business and strategic objectives. These investments are generally small
capitalization stocks in the Internet segment of the educational services
industry. The Company typically does not attempt to reduce or eliminate its
market exposure on these securities. A 10% adverse change in equity prices would
not materially impact the fair value of the Company's marketable securities or
other comprehensive income (loss).
All the potential impacts noted above are based on sensitivity analysis
performed on the Company's financial position at June 30, 2001. Actual results
may differ materially.
27
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its 2000 annual meeting of stockholders on May 30,
2001.
(b) The following sets forth information regarding each matter voted upon
at the 2000 annual meeting. There were 37,788,077 shares of common
stock outstanding as of the record date for, and entitled to vote at,
the 2000 annual meeting.
Proposal No. 1. The stockholders approved election of both of the nominees to
the board of directors. The tabulation of votes on this proposal is as follows:
NOMINEE FOR WITHHELD
---------------------------- ------------------- -------------------
Douglas L. Becker 26,251,379 3,544,296
James H. McGuire 29,465,710 329,965
Richard R. Riley 29,447,125 348,550
Judith D. Moore 29,454,118 341,557
Proposal No. 2. The stockholders ratified the selection of Ernst & Young, LLP as
the Company's independent auditors. The tabulation of votes on this proposal is
as follows:
For Approval 29,536,238
Against Approval 249,494
Abstain 9,943
Total Shares Voted 29,795,675
28
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed one report on Form 8-K during the six month period ended
June 30, 2001. The 8-K dated April 4, 2001 related to Amendment to the
Rights Agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
Sylvan Learning Systems, Inc.
Date: August 10, 2001 /s/ SEAN CREAMER
-------------------------------------
Sean Creamer, Vice President
Corporate Finance
29