UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND
EXCHANGE ACT OF 1934 for the fiscal year ended DECEMBER 31, 2000.
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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
COMMON STOCK, PAR VALUE $.01 NASDAQ
PREFERRED STOCK PURCHASE RIGHTS NONE
Securities registered pursuant to the Section 12 (g) of the Act: NONE
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting Common Stock held by
non-affiliates of the registrant was approximately $691 million as of March 26,
2001.
The registrant had 37,739,597 shares of Common Stock outstanding as of
March 26, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in Sylvan Learning Systems, Inc.'s definitive Proxy
Statement for its 2001 Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A no later than
April 30, 2001, is incorporated by reference in Part III of this Form 10-K.
INDEX
PAGE NO.
PART I.
Item 1. Business.......................................................................1
Item 2. Properties.................................................................... 9
Item 3. Legal Proceedings.............................................................10
Item 4. Submission of Matters to a Vote of Security Holders...........................10
PART II.
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters.....................................11
Item 6. Selected Consolidated Financial Data..........................................11
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................14
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk...............................................................22
Item 8. Financial Statements and Supplementary Data...................................23
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.....................................23
PART III.
Items 10., 11., 12. and 13. are incorporated by reference from
Sylvan Learning Systems, Inc.'s definitive Proxy
Statement which will be filed with the Securities and
Exchange Commission, pursuant to Regulation 14A,
not later than April 30, 2001...............................................24
PART IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.....................................................25
SIGNATURES..............................................................................................27
PART I.
ITEM 1. BUSINESS
Sylvan Learning Systems, Inc. ("the Company" or "Sylvan") is a leading
international provider of educational services to families and schools. The
Company seeks to maintain its leadership position in the core K-12 educational
services market while dramatically expanding its post secondary offerings and
establishing a leadership role in the educational technology marketplace. The
Company plans to achieve this leadership position through focus on the following
business concentrations:
- K-12. Providing consumer and institutionally focused
education services for students ranging from kindergarten
through high school education levels. Services are provided
through Sylvan Learning Centers and Sylvan Education
Solutions. This business focuses on proven successful grade
level advancement of students through direct
student-instructor interaction.
- POST-SECONDARY. Providing educational services to students
beyond the high school education level through a network of
fully accredited international universities, center based
adult English language instruction and accredited teacher
training university courses and degree programs. Services are
tailored to address the fast growing international marketplace
for advanced education as well as the shortage of teaching
professionals in the United States. Services are provided
through the four universities that comprise Sylvan
International Universities as well as the Wall Street
Institute and Canter.
- EDUCATION TECHNOLOGY. Focusing on investment in companies
employing emerging technology solutions in the education
marketplace. Building on brand recognition and an
industry-leading position in education services, the Company
seeks to create shareholder value by capitalizing on an
opportunity to establish a leadership position in the
application of Internet and wireless technologies to the
marketplace through Sylvan Ventures.
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 Education Solutions segment principally provides educational programs to
students of public and non-public school districts through contracts funded by
Title 1 and state-based programs. This segment also provides professional
development and graduate degree programs to teachers through the Canter Group.
The Sylvan English Language Instruction segment consists of the operations of
Wall Street Institute, B.V., ("WSI"), a European-based franchiser and operator
of learning centers that teach the English language to professionals. Sylvan
International Universities segment has acquired controlling interests in four
private, for-profit universities since its inception in the second quarter of
1999. Through its universities in Spain, Mexico, Switzerland and Chile, Sylvan
International Universities now controls the largest global network of fully
accredited universities. The Company's newest segment, Sylvan Ventures, was
launched in the first quarter of 2000 to invest in and incubate companies
developing emerging technology solutions for the education marketplace.
Consistent with the stated goal of focusing management's efforts and
the Company's resources on the core business of consumer educational services
and in order to fund expansion of technology applications in educational and
training services, the Company consumated the sales of three business units
in fiscal 1999 and 2000. On December 31, 1999, The PACE Group ("PACE"), the
Company's corporate training business was sold in exchange for an equity
investment in Frontline Group, Inc., the owner of a corporate training
enterprise. On March 3, 2000, Prometric, the computer-based testing business,
was sold for approximately $775 million in cash. On October 6, 2000, Aspect
Language Schools, Inc. ("Aspect"), an English Language study/travel business,
was sold for approximately $19.8 million in cash. Unless specifically noted,
all discussion of financial results excludes the results of PACE, Prometric
and Aspect except as disclosed as discontinued operations.
Sylvan's services are delivered through an international network of
Company owned and franchised educational centers as well as universities. In
2000, Company revenues were approximately $316.7 million, composed of $98.9
million from the Sylvan Learning Centers segment, $105.2 million from the Sylvan
Education Solutions segment, $49.9 million from the Sylvan English Language
Instruction segment, and $62.6 million from the Sylvan International
Universities segment. System wide revenues, which include franchised Learning
Center revenues of $293.1 million and franchised WSI revenues of $123.5 million,
totaled $733.3 million in 2000. Note 17 of the 2000 audited financial statements
contain additional disclosures regarding the Company's segments and geographic
information.
1
SYLVAN LEARNING CENTERS
Sylvan provides high quality educational services with consistent,
quantifiable results. It has delivered its core educational service to more than
1.4 million students in grades K-12 over the past 20 years. The Company's Sylvan
Learning Centers segment provides supplemental, remedial, and enrichment
instruction primarily in reading, writing, mathematics, study skills, and test
preparation, featuring an extensive series of standardized diagnostic
assessments, individualized instruction, a student motivational system and
continued involvement from both parents and the child's regular school teacher.
Parents learn about Sylvan from the Company's media advertising, from a
referral from another parent, or from school personnel. The Learning Center's
Sylvan-trained educators use assessment results to diagnose students' skill gaps
and to design an individual learning program for each student. Sylvan Learning
Center's curriculum is consistent throughout North America. Instruction is
typically given three times per week for one hour per visit at U-shaped tables
designed to ensure that teachers work with three to four students at a time.
Instructional programs are research based and built upon the philosophy of
mastery learning. There are special incentives, such as tokens redeemable for
novelties and toys, to motivate the student to achieve the program's objectives,
build self-confidence, and to strengthen the student's enthusiasm for learning.
A student's progress is monitored and parent conferences are scheduled
after every 12 hours of a student's program. Throughout a student's course of
study, the Learning Center assesses the student's progress using the same
standardized diagnostic assessments. The results are shared with the parents in
personal conferences, during which the student's continuation in a Sylvan
program is discussed.
FRANCHISE OPERATIONS. As of December 31, 2000, there were a total of
765 Learning Centers in 49 states, 8 Canadian provinces, Spain, Hong Kong and
Guam operated by its franchisees. As of that date, there were 441 U.S.
franchisees operating Sylvan Learning Centers. During 2000, a net of 56
franchised Learning Centers were opened. Additionally, during 2000, the Company
acquired 1 franchisee-owned Learning Center.
The Company's typical franchise agreement (the "License Agreement")
grants a license to operate a Sylvan Learning Center and to use Sylvan's
trademarks within a specified territory. The Company currently offers a License
Agreement with an initial term of ten years, subject to unlimited additional
ten-year extensions at the franchisee's option on the same terms and conditions.
The initial license fee and royalty rates vary depending on upon the
demographics of the territory. Franchisees must obtain the Company's approval
for the location and design of the Learning Center and of all advertising, and
must operate the Learning Center in accordance with the Company's methods,
standards and specifications. The franchisee is required to purchase from Sylvan
certain diagnostic and instructional materials, student record forms, parental
information booklets and explanatory and promotional brochures developed by the
Company. Sylvan specifies requirements for other items necessary for operation
of a Learning Center, such as computers, instructional materials and furniture
(franchisees must submit monthly financial data to the Company).
The Company actively manages its franchise system. The Company requires
franchisees and their employees to attend initial training in Learning Center
operations and Sylvan's educational programs. The Company also offers
franchisees continuing training each year. The Company employs field operations
managers that act as "consultants" to provide assistance to franchisees in
technology implementation, business development, marketing, education and
operations. These employees also facilitate regular communications between
franchisees and the Company.
The Company believes there is significant potential for additional
franchised Learning Centers both domestically and internationally. A number of
territories with only one Learning Center could support one or more additional
Learning Centers based upon the number of school-age children in the market
area. The Company is actively encouraging existing franchisees in these
territories to open additional Learning Centers. In addition, management has
identified at least 206 territories in North America, primarily in smaller
markets, in which there are no Learning Centers. The Company is actively seeking
franchisees for a number of these territories. Forty-one new territories were
sold in 2000.
The Company has sold franchise rights for the operation of Learning
Centers in Hong Kong, the United Kingdom, France and Spain. In pricing
international franchise rights, the Company takes into account estimates of the
number of centers that could be opened in an area. A master franchisee operates
Sylvan Learning Centers in Spain and at December 31, 2000, had 103 centers in
operation.
2
COMPANY-OWNED LEARNING CENTERS. As of December 31, 2000, Sylvan owned
and operated 82 Learning Centers: 7 in the greater Baltimore, MD area, 10 in the
greater Philadelphia, PA area, 9 in the greater Washington, D.C. area, 12 in
South Florida, 5 in Alabama, 5 in the greater Minneapolis, MN area, 7 in Dallas,
TX, 8 in Houston, TX, 5 in the greater Salt Lake, UT area and 14 in the greater
Los Angeles, CA area. The Company recently completed the acquisition of 3
centers in Austin, Texas and 2 centers in Baltimore, MD, in the first quarter of
2001. The Company's operation of Learning Centers enables it to test new
educational programs, marketing plans and Learning Center management procedures.
Company-owned Learning Centers give the Company a local presence in key markets,
which has been helpful in cross-marketing the Company's other educational
services in these communities. The Company may consider selected acquisitions of
additional Learning Centers now operated by franchisees.
SCHULERHILFE. As of December 31, 2000, Schulerhilfe, a major provider
of tutoring services in Germany, has approximately 213 company-owned centers and
approximately 722 franchise locations in Germany, Italy and Austria.
Schulerhilfe is engaged in providing tutoring service to primary and secondary
students with an operational business model that is similar to Sylvan Learning
Centers. Students typically attend twice per week and are instructed in small
groups of four to six students per session. Schulerhilfe advertises using print,
radio and television advertisements on local and national levels.
IVY WEST. On May 19, 2000, the company acquired Ivy West, an SAT
preparation company based in California. Ivy West offers individual home-based
instruction for preparation of the SAT I, SAT II, PSAT, and ACT. Ivy West also
offers School Partnerships to provide SAT preparation materials and instruction
in a group or classroom environment. Sylvan Learning Centers also offer the Ivy
Prep program in their centers using the traditional 3 to 1 student - teacher
ratio, small group instruction and school partnership programs.
3
SYLVAN EDUCATION SOLUTIONS
TEACHER TRAINING AND DEVELOPMENT
Through its Canter business unit, SES provides graduate courses and masters
degree programs to teachers across America. Working in partnership with 17
degree-granting institutions of higher education, Canter delivered over
30,000 graduate courses in 2000. By the close of 2000, an additional 8,800
teachers were enrolled in its masters degree programs.
Canter is the leading provider of teacher training in the United States. Its
courses focus on educational topics that are key to teaching success. Topics
include such areas as reading at the elementary and secondary level, math,
learning styles, instructional strategies, collaborative action research,
classroom management and parental involvement. Canter programs incorporate the
best in video, online and teacher collaboration - bringing national experts
and real classroom application scenes to its students. All Canter courses
focus directly on improving teacher practice. A recent study, conducted by
Dr. Evelyn Odgen, an Independent Consultant, showed that graduates of
Canter's Masters in the Art of Teaching demonstrated significant improvement
in their daily classroom practice.
In addition to its Canter business unit, SES also addresses school districts'
specific teacher training needs through its Alternative Certification,
Teacher Test Preparation, and on-site professional development programs.
These programs are run under contract with districts and are funded by
federal and state Departments of Education programs.
DIRECT INSTRUCTION
Since 1993, SES has been delivering direct instructional service to children
and adults through its contracts with public schools, non-public schools, and
adult welfare agencies. SES takes the Sylvan learning model into our
country's most economically disadvantaged communities, providing access to
the same individualized instruction that their more affluent counterparts
receive at their local Sylvan Learning Centers. SES programs are funded by
federal Department of Education programs, such as Title I, state programs,
such as PA Act 89, and federal Department of Labor initiatives. In 2000, SES
served over 100,000 students in its direct instruction programs.
4
SYLVAN ENGLISH LANGUAGE INSTRUCTION
Sylvan provides post-secondary English Language Instruction through the
Wall Street Institute, a European-based franchiser and operator of language
centers where English is taught through a combination of computer-based and live
instruction. Typically, the instructional programs are approximately nine months
to one year in duration. WSI uses a proprietary teaching system composed of
multimedia interactive video on CD-ROM, live, personalized instruction and small
group classes. WSI has more than 49 Company-owned and 325 franchised centers in
operation throughout Europe, Latin America, the Middle East and Asia. These
centers also serve as distribution points for the Company's other product
offerings.
WSI has 166 centers in Spain (139 franchised and 27 Company-owned)
with the remainder in France, Germany, Italy, Portugal, Switzerland, Turkey,
Czech Republic, Hong Kong, Saudi Arabia, Panama, Mexico, Chile, Israel,
Colombia, Argentina, Brazil, Ecuador, Venezuela and China. WSI's initial
international expansion was accomplished by selling Master Licensing rights,
with each Master Licensor obtaining franchisees to open centers in its
development areas. In 2000, consistent with the change in Sylvan's
international expansion strategy of retaining ownership of franchise
territories in high potential markets, Sylvan continued to expand WSI's
presence globally, through the opening of new Company-owned centers, with a
focus on the Middle East, Latin America, Europe and the Pacific Rim regions.
Additional expansion of the WSI business model is occurring through the
adoption of the programs at universities in the SIU network.
WSI students, typically working professionals, learn through center
based instruction, which applies modern technology and proven methods of
individual instruction. A variety of educational courses are offered from
beginning to advanced English language skills as well as courses for specific
purposes such as business English. All WSI centers have computer labs and
include Internet use for collaborative learning experiences. Per center
enrollment averages 400 to 450 students per year. Students typically attend 2-3
hours per week and receive individual instruction in groups of one to six
students. Wall Street Institute advertises using print, radio and television
advertisements on local and national levels.
SYLVAN INTERNATIONAL UNIVERSITIES
The Sylvan International Universities ("SIU") segment was formed in
1999 to allow the Company to capitalize on opportunities in the international
educational marketplace. Features that make this market attractive for the
Company's investment include: severe imbalances of university supply and
demand, a rising middle class in many countries, governments that are unable
to accommodate all qualified applicants, rapidly changing technology and
economic globalization. The Company has leveraged these business
opportunities by creating a "Sylvan Signature" university network that is
focused on critical competencies such as: career oriented programs, bilingual
instruction, technology centered education, and a leveraged network of
universities equipped to provide centers of excellence and distance learning.
Currently, SIU owns controlling interests in the parent companies of four
fully locally accredited higher education institutions: Universidad Europea
de Madrid, Les Roches School of Hotel Management, Universidad del Valle de
Mexico and Universidad de Las Americas.
UNIVERSIDAD EUROPEA DE MADRID CEES ("UEM")
SIU acquired a 54% controlling interest in Prouniversidad, S.A. in
April 1999. Prouniversidad, S. A. was granted a license to operate
Universidad Europea de Madrid CEES, a for-profit private university offering
a wide array of university degrees officially recognized in Spain, including
doctorate degrees. UEM also provides postgraduate courses and dormitory
services to students. UEM owns, for student training purposes, a Dentistry
Clinic and a Podiatry Clinic.
UEM is located in the outskirts of Madrid, Spain and began operating
in academic year 1995/1996. Prior to this time, the University was licensed
to CEES (a college within the public Universidad Complutense) and has
operated since the early 1990's. The UEM campus is built on a 3 million
square foot plot of land. At present, the campus development consists of
three academic buildings, two student dormitory buildings, sports facilities,
and parking areas. There is enough space available at the campus for future
expansion. The University's dormitory buildings located on campus can
accommodate 529 students. At December 31, 2000, occupancy at the dormitory
buildings was almost 100%.
In academic year 2000/2001, which began October 1, 2000, UEM provides
28 degree programs in a variety of concentrations to 6,982 degree students, 50
doctorate students and 154 postgraduate students. UEM has had 27% growth in new
student enrollment during the current academic year.
5
Bachelor degrees usually take between four and five years to complete.
Associate degrees typically span three years, and doctorate degrees span two
years after the completion of a bachelor degree. The postgraduate courses span
approximately three months. The tuition fee paid per academic year is
approximately $6,300 per student, although the fee may vary depending on the
degree and on the number of academic credits taken. Quality at UEM is achieved
through special attention to the following critical features: low student to
teacher ratio, close tutoring of students, and state-of-the-art laboratories and
clinics. UEM is also focusing on state-of-the-art information technology
infrastructure and advanced methodologies for the instruction of the English
language to students.
SWISS HOTEL ASSOCIATION HOTEL MANAGEMENT SCHOOL LES ROCHES ("LES ROCHES")
SIU acquired 100% ownership of Les Roches in July 2000. The school,
located in Switzerland, was founded in 1979 by the Clivaz family and is
considered one of the finest hotel management schools in the world. It is
accredited by the Swiss Hotel Association and the New England Association of
Schools and Colleges and currently enrolls students from nearly 45 countries.
Les Roches is a center of excellence renowned for its strong theoretical and
practical approach to preparing skilled managers for the hospitality and
hotel management industry. It offers degree programs in 4 undergraduate and
graduate concentrations.
Les Roches campus consists of a main classroom building and 11
residence halls with capacity for 393 students per semester. Enrollments for the
2000/2001 academic year are approximately 1,100 students from 45 countries. New
student enrollment increased 14% in the current academic year. Annual tuition
fees for Les Roches programs (including room and board) range between $12,000 to
$20,400 depending on the program. The school manages its recruitment and
enrollment processes through a network of agents located in more than 35
countries. In addition to its on-campus programs, Les Roches offers an MBA
online, with emphasis on the hospitality industry, delivered in association with
IMCA of the United Kingdom.
UNIVERSIDAD DEL VALLE DE MEXICO ("UVM")
SIU acquired an 80% controlling interest in Planeacion de Sistemas -
("PLANSI S.A."), parent company of Universidad del Valle de Mexico, in December
2000, forming a joint venture with the Ortega family who founded the university
in 1960. It is an officially accredited university by the Mexican Secretary of
Education after having met all its requirements. It is also an active member of
the National Federation of Private Universities ("FIMPES"). UVM operates 14
campuses in Mexico and is considered the second largest private university in
the country. UVM offers 31 degree programs in a wide array of fields and
professional disciplines at the pre-college, undegraduate and graduate levels.
Undergraduate programs usually take between four and five years and
graduate programs typically span 2 years. Enrollments for the 2000 / 2001
academic year were approximately 32,000 full-time students and 8,000 students in
continuing education programs. UVM has increased total enrollment by 7% in the
current academic year. Average revenue per full-time student is $3,320.
UNIVERSIDAD DE LAS AMERICAS ("UDLA")
SIU acquired a 60% equity interest in Desarrollo del Conocimiento S.A.
("DECON"), parent company of Universidad de las Americas in December of 2000,
forming a joint venture with the Artillo family who founded the university in
Santiago, Chile in 1988. The university was granted full accreditation and
autonomy by the Chilean Ministry of Education in December of 1997 after having
successfully fullfilled the requirements established under the Chilean law. The
university offers undergraduate degree programs in 14 professional fields.
Typically, undergraduate programs in Chile take five to six years to
complete and students receive a solid theoretical foundation coupled with strong
practical orientation. The tuition fee paid per academic year is approximately
$3,000. UDLA's courses are conducted in company owned and operated facilities.
UDLA is an urban university located in downtown Santiago. During the 2000
academic year, which goes from March to December, enrollment reached 5,500
students. Through its Continuing Education division, UDLA also offers a wide
array of programs to serve the needs of working adults.
6
SYLVAN VENTURES
The Sylvan Ventures segment was established and commenced operations
during the first quarter of 2000 with a goal of investing in and developing
companies to bring technology solutions to the education and training
marketplace. On June 30, 2000, the affiliates of Apollo Management L.P. and
certain members of management joined the Company in the legal formation of
Sylvan Ventures, LLC with total committed funds of $400 million. Of the $400
million commitment, the Company has committed $285 million, Apollo has
committed to $100 million, and Management investors have committed $15
million.
Sylvan Ventures intends to emerge as a market leader in the
multi-billion dollar, highly fragmented e-learning market. Sylvan Ventures will
invest in select, strategic investments in all phases of the online educational
lifecycle including K-12, higher education, and professional development.
Through promoting activity between portfolio companies and supplementing the
strengths of each early stage enterprise with Sylvan's strong brand recognition,
established relationships, management team experience, and substantial capital,
Sylvan Ventures will create unique and significant operational synergies within
and among the portfolio companies.
As of December 31, 2000, Sylvan Ventures has investments in eSylvan,
Inc., Mindsurf, Inc., Classwell Learning Group, Inc., Caliber Learning Group,
Inc., Chancery Software Limited, iLearning, Inc., OnlineLearning.net,
HigherMarkets, Inc., Kawama.com, Inc. and Club Mom Inc. Subsequent to
year-end, Sylvan Ventures added to its investment portfolio with a
significant investment in Walden University.
For the year ended December 31, 2000, Sylvan Ventures reported
significant losses resulting from recording its proportionate share of losses
generated by its investees. These companies are in the early stages of
development and significant losses are expected to be incurred through at least
2001.
In accordance with the formation agreement, ownership of Sylvan
Ventures is controlled in the following percentages: Company 72%, Apollo 25%
and management investors 3%. The Company has significant control of the
operations of Sylvan Ventures as a result of being the majority shareholder
and through representation on the Investment Committee which reviews and
approves individual Venture projects. The Sylvan Ventures' Board is comprised
of the same slate of directors as the Company's Board. In the event of a
profit triggering event, profits will be shared in the following percentages:
Company 57%, Apollo 20%, management investors 3% and management profits
interests 20% (when fully allocated). As of December 31, 2000 only 15.2% of
the management profits interest has been granted to members of Sylvan and
Ventures' management teams. Profits are only allocated after all losses have
been recaptured. Apollo has a preferred position in allocation of losses
following fiscal year 2000. Losses will be allocated first to the Company and
Management investors to the extent of the capital accounts, and then to
Apollo. No losses can be allocated to the memberships profit interest.
The Company maintains a majority-ownership position in Sylvan Ventures
and accounts for Sylvan Ventures as a consolidated subsidiary with a minority
interest balance representing the minority owners' net investment.
MARKETING
The Company and its franchisees market Sylvan's Learning Center
services to parents of school-aged children at all grade levels and academic
abilities. Far beyond tutoring, Sylvan Learning Centers' supplemental
education utilizes a diagnostic and prescriptive approach to address the
specific needs of each and every student. A portion of Sylvan's advertising
includes commercials on morning news on the national networks as well as
various cable delivered programs. Sylvan's advertising positions it as the
leader in supplemental education and emphasizes Sylvan's high quality
curriculum, personalized attention and positive results: better grades and
improved self-esteem. Franchisees form local cooperatives to collectively
purchase local television and radio advertising and usually supplement their
efforts with local newspaper and direct mail. The Company also has additional
marketing support for specific programs, including Reading, Math, Algebra,
Study Skills, SAT/ACT College Prep, and Writing.
The Company markets its school-based educational services to local
school districts and state education departments. This marketing effort has been
expanded to seek contracts for both public and non-public schools, where both
are administered by the local public school district. The Company markets its
Canter division primarily through cooperative programs with participating
institutions and direct mail advertising to teachers.
7
WSI markets its English language instruction services through the use
of national television and radio advertising programs in Spain as well as
through locally placed advertising by its franchisees and company-owned centers
in various countries.
Sylvan International Universities markets its services in Spain,
Switzerland, Mexico, and Chile through media ad campaigns as well as directly to
prospective students. As part of this marketing effort, UEM, Les Roches , UVM,
and UDLA marketing professionals visit private schools across the countries
presenting the universities to prospective students and parents. Guided tours of
the universities are also provided for high school students. UEM, Les Roches,
UVM, and UDLA also carry out nationwide advertising campaigns on television,
radio, written media and the Internet during annual enrollment periods.
COMPETITION
The Company faces competition in each of its business segments. That
competition focuses on price, educational quality and location in the
franchise businesses. In the Education Solutions and International University
businesses, the competition is primarily based on price and educational
quality.
The Company is aware of only three direct national corporate
competitors in its Sylvan Learning Centers segment: Huntington Learning
Centers, Inc., Kumon Educational Institutes and Kaplan Educational Centers.
The Company believes these competitors operate fewer centers than Sylvan and
that these firms concentrate their services within a smaller geographic area.
In most areas served by Sylvan Learning Centers, competition also exists from
individual tutors and local learning centers. State and local education
agencies also fund tutoring by individuals, which compete with the company's
Sylvan Learning Centers segment. Schulerhilfe competition consists of one
other provider of tutoring services in Germany as well as individual local
tutors.
The Company's Educational Solution segment's most significant
competitor remains the public school system itself. Given the unique position of
public education in the United States, the Company believes that educational
reforms implemented directly by school officials will not face the same degree
of public resistance that the Company may face. The Company also competes with
school reform efforts sponsored by private organizations and universities and
with consultants hired by school districts to provide assistance in the
identification of problems and implementation of solutions. The Company is aware
of several entities that currently provide Title I and state-based programs for
students attending parochial and private schools on a contract basis.
The English Language Instruction market is highly fragmented with
numerous public and private sector operators. These include Berlitz/ELS, E.F. (a
Swedish company) and Opening (a Spanish company). Berlitz is the largest of
these companies in this market segment, with annual revenues of approximately
$330 million.
The university market in Spain is dominated by the public universities,
which have a 95% share of the overall market. In the Madrid area, where UEM
operates, the main competitors are: C.E.U, Alfonso X el Sabio, and Universidad
Pontificia de Comillas. C.E.U. is believed to be the largest, with several
campuses in the Madrid area and approximately 10,000 students.
The main competitors of Les Roches within Switzerland are Lausanne and
Glion Hotel Schools.
UVM is a leader within the growing segment of private universities in
Mexico which now account for 29% of the total university enrollments. UVM's
market share among private universities is 7% at a national level and 14.5% in
the Mexico City metropolitan area. Its closest competitors include, among
others, public universities like UNAM and UAM, and private universities like
UNITEC, Universidad Panamericana and ITESM.
The Chilean higher education system is composed of a group of
traditional publicly funded universities (25) and a growing number of private
universities (48). The private universties account for 31% of the total higher
education enrollments. UDLA's market share within the private university sector
amounts to 5.7%. UDLA competes with main traditional publicly funded
universities, Universidad de Chile and Universidad Catolica, and also with the
following private universities: Universidad Mayor, Universidad Andres Bello, and
Universidad Diego Portales.
GOVERNMENT REGULATION
FRANCHISE. Various state authorities as well as the Federal Trade
Commission (the "FTC") regulate the sales of franchises in the United States.
The FTC requires that franchisers make extensive disclosure to prospective
franchisees but does not require registration. A number of states require
registration and prior approval of the franchise-offering document. In addition,
several states have "franchise relationship laws" or "business opportunity laws"
that limit the ability of a
8
franchiser to terminate franchise agreements or to withhold consent to the
renewal or transfer of these agreements. While the Company's franchising
operations have not been materially adversely affected by such existing
regulation, the Company cannot predict the effect of any future legislation or
regulation.
TITLE I. Title I school districts are responsible for implementing
Title I in carrying out their educational programs. Title I regulations, as well
as provisions of Title I itself, direct Title I school districts to satisfy
obligations including involving parents in their children's education,
evaluating and reporting on student progress, providing equitable services and
other benefits to eligible non-public school students in the district and other
programmatic and fiscal requirements. In contracting with school districts to
provide Title I services, the Company, has become, and will continue to be,
subject to various Title I requirements and may become responsible to the school
district for carrying out specific functions required by law. For example,
Sylvan has responsibility for soliciting parental involvement, introducing
program content adequate to achieve certain educational gains and maintaining
the confidentiality of student records. The Company's failure to adhere to Title
I requirements or to carry out regulatory responsibilities undertaken by
contract may result in contract termination, financial liability, or other
sanctions.
ACCREDITATION. Private Universities must undergo an extensive trial
period being overseen by the competent authorities to guarantee levels of
academic quality before being granted full autonomy over curricula. The
Company's universities in Spain, Switzerland, Mexico and Chile have all been
granted full autonomy. The universities are then subject to periodic reviews by
authorities.
TRADEMARKS
The Company has a federal trademark registration for the words "Sylvan
Learning Center" and distinctive logo and various other trademarks and service
marks and has applications pending for a number of other distinctive phrases.
The Company also has obtained foreign registrations of a number of the same
trademarks. The Company's License Agreement grants the franchisee the right to
use the Company's trademarks in connection with operation of the franchisee's
Learning Center. Additionally, the Company has a federal trademark registration
for the words "Wall Street Institute" and distinctive logo (Statue of Liberty),
as well as foreign trademark registrations and pending applications for the WSI
trademark and logo.
EMPLOYEES
As of December 31, 2000, the Company had approximately 14,200
employees, 5,300 of whom were classified as full-time and 8,900 of whom were
classified as part-time. Most of the Company's part-time employees are
university employees, teachers in school-based programs, Company-owned Learning
Centers and Schulerhilfe centers. The Company's employees are not represented by
a union, and the Company considers its relationship with its employees to be
good.
EFFECT OF ENVIRONMENTAL LAWS
The Company believes it is in compliance with all environmental laws,
in all material respects. Future compliance with environmental laws is not
expected to have a material effect on the business.
ITEM 2. PROPERTIES
The Company leases most of its facilities, consisting principally of
administrative office space and center site locations. The Company's
administrative offices consist of four leased facilities in Baltimore, Maryland.
The Company's segments lease various sites, primarily in North America
and Europe. The Learning Center segment leases space for 84 sites in the United
States, and 177 Schulerhilfe sites in Germany; the English Language Instruction
segment leases 50 sites around the world; the Education Solutions segment leases
3 regional offices; and the International Universities segment leases 2 sites
used for the Dentistry and Podiatry clinics.
The Company also owns academic buildings and dormitories on the UEM,
Les Roches and UDLA campuses.
9
ITEM 3. LEGAL PROCEEDINGS
The Company is the defendant in a legal proceeding pending in the
United States District Court for the Northern District of Iowa, Civil Action No.
C96-334MJM, filed on November 18, 1996 by ACT, Inc., an Iowa nonprofit
corporation formerly known as American College Testing Program, Inc. ("ACT").
ACT's claim arises out of the Company's acquisition of rights to administer
testing services for the National Association of Securities Dealers, Inc.
("NASD"). ACT has asserted that the Company tortuously interfered with ACT's
relations, contractual and quasi-contractual, with the NASD, that the Company
caused ACT to suffer the loss of its advantageous economic prospects with the
NASD and other ACT clients and that the Company has monopolized and attempted to
monopolize the computer-based testing services market. ACT has claimed
unspecified amounts of compensatory, treble and punitive damages, as well as
injunctive relief. If ACT were awarded significant compensatory or punitive
damages, it could materially adversely affect the Company's results of
operations and financial condition. In February 1998, the Court ruled that ACT
may proceed only on three of its five antitrust theories and otherwise narrowed
the scope of ACT's antitrust claims. In March 1998, the Court denied the
Company's motion to dismiss ACT's state law claims. Formal discovery was
completed in 1999. Following discovery, in response to the Company's motion to
dismiss, the Court further narrowed the scope of the litigation by dismissing
all of ACT's tort claims. Following the Court setting a trial date, the Company
filed a motion in limine to strike all of ACT's alleged damages. The Court
granted that motion on May 8, 2000. The Company then renewed the motion for
summary judgment, and ACT filed a motion for reconsideration or, in the
alternative, for an interlocutory appeal, as well as a motion to join Prometric,
Inc. as an additional defendant. The Court indefinitely postponed the trial date
to consider those motions. On March 21, 2001, the Court reaffirmed its earlier
decision striking ACT's alleged damages but granted ACT's motion to certify that
ruling for an interlocutory appeal to the United States Court of Appeals for the
Eighth Circuit. The Court denied ACT's motion for reconsideration and also
denied the Company's renewed motion for summary judgment because the Court would
not preclude a trial on ACT's claim for injunctive relief. The Court denied all
other motions in limine without prejudice and granted ACT's motion to join
Prometric, Inc. as an additional defendant. Prometric, Inc. is the Company's
former subsidiary that now conducts the computer-based testing business formerly
conducted by the Company. The Company believes that all of ACT's claims are
without merit but is unable to predict the outcome of the ACT litigation at this
time.
The Company is the defendant in an arbitration proceeding pending in
Los Angeles, California initiated on or about March 22, 1999 by James Jinsoo
Choi and Christine Choi. The Chois' claim arose out of the previous relationship
Mr. Choi had as a licensee of Sylvan. Mr. Choi was licensed to operate Sylvan
Learning Centers in Korea pursuant to a license agreement. In June 1998, Sylvan
terminated the license agreement for non-curable defaults. In their complaint,
the Chois allege fraud, negligent misrepresentation, breach of fiduciary duty,
and breach of contract. The Chois have claimed unspecified compensatory and
punitive damages. The arbitration hearing has been completed and the parties are
awaiting the decision of the arbitration panel. The Company believes that all of
the Chois' claims are without merit but is unable to predict the outcome of the
Choi arbitration at this time.
At this time the Company is not a party, either as plaintiff or
defendant, in any other material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to be voted on by security holders during the
fourth quarter ended December 31, 2000.
10
PART II.
ITEM 5. MARKET FOR REGISTRANTS' COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market. The
Company's trading symbol is SLVN. The high and low trade prices for 2000 and
1999 for the Company's Common Stock are set out in the following table. These
prices are as reported by NASDAQ, and reflect inter-day price quotations,
without retail mark-up, mark down or commission, and may not necessarily
represent actual transactions.
2000 HIGH LOW
---- ------ ------
1st Quarter $16.75 $12.56
2nd Quarter $16.75 $10.63
3rd Quarter $16.13 $10.94
4th Quarter $16.31 $12.63
1999 HIGH LOW
---- ------ ------
1st Quarter $34.63 $24.94
2nd Quarter $29.25 $19.25
3rd Quarter $28.19 $15.25
4th Quarter $19.13 $10.69
No dividends were declared on the Company's common stock during the
years ended December 31, 2000 and 1999, and the Company does not anticipate
paying dividends in the foreseeable future.
The number of registered shareholders of record as of March 26, 2001
was 383.
During the year ended December 31, 2000, the Company issued 45,162
shares of its common stock as part of acquisition transactions that were not
registered under the Securities Act of 1933.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the years ended December
31, 2000, 1999, 1998, 1997, and 1996 have been derived from Sylvan's
consolidated financial statements. The financial data should be read in
conjunction with the consolidated financial statements and notes thereto.
The Company consummated significant purchase business combinations in
each of the five years in the period ended December 31, 2000. These business
combinations affect the comparability of the amounts presented. Additionally,
the accompanying financial data has been restated to reflect the net assets of
the disposed operations of Aspect, Prometric and PACE as net assets and net
liabilities of discontinued operations. The following data should be read in
conjunction with Notes 3 and 4 to the consolidated financial statements.
11
2000(1)(2) 1999(3)(4) 1998(5)(6) 1997 1996(7)
------------- ------------ ----------- ----------- -----------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXPECT PER SHARE AMOUNTS)
Revenues $316,651 $277,050 $178,802 $118,101 $104,076
Costs and expenses:
Direct costs 270,619 220,607 134,132 96,464 86,384
Sylvan Ventures operating costs 18,183 - - - -
General and administrative expense 20,306 26,855 15,530 18,085 8,049
Transaction costs related to
pooling-of-interests - - 3,245 - -
Restructuring and asset impairment charges - 3,569 - - -
------------- ------------ ----------- ----------- -----------
Total costs and expenses 309,108 251,031 152,907 114,549 94,433
------------- ------------ ----------- ----------- -----------
Operating income 7,543 26,019 25,895 3,552 9,643
Other non-operating income (loss) 20,039 (12,248) 3,988 32,802 1,563
Interest expense (7,322) (4,041) (319) (213) (799)
Sylvan Ventures investment losses (11,441) - - - -
Equity in net loss of affiliates:
Sylvan Ventures investments (21,222) - - - -
Other (981) (2,356) (3,500) (2,006) 361
Minority interest:
Sylvan Ventures 9,133 - - - -
Other (1,674) (319) - - -
------------- ------------ ----------- ----------- -----------
Income (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principle (5,925) 7,055 26,064 34,135 10,768
Tax benefit (expense) 4,308 1,284 (6,624) (9,826) (3,839)
------------- ------------ ----------- ----------- -----------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ (1,617) $ 8,339 $ 19,440 $ 24,309 $ 6,929
============= ============ =========== =========== ===========
Income (loss) from continuing operations per
share, basic $ (0.04) $ 0.16 $0.40 $0.57 $0.19
Income (loss) from continuing operations per
share, diluted $ (0.04) $ 0.16 0.38 0.54 0.18
BALANCE SHEET DATA:
Cash and cash equivalents $ 116,490 $ 18,995 $ 29,267 $ 6,613 $ 3,811
Available-for-sale securities 202,077 10,890 6,108 82,951 16,474
Net working capital 157,458 284,311 24,584 113,572 29,785
Intangible assets and deferred contract costs
(net) 285,155 194,645 116,667 25,602 24,212
Net assets of discontinued operations - 280,287 278,150 134,062 99,169
Total assets 1,016,963 764,625 602,410 369,416 229,625
Long-term debt, including current portion and
other long term liabilities 192,769 185,934 62,248 73,493 29,917
Stockholders' equity 553,263 474,093 488,833 340,460 182,768
(1) In 2000, the Company acquired controlling interests in Swiss Hotel
Association Hotel Management School Les Roches ("Les Roches"),
Universidad del Valle De Mexico ("UVM") and Universidad de las America
("UDLA"). These acquisitions were accounted for as purchases. The
purchase price for Les Roches totaled approximately $23,198 including
net cash payments of $5,219 and the assumption of $17,979 in debt and
net liabilities. Additional variable amounts of consideration are also
payable to the seller if specified levels of earnings are achieved in
2001 and 2002. The purchase price for UVM totaled approximately $55,481
including net cash payments of $46,964 and the assumption of $8,517 of
net liabilities. The purchase price for UDLA totaled approximately
$27,871, including cash payments of $23,988 and the assumption of
$3,883 of debt and net liabilities. Additional variable amounts of
consideration are also payable to the seller if specified levels of
earnings are achieved in 2004, 2005 and 2006. The Company's 2000
results of operations include the results of operations of Les
Roches for the period June 30, 2000 through December 31, 2000 UVM for
the period November 30, 2000 through December 31, 2000, and UDLA for
the period December 12, 2000 through December 31, 2000.
12
Additionally, on May 18, 2000, the Company purchased certain assets and
assumed certain liabilities of Ivy West. The purchase price totaled
approximately $10,200. The Company's 2000 results of operations include
the results of Ivy West for the period May 18, 2000 through December
31, 2000.
(2) On March 3, 2000, the Company sold Prometric for approximately $775,000
in cash and recorded an estimated gain on the sale of approximately
$288,454, net of income taxes of approximately $136,800. On October 6,
2000, the Company sold Aspect for approximately $19,794 in cash and
recorded a gain on the sale of approximately $22,353 including, an
income tax benefit of approximately $3,047.
(3) On April 1, 1999, the Company acquired a controlling interest in the
Universidad Europea de Madrid ("UEM") for cash of $26,000. The
acquisition was accounted for as a purchase, and Sylvan's 1999 results
of operations include the results of operations of UEM for the period
April 1, 1999 through December 31, 1999. Also during 1999, the Company
acquired 23 WSI franchise businesses for a total purchase price of
$65,800. This acquisition was accounted for using the purchase method
of accounting.
(4) During the quarter ended December 31, 1999, the Company recognized
restructuring costs of $3,569 related to continuing operations.
Additionally, the Company recognized significant non-recurring
operating charges related to continuing operations during the fourth
quarter of 1999, which totaled $9,978. These charges were principally
related to asset impairment charges, which resulted from management's
focus on simplification of the business model and a return to the core
business strengths. Losses recorded on disposal of investments in the
fourth quarter of 1999 also resulted in $13,370 of non-recurring
charges during the period. The cumulative effect of these significant,
unusual charges was to reduce income from continuing operations before
income taxes and cumulative effect of change in accounting principle by
$26,947 during the fourth quarter of 1999. See Notes 18 and 20 to the
audited consolidated financial statements.
(5) Includes $3,245 of expenses related to a pooling of interest
acquisition such as legal, accounting and advisory fees.
(6) On January 1, 1998, the Company acquired Canter for an initial purchase
price of $25,000. Additional consideration of $48,819 has been recorded
to reflect Canter's achievement of certain EBITDA targets. The
acquisition was accounted for as a purchase, and Sylvan's results of
operations from January 1, 1998 include the operations of Canter.
Effective October 28, 1998, the Company acquired Schulerhilfe, in
exchange for an initial purchase price of $19,082 in cash. Additional
consideration of $10,424 was recorded subsequent to the initial
purchase to reflect achievement of revenue and collection targets in
1999. The results of operations of Schulerhilfe subsequent to October
28, 1998 are included in Sylvan's results of operations.
(7) Effective December 1, 1996, Sylvan acquired WSI in exchange for an
initial purchase price of $21,071. 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.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company 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,
franchise sales fees, and company-owned center revenue; and Sylvan International
Universities, which earns tuition and dormitory fees paid by the students of
UEM, Les Roches, UVM and UDLA. During 2000 the fifth segment, Sylvan Ventures,
was launched. Sylvan Ventures had no revenues in 2000 but it incurred costs
related to its efforts to develop its investments and recorded its equity share
of the losses of investments accounted for using the equity method.
The following table sets forth the percentage relationships of
operating revenues and direct costs for each segment, as well as certain income
statement line items expressed as a percentage of total revenues for the periods
indicated for the year ended December 31:
2000 1999 1998
--------- ---------- ----------
Revenues:
Sylvan Learning Centers 31% 33% 36%
Sylvan Education Solutions 33% 37% 48%
Sylvan English Language Instruction 16% 19% 16%
Sylvan International Universities 20% 12% 0%
--------- ---------- ----------
Total revenues 100% 100% 100%
Direct costs:
Sylvan Learning Centers 24% 25% 25%
Sylvan Education Solutions 28% 29% 40%
Sylvan English Language Instruction 15% 15% 9%
Sylvan International Universities 18% 11% 0%
--------- ---------- ----------
Total direct costs 85% 80% 75%
General and administrative expenses 6% 10% 9%
Sylvan Ventures operating costs 6% 0% 0%
Costs related to pooling of interests and restructuring costs 0% 1% 2%
--------- ---------- ----------
Operating income (loss) 2% 9% 14%
Other non-operating income (loss) 6% (4%) 2%
Interest expense (2%) (1%) 0%
Sylvan Ventures investment losses (4%) 0% 0%
Equity in loss of affiliates (7%) (1%) (2%)
Minority interest 2% 0% 0%
----------- ---------- ----------
Income (loss) from continuing operations before taxes (2%) 3% 15%
Tax benefit (expense) 1% 0% (4%)
--------- ---------- -----------
Income (loss) from continuing operations (1%) 3% 11%
=========== ========== ==========
14
RESULTS OF OPERATIONS
The Company has continued to grow during 2000 in response to expanding
opportunities in the educational services industry. The Company dramatically
increased its activity in the post secondary market with the completion of
acquisitions of controlling interests in three universities located in Mexico,
Switzerland and Chile. The Sylvan International Universities segment now
operates the largest global network of international universities with full
local accreditation through its network of four universities. Additional post
secondary growth also occurred through increased Canter enrollments and the
expansion of the WSI operation. The Company's K-12 businesses also displayed
continued strong growth with the expansion of the Learning Centers network and
the addition of contracts and services within Education Solutions. The Company
also moved to address the increasing importance of technology in learning by
focusing efforts on applications of Internet technology to the education and
instruction marketplaces through the creation of Sylvan Ventures. In order to
fund Sylvan International Universities, Sylvan Ventures and to ensure that
management remains focused on core business strengths in the educational and
training services industry, the Company opted to sell the PACE corporate
training business, the Prometric computer-based testing business and the Aspect
English language immersion business in December 1999, March 2000 and October
2000, respectively. The operating results of the discontinued businesses have
been reported in the discontinued operations section of the consolidated
statement of operations. The following comparison of operating results focuses
on the continuing operations of the Company.
COMPARISON OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 2000 TO RESULTS FOR THE
YEAR ENDED DECEMBER 31, 1999.
REVENUES. Total revenues from continuing operations increased by $39.6 million,
or 14%, to $316.7 million for the year ended December 31, 2000 ("fiscal 2000")
from $277.1 million for the year ended December 31, 1999 ("fiscal 1999"). This
revenue increase has been primarily driven by expansion of the International
Universities segment through university acquisitions along with revenue growth
in Learning Centers and Education Solutions segments. These revenue increases
were offset by the impact of the Company's announced strategy of foregoing
franchise sales in lieu of retaining ownership of franchise territories in high
potential markets.
SYLVAN LEARNING CENTERS revenues for 2000 increased by $8.3 million,
or 9%, to $98.9 million. Franchise royalties increased by $3.2 million, or
18%, as a result of the net increase of 55 franchised Centers opened in 2000
and a 12% increase in same center revenue. Franchise sales fees decreased by
$5.6 million, primarily due to an international area development agreement to
develop France sold for $5.0 million in September 1999. Ivy West, an SAT
preparation company based in California was acquired in 2000, which resulted
in additional revenues of $3.0 million. Product sales and other franchise
service revenues increased $2.6 million for fiscal 2000, as compared to
fiscal 1999. Revenues from Company-owned Learning Centers increased $5.6
million, or 13%, to $47.7 million during 2000. Same center revenues increased
5%, or $2.1 million, with the remaining revenue increase of $3.5 million
generated from three new Company-owned centers opened or acquired from
franchise owners in 2000. Fiscal 2000 marked the ninth consecutive year of
double-digit same-center sales growth for the combined operations of
franchise and Company-owned centers. International revenues, primarily
Schulerhilfe, decreased by $0.5 million to $13.9 million primarily due to
unfavorable foreign exchange variances for fiscal 2000 compared to fiscal
1999. Revenues for Learning Centers represent 31% of the total continuing
revenues of the Company for the year ended fiscal December 31, 2000.
SYLVAN EDUCATION SOLUTIONS revenue increased by $3.9 million, or 4%,
to $105.2 million in fiscal 2000 compared to fiscal 1999. Sylvan At School
revenue increased $2.6 million or 4% over the same period in 1999. Canter
teacher-training revenue increased $1.3 million to $36.8 million in fiscal
2000 from $35.5 million in the same period of 1999. Canter revenues grew $4.8
million, in fiscal 2000, through programs designed to meet the strong demand
for teacher training. This increase in 2000 revenues is partially offset in
the comparison to 1999 revenues by a $3.5 million international license fee
recorded in 1999. Operating revenue for Education Solutions represents 33% of
total revenues from continuing operations of the Company for the year ended
December 31, 2000.
SYLVAN ENGLISH LANGUAGE INSTRUCTION revenues for fiscal 2000 decreased
$2.9 million, or 5%, to $49.9 million. The primary reason for the revenue
decrease is that sales of territory fees decreased by $4.7 million to $2.5
million for fiscal 2000 from $7.2 million for fiscal 1999. This decline in
territory fees resulted from the aforementioned change in the Company's
expansion strategy to one of retaining ownership of franchise territories in
high potential markets. The remaining $1.8 million increase in revenue is
attributable to expansion in Brazil and Italy. These increases were offset by
lower franchise sales, maturation of the market in Spain and unfavorable foreign
exchange differences for fiscal 2000 compared to fiscal 1999. Revenue from
Sylvan English Language Instruction represents 16% of total continuing revenues
of the Company for fiscal 2000.
15
SYLVAN INTERNATIONAL UNIVERSITIES revenue for fiscal 2000 increased
$30.3 million, or 94%, to $62.6 million. UEM revenues increased $13.0 million in
2000 principally because fiscal year 1999 included only nine months of
operations. Additionally, the acquisitions of controlling interests of Les
Roches on June 30, 2000, UVM on November 30, 2000 and UDLA on December 12, 2000
contributed $6.3 million, $10.1 million and $0.9 million, respectively. Revenue
from Sylvan International Universities represents 20% of total continuing
revenues of the Company for fiscal 2000.
DIRECT COSTS. Total direct costs of continuing operations, excluding Sylvan
Ventures, increased 23%, to $270.6 million in fiscal 2000 from $220.6 million in
fiscal 1999, as a result of business expansion. Direct costs as a percentage of
total revenues increased from 80% in 1999 to 85% in 2000. The increase in direct
costs as a percentage of total revenues from continuing operations is primarily
due to the expenses related to the international expansion of the International
Universities and English Language Instruction segments.
SYLVAN LEARNING CENTERS expenses increased $8.1 million to $76.8
million, or 78% of Learning Centers revenue for fiscal 2000, compared to $68.7
million, or 76% of Learning Centers revenue for fiscal 1999. The increase for
fiscal 2000 is primarily related to expenses incurred by Company-owned Learning
Centers due to the acquisition of franchised Learning Centers and costs
associated with higher revenues at existing Company-owned centers. Cost
increases also related to franchise services support costs as a result of growth
in franchised centers over the prior year, costs related to Sylvan Ivy Prep, and
increased costs related to international development. These cost increases were
offset by a $3.4 million decrease in non-recurring costs incurred in fiscal 1999
related to the technology driven impairment of certain educational programs, and
the refocusing of management efforts on core business objectives during 1999.
SYLVAN EDUCATION SOLUTIONS expenses increased by $7.6 million to $89.0
million, or 85% of Sylvan Education Solutions revenue for the year ended
December 31, 2000, compared to $81.4 million or 80% of Sylvan Education
Solutions revenue for the same period of 1999. The increase in expenses as a
percentage of revenue for the year ended December 31, 2000 is primarily due to
$3.5 million of high-margin fiscal 1999 revenue related to the sale of a
territory license to provide Canter's master's degree program in Mexico.
SYLVAN ENGLISH LANGUAGE INSTRUCTION expenses increased by $6.0 million
to $47.1 million, or 94% of English Language Instruction revenues for fiscal
2000, compared to $41.1 million, or 78% of the segment's revenues in fiscal
1999. The increase in expenses as a percentage of revenues was primarily a
result of the business decision to reduce the amount of high margin territory
sales further compounded by cost increases in staffing administrative efforts to
internally support the international expansion program.
SYLVAN INTERNATIONAL UNIVERSITIES expenses increased by $28.2 million
to $57.6 million, or 92% of Sylvan International Universities revenue for fiscal
2000, compared to $29.4 million or 91% of Sylvan International Universities
revenue for fiscal 1999. This increase in expenses is primarily due to the full
year 2000 impact of UEM, which was acquired in April 1999, as well as
acquisition of the controlling interests in Les Roches, UVM, and UDLA during
fiscal 2000. Additionally, headquarters personnel costs for Sylvan International
Universities were also incurred to support the expansion of the university
network during fiscal 2000.
OTHER EXPENSES. General and administrative expenses decreased by $6.5 million
during 2000, to $20.3 million. This decrease in expense was due to overall cost
reductions as a result of discontinued business units, as well as $3.0 million
of 1999 non-recurring expenses related to business start-up costs and
simplification of the Sylvan business model. Excluding these non-recurring
expenses, expenses as a percentage of revenues decreased to 6% in fiscal 2000
from 9% in fiscal 1999.
Sylvan Ventures operating costs were $18.2 million for fiscal 2000.
eSylvan, a wholly-owned subsidiary of the Company, contributed $13.0 million of
expenses related to the development of the Company's Internet based tutoring
operations. Ventures management expenses of $5.2 million were incurred related
to organizational start-up costs and management expenses related to the
research, evaluation and management of the investment portfolio companies.
Sylvan Ventures investment losses of $11.4 million related to the sale
of the Zapme! investment and various impairment charges related to portfolio
investments. Sylvan Ventures equity in net losses of affiliates of $21.2 million
relates to Sylvan Ventures' share of operating losses generated by the early
stage enterprises in the investment portfolio and the amortization of the
initial difference between the carrying amount of equity method investments and
the underlying equity in net assets of these investments at the time of the
purchase. Sylvan Ventures minority interests' share of investment losses totaled
$9.1 million for fiscal 2000. Beginning in 2001, any investment losses incurred
by Sylvan Ventures will be allocable principally to the Company.
16
Other non-operating income increased $15.6 million in fiscal 2000 as
compared to fiscal 1999. This net increase was primarily attributable to a $20.9
million increase in interest income from investing the proceeds of the March
2000 sale of Prometric, offset by a $3.3 million increase in interest expense
related to increased borrowings outstanding during the period, and a $2.0
increase in foreign currency exchange losses. The primary reason for the
exchange loss was a loss of $3.1 million that was incurred on the settlement of
a forward exchange contract acquired to protect against fluctuations in local
currency related to a pending International University acquisition.
Fiscal 1999 results from continuing operations included $3.6 million in
restructuring costs resulting from strategic changes in the Company's core
educational services business. These restructuring charges were primarily the
result of employee termination costs, school closings and facility exit costs
resulting from management's plan to exit certain activities outside the core
business of providing educational instruction.
In conjunction with the Company's 1999 formal restructuring plan,
management also examined existing corporate investments to determine realizable
investment value. Non-operating losses totaling $13.4 million were incurred in
1999 as a result of decreases in investment values resulting from changing
market conditions for the educational services industry, including an aggregate
loss of $11.4 million related to the sale of the investment in JLC Learning
Corporation as disclosed in Note 6 to the audited consolidated financial
statements.
The reported effective income tax rate for continuing operations
exceeds the U.S. federal statutory rates due to the impact of state income
taxes, the impact of minority interests, and the inability to utilize tax
benefits from certain investment losses of Sylvan Ventures. The Company's
effective tax rate for continuing operations prior to Sylvan Ventures was 34%
for fiscal 2000.
The Company's effective tax rate for continuing operations for fiscal
1999 was significantly impacted by utilized tax credits, foreign tax benefits
and state income taxes offset by permanent differences that arose due to the
significant amount of restructuring and non-recurring charges in 1999. Because
of these factors, comparison of the fiscal 2000 and fiscal 1999 effective tax
rates is not meaningful.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income (loss) from continuing
operations before cumulative effect of change in accounting principle decreased
by $10.0 million, to a loss of $1.6 million for fiscal 2000. The decrease is
primarily a result of costs and investment losses totaling $25.2 million
related to Sylvan Ventures. Prior to the fiscal 2000 impact of Sylvan Ventures
and after the removal of 1999 restructuring and non-recurring items, pre-tax
income from continuing operations increased in fiscal 2000 by $1.8 million, to
$35.8 million, due primarily to the increase in interest income related to the
investment of the proceeds of the sale of discontinued operations, offset by the
Company's change in international strategy to retaining ownership of franchise
territories in high potential markets.
COMPARISON OF RESULTS FOR THE YEAR ENDED DECEMBER 31, 1999 TO RESULTS FOR THE
YEAR ENDED DECEMBER 31, 1998.
REVENUES. Total revenues from continuing operations increased by $98.2 million,
or 55%, to $277.1 million for the year ended December 31, 1999 from $178.8
million for the same period in 1998. This increase resulted from higher revenues
in all business segments - Sylvan Learning Centers, Sylvan Education Solutions,
Sylvan English Language Instruction and the initial operations of Sylvan
International Universities.
SYLVAN LEARNING CENTERS revenues for 1999 increased by $25.9 million,
or 40%, to $90.7 million. Franchise royalties increased by $2.5 million, or 16%,
as a result of the net increase of 43 franchised Centers opened in 1999 and a
12% increase in same center revenue. Franchise sales fees increased by $1.6
million, primarily due to the sale of a master franchise agreement for France
for $5.0 million in September 1999, the effect of which was partially offset by
the sale of a master franchise agreement for the United Kingdom for $3.3 million
in 1998. Revenues from Company-owned Learning Centers increased $7.8 million, or
23%, to $42.2 million during 1999. Same center revenues increased 7%, or $2.2
million, with the remaining revenue increase of $5.6 million generated from 29
new Company-owned centers opened or acquired from franchise owners in 1998 and
1999. The full year impact of the October 1998 acquisition of Schulerhilfe, a
Germany-based tutoring company, resulted in an additional $12.0 million in
revenue for the year ended December 31, 1999. Product sales and other franchise
service revenues generated the remaining revenue increase of $2.0 million for
1999, as compared to 1998. Revenues for Learning Centers represent 33% of the
total continuing revenues of the Company for the year ended December 31, 1999.
17
SYLVAN EDUCATION SOLUTIONS revenues increased for 1999 by $15.0
million, or 17%, to $101.3 million. The revenue increase for the year ended
December 31, 1999 was the result of a $3.9 million increase in revenue from
Sylvan at School contracts, a $0.3 million increase in Sylvan at Work contracts,
and a $10.8 million increase in revenue from the Canter teacher instruction
group. The $3.9 million increase in revenue from public and nonpublic schools
for 1999 is the result of $4.5 million in revenue attributable to new contracts
obtained after December 31, 1998, offset by a $0.6 million decrease in revenue
from existing contracts. The revenue increase at Canter was due to increasing
demand for domestic teacher training as well as the sale of a license to apply
the Canter teachers distance learning masters degree program in Mexico for a
licensing fee of $3.5 million. Revenue for Education Solutions represents 37% of
total continuing revenues of the Company for the year ended December 31, 1999.
SYLVAN ENGLISH LANGUAGE INSTRUCTION revenues increased for 1999 by
$25.1 million, or 90%, to $52.8 million The revenue increase was due to a
combination of acquisitions of Centers in high-growth European countries coupled
with growth in the core areas of the business. Corporate center revenues
increased by $24.0 million in 1999 to $30.8 million, primarily due to the
inclusion of operating results of centers acquired in Italy, Germany and Spain.
Franchising revenues fees increased to $12.6 million in 1999 from $12.3 million
in 1998. The growth of the franchising revenues was reduced by a decrease in
franchise royalties of $0.2 million for 1999 and the impact of the acquisition
of successful franchised centers by WSI in 1999. Revenues from new area
development agreements generated $3.9 million in franchise sales fees in 1999,
which was a decrease from the 1998 franchise sales fees of $5.1 million. Fees
from area development agreements have declined as a result of management's
decision to retain undeveloped territories for Company-operated center
expansion. Product sales revenues increased by $0.4 million to $6.3 million in
1999 due to increased demand for the English language instruction product.
Revenues for the English Language Instruction segment represent 19% of total
revenues of the Company for the year ended December 31, 1999.
SYLVAN INTERNATIONAL UNIVERSITIES, began operations in the second
quarter of 1999 with the acquisition of a controlling interest (54%) in the
Universidad Europea de Madrid (UEM). Sylvan assumed operating control of UEM on
April 1, 1999, at which time the results of UEM's operations began to be
consolidated with those of the Company. Total revenues for UEM subsequent to
April 1, 1999 were $32.3 million, which represent 12% of total revenues of the
Company for the year ended December 31, 1999.
DIRECT COSTS. Total direct costs of continuing operations increased 64%, to
$220.6 million in 1999 from $134.1 million in 1998, as a result of business
expansion. Direct costs as a percentage of total revenues increased from 75% in
1998 to 80% in 1999. The increase in direct costs as a percentage of total
revenues from continuing operations was a result of non-recurring costs in
existing businesses, start-up costs of new business ventures and investments in
technology enhancements.
SYLVAN LEARNING CENTERS expenses increased $23.3 million to $68.7
million, or 76% of Learning Centers revenue for 1999, compared to $45.4 million,
or 70% of Learning Centers revenue for 1998. Approximately $7.3 million of the
increase for 1999 related to expenses incurred by Company-owned Learning Centers
due to the acquisition of franchised Learning Centers and costs associated with
higher revenues at existing Company-owned centers. Expenses as a percentage of
revenues in Company-owned centers increased for the period as a result of the
acquisition of more franchise centers, which tend to operate at lower margins.
Cost increases of $2.5 million in 1999 related to franchise services support
costs as a result of growth in franchised centers over the prior year. The
impact of the October 1998 acquisition of Schulerhilfe resulted in $10.1 million
of increased costs for 1999. Approximately $3.4 million of the segments direct
cost increase represented non-recurring costs related to the technology driven
impairment of certain educational programs, and the refocusing of management
efforts on core business objectives.
SYLVAN EDUCATION SOLUTIONS expenses increased by $9.4 million to $81.4
million, or 80% of Education Solutions revenue for 1999, compared to $72.0
million, or 83% of Education Solutions revenues for 1998. The decrease in
expenses as a percentage of revenue for 1999 was primarily due to the increased
volumes at Canter, which has higher operating margins. Canter operating margins
were further enhanced by the sale of a license agreement to provide Canter's
masters degree program in Mexico.
SYLVAN ENGLISH LANGUAGE INSTRUCTION expenses increased $24.3 million to
$41.1million, or 78% of WSI revenues for 1999, compared to $16.8 million, or 60%
in 1998. This expense increase was primarily due to business growth and the cost
of operating the corporate centers that were acquired in 1999. Approximately
$24.1 million of the increase for 1999 related to expenses incurred in corporate
centers due to the acquisition of franchised centers and costs associated with
higher revenues at existing corporate centers. Expenses as a percentage of
revenues in corporate centers increased for the period
18
as a result of the acquisition of more franchise centers, which tend to operate
at lower margins.
SYLVAN INTERNATIONAL UNIVERSITIES expenses were $29.4 million for the
nine-month period ended December 31, 1999. These direct expenses consist
primarily of personnel, marketing and advertising, and facility-related costs of
UEM. These expenses are a larger percentage of the International Universities
revenues for the period from acquisition through December 31, 1999 than the
anticipated annual percentage because of the seasonality of the business.
Classes are not in session for June, July, August and September. However,
certain fixed expenses are incurred year round.
OTHER EXPENSES. General and administrative expenses increased by $11.3 million
during 1999, to $26.9 million. These expenses as a percentage of revenues
increased to 10% in 1999. This increase in expenses as a percentage of revenues
is largely due to $3.0 million of non-recurring expenses incurred in 1999
related to business start-up costs, asset impairments, and simplification of the
Sylvan business model. Also included were the general and administrative costs
necessary to provide support for the PACE and Prometric businesses although
their operating results are included in discontinued operations.
Results from continuing operations included $3.6 million in
restructuring costs resulting from strategic changes in the Company's core
educational services business. These restructuring charges were primarily the
result of employee termination costs, school closings and facility exit costs
resulting from management's plan to exit certain activities outside the core
business of providing educational instruction.
In conjunction with the Company's formal restructuring plan, management
also examined existing corporate investments to determine realizable investment
value. Non-operating losses totaling $13.4 million were incurred in 1999 as a
result of decreases in investment values resulting from changing market
conditions for the educational services industry, including an aggregate loss of
$11.4 million related to the sale of the investment in JLC Learning Corporation
as disclosed in Note 6 to the audited consolidated financial statements.
Other non-operating expenses increased $5.7 million as compared to the
same period in 1998. This net increase was primarily attributable to a $2.3
million decrease in other investment income, a $3.7 million increase in interest
expense related to increased borrowings outstanding during the period, (which
included $1.8 million of UEM interest expense) and a $0.3 million minority
interest in income of consolidated subsidiary recorded in 1999, which was
associated with UEM, offset by favorable impacts of other non-operating expenses
of $0.6 million.
The Company's effective tax position on continuing operations has been
significantly impacted by utilized tax credits, foreign tax benefits and state
income taxes offset by permanent differences that arose due to the significant
amount of restructuring and non-recurring charges in 1999. Because of these
factors, comparison of the 1999 and 1998 effective tax rates is not meaningful.
INCOME FROM CONTINUING OPERATIONS. Income from continuing operations before
cumulative effect of change in accounting principle decreased by $11.1 million,
to $8.3 million for the year ended December 31, 1999. After removing the effects
of restructuring charges of $3.6 million, non-recurring operating expenses of
$10.0 million and losses on investments of $13.4 million, pre-tax income from
continuing operations for the year ended December 31, 1999 increased over 1998
by $8.0 million, or 30.7%, to $34.1 million. This increase was the result of
increased revenues and operating income from the Learning Centers, Education
Solutions and International University segments.
FUTURE ASSESSMENT OF RECOVERABILITY AND IMPAIRMENT OF GOODWILL
In connection with various acquisitions, the Company has recorded
goodwill. At December 31, 2000, unamortized goodwill was $277.1 million, which
represented 27% of total assets and 51% of stockholders' equity. Goodwill arises
when an acquirer pays more for a business than the fair value of the tangible
and separately measurable intangible net assets. For financial reporting
purposes, goodwill and all other intangible assets are amortized over the
estimated period benefited. The Company has determined the life for amortizing
goodwill based upon several factors, the most significant of which are the
relative size, historical financial viability and growth trends of the acquired
companies and the relative lengths of time such companies have been in
existence. The Company amortizes goodwill on a straight-line basis over periods
of 15 to 25 years based upon the factors associated with the specific
acquisition.
In connection with the Company's fiscal 2000 acquisition of Les Roches
and UDLA, additional goodwill may be recorded for variable amounts of contingent
consideration that are payable to the seller if certain criteria are met. The
19
contingent consideration will be recorded as additional goodwill when the
contingencies are resolved and the additional consideration is payable. Variable
amounts of contingent consideration are payable to the seller's of Les Roches if
specified levels of earnings are achieved in 2001 and 2002. Variable amounts of
contingent consideration are payable to the sellers of UDLA in 2001, 2006 and
2007 if specified levels of earnings are achieved in 2000, 2004, 2005 and 2006.
As of December 31, 2000, the Company has recorded an estimate of the
consideration due in 2001 as a liability and additional goodwill of
approximately $12,000.
Management periodically reviews the Company's carrying value and
recoverability of unamortized goodwill. If the facts and circumstances suggest
that goodwill may be impaired, the carrying value of such goodwill will be
adjusted, which will result in an immediate charge against income during the
period of the adjustment and/or the length of the remaining amortization period
may be shortened, which will result in an increase in the amount of goodwill
amortization during the period of adjustment and each period thereafter until
fully amortized. Once adjusted, there can be no assurance that there will not be
further adjustments for impairment and recoverability in future periods. Of the
various factors considered by management of the Company in determining whether
goodwill is impaired, the most significant are (i) losses from operations, (ii)
loss of customers, and (iii) industry developments, including the Company's
inability to maintain its market share, development of competitive products or
services, and imposition of additional regulatory requirements.
LIQUIDITY AND CAPITAL RESOURCES
During 2000, the Company generated $7.9 million of cash flow from
operations, a decrease of $63.0 million from the prior year. The reported net
income of $305.2 million included significant non-operating elements such as
net gain on sale of discontinued operations of $310.8 million, and non-cash
elements such as depreciation and amortization charges of $30.4 million, loss
from sale of investments of $11.4 million, equity in loss of affiliates,
primarily due to Sylvan Ventures, of $22.2 million and minority interest of
$7.5 million. Working capital related decreases in liquidity of $39.6 million
during the year resulted primarily from an increase in receivables and a
reduction of payables and other current liabilities.
Cash generated from investing activities was $305.3 million in 2000,
an increase of $464.9 million over the cash used in investing activities of
$159.3 million in 1999. During 2000, cash generated consisted primarily of
proceeds from the sale of Prometric ($710.3 million) and Aspect ($19.8
million). These amounts were offset by purchases of securities ($191.8
million) and net cash used to purchase Les Roches, UVM and UDLA ($64.2
million), Ivy West ($7.9 million), and other businesses, primarily by WSI
($18.7 million), increases in investments in and advances to affiliates
primarily related to investments by Sylvan Ventures ($69.5 million), payments
of contingent consideration and other accrued liabilities for prior period
acquisitions ($19.3 million) and purchases of property and equipment ($33.8
million). The 2000 investment activity was primarily related to the Company's
strategic plan to dispose of Sylvan Prometric and Aspect and to invest the
proceeds of those sales into expansion of the International University and
Sylvan Ventures segments. At December 31, 2000, the Company had accrued
obligations payable in cash of $40.1 million related to contingent
consideration for certain acquisitions. The amount due will be paid in 2001.
During 2000, the Company used cash in financing activities of $212.0
million, which was primarily funded by the proceeds from the sale of the
discontinued operations. The financing activity related primarily to the net
repayment of the Company's borrowings under its existing credit agreements
($260.0 million) and the payment to repurchase common shares pursuant to two
tender offers ($212.0 million). These amounts were offset by borrowings under
bank lines of credit ($133.4 million) prior to the Prometric sale, the issuance
of convertible debentures ($100.0 million) and capital contributions from
minority investors ($24.9 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 expected expansion of its existing business, fund
International University acquisitions, pay contingent consideration and fund
Sylvan Ventures investments and operating costs. In connection with the
Company's ownership of Sylvan Ventures, commitments have been made to provide
certain investments additional funding totaling $44.3 million. 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.
20
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.
CONTINGENT MATTERS
In connection with the Company's acquisition of Canter and based on
Canter's earnings in 2000, additional consideration of $13.1 million was paid to
the seller in cash in 2001. As of December 31, 2000, the Company has recorded
this additional consideration as a liability and goodwill, which will be
amortized over the remaining amortization period of 22 years.
In connection with the Company's acquisition of Les Roches, various
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 also 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 franchisees of the
Learning Centers and Wall Street Institute that allow the franchisee to put
the centers back to the Company in the future at a predetermined multiple of
operating results upon the achievement of specified operating thresholds.
When the Company can access the likelihood of a put being exercised and the
amount of the related commitment to purchase the center such obligation is
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 future effect.
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 recognized 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 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 ANTICIPATED IMPACT OF UNCOLLECTIBLE
ACCOUNTS RECEIVABLE ON FUTURE LIQUIDITY, 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 COMMISSION. THE COMPANY
WISHES TO CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD
LOOKING STATEMENTS, WHICH STATEMENTS ARE MADE PURSUANT TO THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 AND, AS SUCH, SPEAK ONLY AS OF THE
DATE MADE.
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 its regular
operating and financing activities.
FOREIGN CURRENCY RISK
The Company derives approximately 40% of its revenues from continuing
operations from customers outside of 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 weakening of 10% of the U.S. dollar relative to all
other currencies should not materially adversely affect expected 2001 earnings
or cash flows. The Company generally views its investment in the majority of its
foreign subsidiaries as long-term. The functional currencies of these foreign
subsidiaries are principally denominated in Euro-based currencies. 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. A 10%
depreciation in functional currencies relative to the U.S. dollar would result
in a decrease in consolidated stockholders' equity at December 31, 2000 of
approximately $16.1 million.
The Company has entered into forward foreign exchange contracts
principally to manage the currency fluctuations in significant foreign
transactions, thereby limiting the Company's risk that would otherwise result
from changes in exchange rates. Gains and losses on forward foreign exchange
contracts for purposes of business acquisitions are reflected in the income
statement.
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 impact net interest income and interest expense by
reducing pretax income for the year ended December 31, 2000 by $2.7 million.
INVESTMENT RISK
The Company's investment portfolio contains high quality debt
securities that mature within one year. A hypothetical 10% adverse change in
the fair value of the debt securities should 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 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
values these investments at either cost less impairment (if any) or under the
equity method of accounting. Equity method investors are specifically excluded
from the scope of this disclosure. Non-public investments where the Company owns
less than a 20% stake 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.
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 and
comprehensive income.
All the potential impacts noted above are based on sensitivity analysis
performed on the Company's financial
22
position at December 31, 2000. Actual results may differ materially.
ITEM 8. FINANCIAL STATEMENTS
The financial statements of the Company are included on pages 32
through 60 of the report as indicated on page 31.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in accountants, disagreements, or other events
requiring reporting under this Item.
23
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF SYLVAN LEARNING SYSTEMS, INC.
Information required is set forth under the caption "Election of
Directors" in the Proxy Statement relating to the 2001 Annual Meeting of
Shareholders, which will be filed on or before April 30, 2001.
Information required pertaining to compliance with Section 16 (a) of
the Securities and Exchange Act of 1934 is set forth under the caption "Election
of Directors" in the Proxy Statement relating to the 2001 Annual Meeting of
Shareholders, which is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required is set forth under the caption "Executive
Compensation" in the Proxy Statement relating to the 2001 Annual Meeting of
Shareholders, which is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required is set forth under the caption "Security
Ownership" in the Proxy Statement relating to the 2001 Annual Meeting of
Shareholders, which is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required is set forth under the caption "Certain
Transactions" in the Proxy Statement relating to the 2001 Annual Meeting of
Shareholders, which is incorporated by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. FINANCIAL STATEMENTS
The response to this portion of Item 14 is submitted as a separate
section of this Report.
2. FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are inapplicable
or immaterial and therefore have been omitted.
(b) Reports on Form 8-K:
Form 8-K dated March 6, 2000
ITEM 2. Acquisition or Disposition of Assets
ITEM 7. Financial Statements, Pro Forma Financial Information
and Exhibits
Form 8-K dated October 9, 2000
ITEM 2. Acquisition or Disposition of Assets
ITEM 7. Financial Statements, Pro Forma Financial Information
and Exhibits
24
3. EXHIBITS
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
11.01 Purchase Agreement for $100,000 Convertible Subordinated Debentures Due 2010,
11.02 Formation Agreement by and among Sylvan Learning Systems, Inc., AP Educate
Investments, LLC, R. Christopher Hoehn-Saric and Douglas L. Becker dated June 30, 2000,
11.03 Limited Liability Company Agreement of Sylvan Ventures, LLC by and among Sylvan
Learning Systems, Inc., AP Educate Investments, LLC, Sylvan Ventures, Inc., R. Christopher
Hoehn-Saric and Douglas Becker dated June 30, 2000,
11.04 Stock Purchase Agreement among Optagon Holdings Limited ("Buyer") and Sylvan Learning
Systems, Inc., Sylvan Learning Systems International, Ltd. and Aspect International
Language Schools, B.V. (collectively, "Seller") dated October 6, 2000,
11.05 Share Purchase Agreement dated as of June 30, 2000 between Francis Clivaz and Christian
Clivaz ("Sellers") and Sylvan Learning Systems, Inc. ("Purchaser") regarding Gesthotel S.A.,
11.06 Agreement by and among Sylvan Learning Systems Mexico, S. de R.L. de C.V. ("Purchaser")
and Jose Ortega Martinez, et. al. ("Sellers") for the purchase of Universidad del Valle de
Mexico, A.C. dated September 25, 2000,
11.07 Purchase Agreement dated December 12, 2000 between Sylvan Chile Limitada ("Purchaser") and
Indeco S.A. ("Seller") for the purchase of Universidad de las Americas de Chile.
25
23.01 Consent of Ernst & Young LLP with respect to consolidated financial statements of Sylvan Learning
Systems, Inc.
23.02 Consent of Ernst & Young LLP with respect to financial statements of Caliber Learning Network, Inc.
23.03 Consent of Ernst & Young LLP with respect to financial statements of Classwell Learning Group, Inc
23.04 Consent of Arthur Anderson LLP with respect to consolidated financial statements of iLearning, Inc
23.05 Consent of Ernst & Young LLP with respect to consolidated financial statements of Highermarkets, Inc.
23.06 Consent of Ernst & Young LLP with respect to consolidated financial statements of Mindsurf, Inc
23.07 Consent of Pricewaterhouse Coopers, LLP with respect to financial statements of Chancery Software, Inc.
99.1 Chancery Software Limited Audited Financial Statements
99.2 Higher Markets, Inc. Audited Financial Statements
99.3 iLearning, Inc. Audited Financial Statements
99.4 Mindsurf, Inc. Audited Financial Statements
99.5 Classwell Learning Group Inc. Audited Financial Statements
99.6 Caliber Learning Network, Inc. Audited Financial Statements
26
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf of the undersigned, thereunto duly authorized on March 29, 2001.
SYLVAN LEARNING SYSTEMS, INC.
(Registrant)
By: /s/ DOUGLAS L. BECKER
-------------------------
Douglas L. Becker
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated and on March 29, 2001.
SIGNATURE CAPACITY
/s/ DOUGLAS L. BECKER Director, Chairman of the Board and Chief
-------------------------------------------- Executive Officer
Douglas L. Becker
/s/ PETER COHEN President and Chief Operating Officer
--------------------------------------------
Peter Cohen
/s/ NEAL S. COHEN Executive Vice President and Chief Financial
-------------------------------------------- Officer
Neal S. Cohen
/s/ DONALD BERLANTI Director
--------------------------------------------
Donald Berlanti
/s/ R. CHRISTOPHER HOEHN-SARIC Director
-------------------------------------------
R. Christopher Hoehn-Saric
/s/JAMES H. MCGUIRE Director
----------------------------------------------
James H. McGuire
/s/LAURENCE M. BERG Director
-----------------------------------------------
Laurence M. Berg
27
ITEM 14(a)(1)
INDEX TO FINANCIAL STATEMENTS
PAGE
THE COMPANY:
Report of Independent Auditors......................................................................................29
Consolidated Balance Sheets as of December 31, 2000 and December 31, 1999...........................................30
Consolidated Statements of Operations for the years ended December 31, 2000, 1999, and 1998.........................32
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998................33
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 .........................34
Notes to Consolidated Financial Statements..........................................................................35
28
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Sylvan Learning Systems, Inc.
We have audited the consolidated balance sheets of Sylvan Learning Systems, Inc.
and subsidiaries as of December 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. The 2000
financial statements of iLearning, Inc., (a corporation in which the Company has
a 29% interest), have been audited by other auditors whose report has been
furnished to us; insofar as our opinion on the 2000 consolidated financial
statements relates to data included for iLearning, Inc., it is based solely on
their report. In the consolidated financial statements, the Company's investment
in iLearning, Inc. is stated at $5,568,000 at December 31, 2000, and the
Company's equity in the net loss of iLearning, Inc. is stated at $1,932,000, for
the year then ended.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and, for 2000, the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Sylvan Learning Systems, Inc.
and subsidiaries at December 31, 2000 and 1999, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for start-up costs in 1999.
/s/ Ernst & Young LLP
Baltimore, Maryland
February 22, 2001
29
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
2000 1999
---------------- -------------------
(Restated - Note 1)
ASSETS
Current assets:
Cash and cash equivalents $116,490 $18,995
Available-for-sale securities 202,077 10,890
Receivables:
Accounts receivable 68,468 45,537
Costs and estimated earnings in excess of billings
on uncompleted contracts 2,613 3,061
Notes receivable from tuition financing 7,489 4,647
Other notes receivable 13,317 16,783
Other receivables 15,549 1,265
---------------- -------------------
107,436 71,293
Allowance for doubtful accounts (5,554) (2,138)
---------------- -------------------
101,882 69,155
Inventory 5,832 6,098
Deferred income taxes 3,936 6,963
Prepaid expenses and other current assets 20,955 9,073
Net current assets of discontinued operations - 280,287
---------------- -------------------
Total current assets 451,172 401,461
Notes receivable from tuition financing, less current portion 8,313 5,330
Other notes receivable, less current portion 2,378 1,879
Property and equipment:
Land and buildings 94,151 63,319
Furniture, computer equipment and software 94,249 69,770
Leasehold improvements 22,407 10,819
---------------- -------------------
210,807 143,908
Accumulated depreciation (38,965) (28,090)
---------------- -------------------
171,842 115,818
Intangible assets:
Goodwill 296,422 200,382
Other 2,611 2,574
---------------- -------------------
299,033 202,956
Accumulated amortization (21,078) (11,952)
---------------- -------------------
277,955 191,004
Investments in and advances to affiliates 57,999 13,317
Other investments 25,935 25,933
Deferred costs, net of accumulated amortization of $1,969
and $984 at December 31, 2000 and 1999, respectively 7,200 3,641
Other assets 14,169 6,242
---------------- -------------------
Total assets $1,016,963 $764,625
================ ===================
30
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, DECEMBER 31,
2000 1999
--------------- -------------
(Restated - Note 1)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 20,108 $ 23,456
Accrued expenses 40,452 21,234
Income taxes payable 119,511 9,711
Current portion of long-term debt 20,292 14,315
Due to shareholders of acquired companies 40,195 22,474
Deferred revenue 42,483 23,234
Other current liabilities 10,673 -
Net current liabilities of discontinued operations - 2,726
--------------- -------------
Total current liabilities 293,714 117,150
Long-term debt, less current portion 128,575 146,095
Deferred income taxes 4,824 12,152
Other long-term liabilities 3,707 3,050
--------------- -------------
Total liabilities 430,820 278,447
Minority interest 32,880 12,085
Stockholders' equity:
Preferred stock, par value $.01 per share--authorized
10,000 shares, no shares issued and
outstanding as of December 31, 2000 and 1999 - -
Common stock, par value $.01 per share--authorized
90,000 shares, issued and outstanding shares of
37,278 as of December 31, 2000 and
50,904 as of December 31, 1999 373 509
Additional paid-in capital 205,343 414,567
Retained earnings 360,232 60,762
Accumulated other comprehensive loss (12,685) (1,745)
--------------- -------------
Total stockholders' equity 553,263 474,093
--------------- -------------
Total liabilities and stockholders' equity $1,016,963 $764,625
=============== =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
31
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2000 1999 1998
--------------- --------------- ----------------
(Restated - (Restated -
Note 1) Note 1)
REVENUES $316,651 $277,050 $178,802
COST AND EXPENSES
Direct costs 270,619 220,607 134,132
Sylvan Ventures operating costs 18,183 - -
General and administrative expense 20,306 26,855 15,530
Transaction costs related to pooling-of-interests - - 3,245
Restructuring charges - 3,569 -
--------------- --------------- ----------------
Total expenses 309,108 251,031 152,907
--------------- --------------- ----------------
Operating income 7,543 26,019 25,895
OTHER INCOME (EXPENSE)
Investment and other income 20,039 1,122 3,988
Interest expense (7,322) (4,041) (319)
Sylvan Ventures investment losses (11,441) - -
Other investment losses - (13,370) -
Equity in net loss of affiliates:
Sylvan Ventures (21,222) - -
Other (981) (2,356) (3,500)
--------------- --------------- ----------------
(22,203) (2,356) (3,500)
Minority interest in consolidated subsidiaries:
Sylvan Ventures 9,133 - -
Other (1,674) (319) -
--------------- --------------- ----------------
7,459 (319) -
--------------- --------------- ----------------
Income (loss) from continuing operations before income taxes
and cumulative effect of change in accounting principle (5,925) 7,055 26,064
Income tax benefit (expense) 4,308 1,284 (6,624)
--------------- --------------- ----------------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle (1,617) 8,339 19,440
Income (loss) from discontinued operations, net of
income tax expense of $163, $12,398
and $14,958, respectively (3,968) 4,964 16,269
Gain (loss) on disposal of discontinued operations,
net of income tax expense of $133,753 and
$1,100, respectively 310,807 (26,968) -
--------------- --------------- ----------------
Income (loss) before cumulative effect of change in
accounting principle 305,222 (13,665) 35,709
Cumulative effect of change in accounting
principle, net of income tax benefit of $682 - (1,323) -
--------------- --------------- ----------------
Net income (loss) $305,222 $ (14,988) $35,709
=============== =============== ================
Earnings (loss) per common share, basic:
Income (loss) from continuing operations before
cumulative effect ofchange in accounting principle $(0.04) $ 0.16 $0.40
Net income (loss) $7.02 $ (0.29) $0.73
Earnings (loss) per common share, diluted:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $(0.04) $ 0.16 $0.38
Net income (loss) $7.02 $ (0.28) $0.70
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY
--------- ----------- ----------- ------------- -------------
Balance at January 1, 1998 $455 $302,022 $ 39,144 $(1,161) $ 340,460
Options and warrants exercised for purchase of 654
shares of common stock, including income tax
benefit of $5,176 7 11,531 11,538
Stock options granted to non-employees 539 539
Issuance of 27 shares of common stock in connection
with the Employee Stock Purchase Plan 527 527
Issuance of 2,570 shares of common stock in
connection with contingent consideration
related to the acquisition of Drake 26 39,179 39,205
Issuance of 964 shares of common stock in
connection with the acquisition of NAI / Block 10 24,990 25,000
Issuance of 345 shares of common stock in
connection with contingent consideration
related to the acquisition of PACE 3 11,305 11,308
Issuance of 864 shares of common stock in
connection with other acquisitions
and investments 9 19,301 999 20,309
Capital contribution by former shareholders
of Aspect 1,300 1,300
Comprehensive income:
Net income for 1998 35,709 35,709
Foreign currency translation adjustment 2,938 2,938
-------------
Total comprehensive income 38,647
--------- ----------- ------------ ------------- -------------
Balance at December 31, 1998 510 410,694 75,852 1,777 488,833
Options and warrants exercised for purchase
of 311 shares of common stock, including
income tax benefit of $1,456 3 4,391 4,394
Stock options granted to non-employees 348 348
Repurchase of 1,730 shares of common stock
for payment of future contingent
consideration resulting from business
combinations (17) (36,195) (36,212)
Issuance of 41 shares of common stock in
connection with the Employee Stock
Purchase Plan 961 961
Issuance of 510 shares of common stock in
connection with the contingent consideration
related to the acquisition of Canter 5 11,162 11,167
Issuance of 720 shares of common stock in
connection with contingent consideration
related to theacquisition of Drake 7 21,343 21,350
Issuance of 99 shares of common stock in
connection with other acquisitions 1 1,863 (102) 1,762
Comprehensive income (loss):
Net loss for 1999 (14,988) (14,988)
Foreign currency translation adjustment (6,639) (6,639)
Unrealized gain on available-for-sale
securities 3,117 3,117
-------------
Total comprehensive loss (18,510)
--------- ----------- ----------- ----------- -------------
Balance at December 31, 1999 509 414,567 60,762 (1,745) 474,093
Repurchase of 13,823 shares of common
stock for cash (139) (211,850) (211,989)
Options exercised for purchase of 91 shares of
common stock, including income tax
benefit of $322 1 801 802
Issuance of 62 shares of common stock in
connection with the Employee Stock Purchase Plan 1 785 786
Effect of change in year-end of subsidiary (5,752) (5,752)
Other 1 1,040 1,041
Comprehensive income (loss):
Net income for 2000 305,222 305,222
Foreign currency translation adjustment (8,140) (8,140)
Unrealized loss on available-for-sale
securities (793) (793)
Reclassification adjustment, net of tax (2,007) (2,007)
-----------
Total comprehensive income 294,282
---------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 $373 $205,343 $360,232 $(12,685) $553,263
========== =========== =========== =========== ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
33
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2000 1999 1998
---------------- --------------- -------------
OPERATING ACTIVITIES
Net income (loss) $305,222 $(14,988) $35,709
Adjustments to reconcile net income
(loss) to cash provided by operating
activities:
Depreciation 16,700 25,999 15,599
Amortization 13,742 20,788 16,724
(Gain) loss from discontinued operations (310,807) 26,891 -
Loss on investments 11,441 13,370 -
Other non-cash items 2,063 2,586 672
Minority interest in income of
consolidated subsidiaries (7,459) 319 -
Cumulative effect of change in accounting
principle - 1,323 -
Equity in net loss of affiliates 22,203 2,140 3,504
Deferred income taxes (4,639) (317) 1,265
Changes in operating assets and liabilities:
Receivables (21,304) (35,109) (22,734)
Inventory, prepaid expenses and other
current assets 8,185 (4,018) (8,653)
Accounts payable, income taxes payable
and accrued expenses (21,386) 30,029 8,475
Deferred revenue and other current
liabilities (6,033) 1,907 7,565
---------------- --------------- -------------
Net cash provided by operating activities 7,928 70,920 58,126
---------------- --------------- -------------
INVESTING ACTIVITIES
Purchase of available-for-sale securities (418,828) - (2,502)
Proceeds from sale or maturity of
available-for-sale securities 227,026 3,082 79,611
Investment in and advances to affiliates and
other investments (69,524) (10,510) (16,618)
Purchase of property and equipment, net (33,813) (61,211) (58,294)
Proceeds from sale of discontinued operations 730,106
Proceeds from sale of investment in JLC Learning
Corporation - 15,211 -
Purchases of international universities,
including direct costs of acquisition, net
of cash acquired (64,173) (26,000) -
Payment of contingent consideration for prior
period acquisitions (19,323) (16,689) (13,532)
Cash paid for other businesses, net of cash
acquired (26,833) (48,989) (54,512)
Expenditures for deferred contract costs (3,711) (10,367) (2,771)
Increase in other assets (15,665) (3,854) (5,895)
---------------- --------------- -------------
Net cash provided by (used in) investing
activities 305,262 (159,327) (74,513)
---------------- --------------- -------------
FINANCING ACTIVITIES
Proceeds from exercise of options and warrants 480 2,938 6,362
Repurchases of common stock (211,989) (36,212) -
Proceeds from issuance of common stock 785 961 527
Proceeds from issuance of long-term debt 233,437 207,748 136,435
Payments on long-term debt (259,670) (97,295) (126,092)
Cash received from minority interest members in
Sylvan Ventures 24,931 - -
Decrease in long-term liabilities - (1,268) -
---------------- --------------- -------------
Net cash provided by (used in) financing
activities (212,026) 76,872 17,232
---------------- --------------- -------------
Effect of subsidiary year-end change on cash (2,565) - -
and cash equivalents
Effects of exchange rate changes on cash (1,104) (2,640) 2,507
---------------- --------------- -------------
Net increase (decrease) in cash and cash
equivalents 97,495 (14,175) 3,352
Cash and cash equivalents at beginning of year 18,995 33,170 29,818
---------------- --------------- -------------
Cash and cash equivalents at end of year $116,490 $18,995 $33,170
================ =============== =============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
34
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
NOTE 1 - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Sylvan Learning Systems, Inc. and subsidiaries ("the Company" or "Sylvan") is an
international provider of educational services. The Company conducts operations
in five separate business segments- Sylvan Learning Centers, Sylvan Education
Solutions, Sylvan English Language Instruction, Sylvan International
Universities and Sylvan Ventures. The Sylvan Learning Centers segment designs
and delivers individualized tutorial programs to school age children through
franchised and Company-owned Learning Centers. The Sylvan Education Solutions
segment principally provides educational programs to students of public and
non-public school districts through contracts funded by federal Title I and
state-based programs, and professional development services to teachers. The
Sylvan English Language Instruction segment includes the operations of Wall
Street Institute, B.V. ("WSI") a European-based franchiser and operator of
learning centers that teach the English language. The Sylvan International
Universities segment, which commenced operations in the second quarter of 1999,
has controlling interests in four private, for-profit universities. This segment
principally earns tuition and dormitory fees paid by university students. The
newest segment, Sylvan Ventures, was launched in the first quarter of 2000 to
invest in and incubate companies developing emerging technology solutions for
the education marketplace.
The Company sold the PACE Group ("PACE") corporate training business during
fiscal year 1999. The Company sold its computer-based testing division, Sylvan
Prometric, in the first quarter 2000 and its English language immersion
division, Aspect, in the fourth quarter 2000. The accompanying consolidated
balance sheets, statements of operations and related notes have been restated to
reflect PACE, Sylvan Prometric and Aspect as discontinued operations for all
periods presented.
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
that require the Company's management to make estimates and assumptions that
affect reported amounts and related disclosures. Actual results could differ
from those estimates.
Certain amounts previously reported have been reclassified to conform with the
2000 presentation.
PRINCIPLES OF CONSOLIDATION
The various interests that the Company acquires in its affiliated companies are
accounted for under three methods: consolidation, equity method, or cost method.
The Company determines the method of accounting for its affiliated companies on
a case-by-case basis based upon its ownership percentage in each affiliated
company, as well as its degree of influence over each affiliated company.
CONSOLIDATION. Affiliated companies in which the Company owns, directly or
indirectly, or otherwise controls more than 50% of the outstanding voting
interests are accounted for under the consolidation method of accounting. Under
this method, an affiliated company's results of operations are reflected within
the Company's consolidated statements of operations. Earnings or losses
attributable to other stockholders of a consolidated affiliated company are
classified as "minority interest in consolidated subsidiaries" in the Company's
consolidated statements of operations. Minority interest adjusts the Company's
consolidated net results of operations to reflect only its share of the earnings
or losses of an affiliated company. Transactions between the Company and its
consolidated affiliated companies are eliminated in consolidation.
EQUITY METHOD. Affiliated companies, in which the Company owns 50% or less of
the outstanding voting interests, but over which the Company exercises
significant influence, are accounted for under the equity method of accounting.
Significant influence with respect to an affiliated company depends on an
evaluation of several factors including, among other things, representation on
the associated company's board of directors, ownership percentage and voting
rights associated with the Company's holdings in the securities of the
affiliated company. Investments accounted for under the equity method are
reflected in the consolidated balance sheet as "investments in and advances to
affiliates". Under the equity method of accounting, affiliated companies'
results of operations are not reflected within the Company's consolidated
operating results. However, the Company's share of the earnings or losses of
these affiliated companies is classified as "equity in net income
35
NOTE 1 - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS (CONTINUED)
(loss) of affiliates" in the Company's consolidated statements of operations.
The Company initially records its share of the earnings or losses of an
affiliated company based upon its proportionate ownership of voting common
stock. If the affiliated company is incurring losses, and previous losses have
reduced the common stock investment account to zero, or if the Company holds no
common stock, the Company continues to recognize equity method losses based on
the ownership level of the particular affiliated company security or
loan/advance held by the Company to which the equity method losses are being
applied. The Company continues to report losses up to the investment carrying
value, including any additional financial support made or committed to by the
Company.
The amount by which the Company's carrying value exceeds its share of the
underlying net assets of the affiliated companies accounted for under the equity
method of accounting, if any, is amortized on a straight-line basis over the
estimated useful life of three years. This amortization adjusts the Company's
share of the "equity in net loss of affiliates" in the Company's consolidated
statements of operations.
COST METHOD. Affiliated companies not accounted for under either the
consolidation or the equity method of accounting are accounted for under the
cost method of accounting. Under this method, the Company's share of earnings or
losses of these companies is not included in the Company's consolidated
statements of operations. However, a series of operating losses of an affiliated
company or other factors may indicate that a decrease in value of the
investments has occurred which is other than temporary. These impairment losses
are recognized in the consolidated statements of operations and are included in
"investment losses."
The Company records its ownership interest in equity securities of its
affiliated companies accounted for under the cost method at cost, unless the
securities have readily determinable fair values based on quoted market prices,
in which case these interests are reported at fair value.
NOTE 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 any unrealized
gains and losses, net of tax, reported in other comprehensive income (loss). 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 and other 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 and other 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.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Included in property and equipment are
the direct costs of developing or obtaining software for internal use.
Depreciation is determined using the straight-line method over the estimated
useful lives of the assets, which are as follows:
Buildings 29-50 years
Furniture, computer equipment and software 2-7 years
Leasehold improvements 3-10 years
36
NOTE 2 - ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Goodwill consists of the cost in excess of fair value of assets acquired in
purchase transactions, and is amortized on a straight-line basis over the
estimated future periods to be benefited, which range from 15 to 25 years. At
December 31, 2000 and 1999, accumulated amortization of goodwill was $19,370 and
$10,480, respectively.
DEFERRED COSTS
Deferred costs include direct-mail advertising costs for university-based
distance learning masters programs. Under these arrangements, the Company incurs
certain direct-mail advertising costs to market its programs in advance of the
program start date. These costs are capitalized and amortized over the estimated
useful life of the programs, which approximate eighteen months.
Deferred costs also include the cost of internally developing proprietary
products and materials. These costs are capitalized and amortized over the
estimated useful life of the products and materials, which approximates five
years.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be fully recoverable. If an impairment indicator is present,
the Company evaluates whether impairment exists on the basis of undiscounted
expected future cash flows from operations for the remaining amortization
period. If impairment exists, the asset is reduced by the estimated shortfall of
discounted cash flows.
REVENUE RECOGNITION
Revenue related to single-center and area franchise sales is recognized when all
material services or conditions relating to the sales have been substantially
performed or satisfied by the Company and collectibility of the fee is
reasonably assured. 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.
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 reasonably assured. Revenues from
educational services are recognized in the period the services are provided.
Revenue from the sale of educational products is generally recognized when
shipped.
Tuition and dormitory revenues are recognized over the term that the services
are provided. Semester based expenses are recognized over the matching revenue
recognition period.
37
NOTE 2 - ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
The Company expenses advertising costs as incurred, except for direct-mail
advertising, which is capitalized and amortized over its expected period of
future benefit. Advertising expense for the years ended December 31, 2000, 1999
and 1998 was $25,841, $23,663, and, $9,313 respectively.
Capitalized direct-response advertising consists primarily of the costs to
produce direct-mail order catalogues and brochures that are used to solicit
students of educational programs who have responded directly to the advertising.
The capitalized production costs are amortized over the period of the respective
programs, ranging from one to three years. At December 31, 2000 and 1999,
advertising costs totaling approximately $4,280 and $3,253, respectively, were
included in deferred costs.
STOCK OPTIONS GRANTED TO EMPLOYEES AND NON-EMPLOYEES
The Company records compensation expense for all stock-based compensation plans
using the intrinsic-value-based method and provides pro forma disclosures of net
income (loss) and net earnings (loss) per common share as if the fair value
method had been applied in measuring compensation expense. The Company records
compensation expense for all stock options granted to non-employees in an amount
equal to their estimated fair value at the earlier of the performance commitment
date or the date at which performance is complete, determined using the
Black-Scholes option valuation model. The compensation expense is recognized
ratably over the vesting period.
FOREIGN CURRENCY TRANSLATION
The financial statements of foreign subsidiaries with a functional currency
other than the U.S. dollar have been translated into U.S. dollars using the
current rate method. Assets and liabilities have been translated using the
exchange rates at year-end. Income and expense amounts have been translated
using the average exchange rates for the year. Translation gains or losses
resulting from the changes in exchange rates have been reported as a component
of accumulated other comprehensive income (loss) included in stockholder's
equity, net of tax.
OTHER COMPREHENSIVE INCOME
The Company displays the accumulated balance of other comprehensive income or
loss in accumulated other comprehensive income in the statement of stockholders'
equity. The components were as follows at December 31:
2000 1999
------------- --------------
Foreign currency translation adjustment $(13,002) $(4,862)
Unrealized gain on available for-sale-securities, net of
tax 317 3,117
------------ --------------
Accumulated other comprehensive loss $(12,685) $(1,745)
============= ==============
INCOME TAXES
The Company accounts for income taxes using the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
the differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities (i.e. temporary differences) and are
measured at prevailing enacted tax rates that will be in effect when these
differences have been settled or realized.
38
NOTE 2 - ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING CHANGE
On January 1, 1999, the Company adopted the provisions of AICPA Statement of
Position No. 98-5, REPORTING THE COSTS OF START-UP ACTIVITIES ("SOP 98-5"),
which requires start-up costs capitalized prior to January 1, 1999 to be
written-off and any future start-up costs to be expensed as incurred. The
Company previously capitalized pre-contract costs directly associated with
specific anticipated contracts as well as development costs for new educational
programs that were estimated to be recoverable. The cumulative effect of
adopting SOP 98-5 in 1999 decreased net income for the year ended December 31,
1999 by $1,323 (net of $682 in income taxes). The amount of the cumulative
effect related to the discontinued operations was $567 (net of $291 in income
taxes).
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. Statement No. 133 provides standards on accounting and
disclosure for derivative instruments, and requires that all derivatives be
measured at fair value and reported as either assets or liabilities in the
Company's consolidated balance sheet. The Company will be required to adopt the
provisions of Statement No. 133 no later than the beginning of fiscal year 2001.
The Company has completed its evaluation of adopting Statement No. 133 on its
consolidated financial position and results of operations, and has determined
that it will not be material.
NOTE 3 - DISCONTINUED OPERATIONS
ASPECT
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 a party to the transaction and the tax laws of the
jurisdictions in which theses subsidiaries operate, assuming that undistributed
gains outside the United States will be reinvested outside the United States.
Effective January 1, 2000, the Company changed the year-end of Aspect from
September 30 to December 31 to produce a consistent reporting period for the
consolidated entity. As a result of this change in year-end, Aspect's net
results of operations for the three month period ended December 31, 1999 are
reflected as an adjustment to retained earnings on the consolidated balance
sheet as of January 1, 2000. The impact of this change resulted in a decrease in
retained earnings of approximately $5,752. The results of Aspect's operations,
which are included in discontinued operations, for the period October 1, 1999 to
December 31, 1999 are summarized as follows:
Revenues $10,709
Direct costs (16,350)
Operating loss (5,641)
Other expense (111)
--------------
Net loss $ (5,752)
==============
39
NOTE 3 - DISCONTINUED OPERATIONS (CONTINUED)
SYLVAN PROMETRIC
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 $136,800. 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 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.
THE PACE GROUP
On September 30, 1999, the Company adopted a formal plan to dispose of PACE. The
sale transaction closed on December 31, 1999, and the Company received 10 shares
of series C preferred stock and 2,503 shares of common stock of Frontline Group,
Inc., a private investment holding company. The Company's investment in the
stock was recorded at its estimated fair value at December 31, 1999 of $7,000,
based on an independent appraisal, and a resulting loss on disposition was
recorded of approximately $27,000, including income tax expense of approximately
$1,100.
SUMMARIZED FINANCIAL INFORMATION OF DISCONTINUED OPERATIONS
Summarized operating information of the Company's discontinued operations for
the years ended December 31 are as follows :
2000 1999 1998
----------------- --------------- --------------
Revenues $75,898 $293,877 $261,531
----------------- --------------- --------------
Income (loss) before income taxes (3,805) 17,362 31,227
Income tax expense 163 12,398 14,958
------------------ --------------- --------------
Net income (loss) ($3,968) $ 4,964 $ 16,269
================== =============== ==============
Included in income from discontinued operations for the years ended December 31,
2000, 1999, and 1998 is an allocation of corporate interest expense of $784,
$2,411, and $232, respectively, based upon a percentage of the net equity
investment in discontinued operations to the net equity of the Company including
the discontinued operations. The accompanying consolidated statements of
operations have been restated to reflect the results of operations for these
entities as discontinued operations.
The accompanying consolidated balance sheet at December 31, 1999 reflects the
net assets of Sylvan Prometric as net assets of discontinued operations and net
liabilities of Aspect as net liabilities of discontinued operations. Net
long-lived assets of Prometric and Aspect as of December 31, 1999 have been
included in the net current asset and net current liability amounts because the
sale transactions closed during the year ended December 31, 2000. The net assets
of discontinued operations and net liabilities of discontinued operations
include the following for Prometric and Aspect as of December 31, 1999:
Accounts and notes receivable, net $50,598
Accounts payable and accrued expenses (41,332)
Other, net 1,621
Net long-lived assets 269,400
------------------
Net current assets of Prometric discontinued operations $280,287
==================
40
NOTE 3 - DISCONTINUED OPERATIONS (CONTINUED)
Cash and marketable securities $ 1,415
Accounts and notes receivable, net 6,312
Accounts payable and accrued expenses (7,226)
Other current liabilities, net (10,948)
Net long-lived assets 13,070
Long-term debt (5,109)
Other non-current liabilities, net (240)
------------------
Net current liabilities of Aspect discontinued operations $ (2,726)
==================
At December 31, 2000, undistributed gains on the sale of non-domestic
discontinued operations totaled approximately $238,400. Deferred tax liabilities
have not been recognized for these undistributed gains because it is
management's intention to reinvest such undisbtributed gains outside of the
United States. If all undistributed gains were remitted to the United States,
the amount of incremental United States federal income taxes, net of foreign tax
credits, would be approximately $83,400.
NOTE 4 - ACQUISITIONS
UNIVERSIDAD DE LAS AMERICAS
Effective December 12, 2000, the Company acquired a 60% controlling interest in
Universidad de Las Americas ("UDLA"), a private, for-profit university in Chile.
The purchase price totaled approximately $27,871; including an initial net cash
payment of $11,988, payments due of $12,000 after finalization of 2000
operating results, the assumption of $3,882 in outstanding debt. The final
purchase price may differ from this preliminary amount due to adjustments to
acquisition related costs. The acquisition was accounted for using the purchase
method of accounting and goodwill of $19,734 was recorded and is being amortized
over 25 years. The results of operations of UDLA are included in the
accompanying consolidated statements of operations from December 12, 2000
through December 31, 2000. In connection with the Company's acquisition of UDLA,
variable amounts of contingent consideration are also 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
final payment in 2007 will also include the Company's purchase of an additional
20% ownership interest for an agreed upon multiple of average operating
performance of 2005 and 2006.
UNIVERSIDAD DE VALLE DE MEXICO
Effective November 24, 2000, the Company acquired an 80% controlling interest in
Universidad de Valle de Mexico ("UVM"), a private, for-profit university in
Mexico. The purchase price totaled approximately $55,481 including estimated net
cash payments of $46,964 and the assumption of $8,517 of net liabilities. The
final purchase price may differ from this preliminary amount due to adjustments
to acquisition related costs. The acquisition was accounted for using the
purchase method of accounting and goodwill of $38,595 was recorded and is being
amortized over 25 years. The results of operations of UVM are included in the
accompanying consolidated statements of operations from November 24, 2000
through December 31, 2000.
LES ROCHES
Effective July 25, 2000, the Company acquired Les Roches, a private, for-profit
university in Switzerland. The purchase price totaled approximately $23,198
including estimated net cash payments of $5,219 and the assumption of $11,117 in
outstanding debt and $6,862 of other net liabilities. The transaction was
accounted for using the purchase method of accounting. The results of operations
of Les Roches are included in the accompanying consolidated statements of
operations from July 25, 2000 through December 31, 2000. In connection with the
Company's acquisition of Les Roches, variable amounts of contingent
consideration are also 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.
41
NOTE 4 - ACQUISITIONS (CONTINUED)
IVY WEST
Effective May 18, 2000, the Company purchased certain assets and assumed certain
liabilities of Ivy West, which offers SAT test preparation services. The
purchase price totaled approximately $10,200 including estimated net cash
payments of $7,900, a promissory note of $1,400, common stock valued at $250,
common stock of a subsidiary of the Company valued at approximately $250 and the
assumption of $400 of liabilities. The acquisition was accounted for using the
purchase method of accounting and goodwill of $9,300 was recorded and is being
amortized over 15 years. The results of operations of Ivy West are included in
the accompanying consolidated statements of operations from May 18, 2000 through
December 31, 2000.
UNIVERSIDAD EUROPEA DE MADRID
Effective April 1, 1999 the Company acquired a 54% controlling interest in
Universidad Europea de Madrid ("UEM"), a private, for-profit university. The
purchase price, including acquisition costs, was approximately $26,000 in cash,
net of cash received. The acquisition was accounted for using the purchase
method of accounting and goodwill of $10,445 was recorded and is being amortized
over a period of 25 years. The results of operations of UEM for the periods
subsequent to acquisition are included in the accompanying consolidated
statement of operations.
CANTER & ASSOCIATES, INC. AND CANTER EDUCATIONAL PRODUCTIONS, INC.
Effective January 1, 1998, the Company acquired all of the outstanding stock of
Canter & Associates, Inc. and Canter Educational Productions, Inc.
(collectively, "Canter"), commonly controlled companies engaged in the business
of providing materials and training programs for educators, for an initial
purchase price of $25,000 in cash. The acquisition was accounted for using the
purchase method of accounting and goodwill of $24,559 was recorded and is being
amortized over a period of 25 years. The results of operations of Canter for the
periods subsequent to acquisition are included in the accompanying consolidated
statements of operations.
The purchase agreement required the Company to pay Canter's shareholders
additional consideration in the event that earnings in 1998, 1999 and 2000
exceeded certain prescribed levels. For the 1998 contingency period, the Company
determined that additional consideration of $26,674 was due, and cash of $15,507
and restricted common stock with a value of $11,167 was paid in 1999. In 2000,
the Company settled all remaining contingent payments for $22,145 consisting of
$9,000 in cash and a commitment to pay the remaining $13,145 in 2001.
SCHULERHILFE
Effective October 28, 1998, the Company acquired two entities in Germany
operating as Schulerhilfe for an initial purchase price of $16,554 in cash and
124 shares of restricted common stock valued at $2,528. The acquisition was
accounted for using the purchase method of accounting and goodwill of $19,749
was recorded and is being amortized over a period of 25 years. The results of
operations of Schulerhilfe subsequent to acquisition are included in the
accompanying consolidated statements of operations.
In connection with the Company's acquisition of Schulerhilfe, and based on the
amount of 1999 franchise fees collected, additional consideration was payable to
the seller in cash. As of December 31, 1999, the Company recorded this
consideration as a liability and additional goodwill of $10,424, which is being
amortized over the remaining amortization period of 24 years.
WALL STREET INSTITUTE FRANCHISES
During 1999, the Company acquired 23 WSI franchise businesses for a combined
cash purchase price of approximately $65,800 including estimated net cash
payments of $35,981 in 1999 and $18,719 in 2000, a promissory note of $2,600 and
the assumption of approximately $8,500 of net current liabilities. The
acquisitions were accounted for using the purchase method of accounting, and
goodwill of $55,700 was recorded and is being amortized over 25 years. In
connection with one of the 1999 acquisitions, contingent consideration was
payable to the seller if a certain level of earnings was achieved in 2000. As of
December 31, 2000, the Company has recorded an estimate of the contingent
consideration of $12,000 as a liability and additional goodwill.
42
NOTE 4 - ACQUISITIONS (CONTINUED)
UNAUDITED PRO FORMA RESULTS OF OPERATIONS
The following combined unaudited pro forma results of operations of the Company
give effect to the Les Roches, UVM, UDLA and UEM acquisitions as though they had
occurred on January 1, 1999 for the years ended December 31:
2000 1999
------------- -------------
Revenues $427,526 $389,128
Income from continuing operations before cumulative
effect of change in accounting principle 342 9,169
Net income (loss) 367,181 (14,158)
Earnings (loss) per common share, diluted:
Continuing operations before cumulative effect of
change in accounting principle $0.01 $ 0.17
Net income (loss) $7.06 $(0.27)
NOTE 5 - AVAILABLE-FOR-SALE SECURITIES
The following is a summary of available-for-sale securities at December 31:
2000 1999
------------- -------------
Equity securities $ 99 $ 8,281
Debt securities 201,649 -
Cash reserve fund and other 329 2,609
------------- -------------
$202,077 $10,890
============= =============
At December 31, 2000, equity securities represent common stock investments in a
public company with a cost of $250 and a quoted market price of $99. The
adjustment to unrealized holding loss of $151 is a component of accumulated
other comprehensive income (loss), included in stockholders' equity. The cost of
the Company's other investments approximates fair value. Aggregate maturities of
debt securities are as follows: $136,631 within 1 year, $40,604 within 2-5 years
and $24,414 thereafter. The investments are classified as current as the Company
views its available-for-sale securities as available for use in its current
operations.
NOTE 6 - INVESTMENTS
FORMATION OF SYLVAN VENTURES
The Sylvan Ventures segment was established during the first quarter of 2000 to
invest in and develop companies developing emerging technology solutions for
the education and training marketplace ("portfolio companies"). On June 30,
2000, the affiliates of Apollo Management L.P. ("Apollo") and certain members of
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 management investors have
committed $15,000. On June 30, 2000, the Company transferred four investments in
portfolio companies to Sylvan Ventures - eSylvan, Inc., Caliber Learning
Network, Inc., OnlineLearning.net, and Zapme! corporation.
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 entitles the recipients to receive an
aggregate allocation of 20% of any cumulative net profits. As of December 31,
2000, the plan membership profit interests have been granted to management for
an aggregate allocation of approximately 15% of the cumulative net profits upon
a 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. Beginning January 1, 2001,
net losses will be 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 to
all membership
43
NOTE 6 - INVESTMENTS (CONTINUED)
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.
CONSOLIDATED INVESTMENTS
eSylvan is a start-up organization designed to distribute the Company's highly
successful learning center tutoring product to students at home via a computer.
Sylvan Ventures owns 98% of eSylvan. eSylvan has not generated significant
revenue through December 31, 2000 and its operating expenses have been included
in the 2000 consolidated statement of operations as a component of Sylvan
Ventures operating costs. Sylvan Ventures has committed additional funding of
$13,333 for eSylvan development and operating costs in 2001.
INVESTMENT IN AFFILIATES (EQUITY METHOD INVESTMENTS):
The Company's investments 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's accounting policies with respect to
its investments are described in Note 2. 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.
Investments in and advances to affiliates consist principally of investments in
common stock and preferred stock, as follows as of December 31:
VOTING VOTING
2000 INTEREST 1999 INTEREST
-------------- ------------- ------------- -------------
Caliber Learning Network, Inc. $15,123 36% $10,775 10%
Chancery Software Limited 14,224 42% - -
Classwell Learning Group, Inc. 13,045 42% - -
iLearning, Inc. 5,568 29% - -
HigherMarkets, Inc. 6,694 31% - -
Mindsurf, Inc. 1,109 47% - -
Other 2,236 - 2,542 -
-------------- -------------
Total $57,999 $13,317
============== =============
Each period in the table below includes summarized financial data of those
affiliates in which Sylvan Ventures had an interest at the end of the
respective period and includes results of operations data of the affiliate
for the entire year.
2000 1999 1998
-------------- ------------- --------------
Current assets $ 44,420 $ 31,765 $ 37,381
Other assets 67,191 21,519 24,778
Current liabilities 37,902 12,570 9,910
Long-term liabilities and other 7,149 10,250 14,635
Redeemable convertible preferred stock 77,643 15,153 -
Net sales 36,086 26,033 15,415
Gross profit 23,105 15,885 4,930
Net loss (66,761) (22,242) (28,825)
Caliber is a leading provider of end-to-end eLearning solutions to global
corporations and organizations. Sylvan Ventures has a commitment to fund an
additional $2,000 for Series B preferred stock in 2001. The Caliber
investment includes a secured note payable to the Company for management
services in the amount of $7,150 and $3,024 as of December 31, 2000 and 1999,
respectively. The Company has also guaranteed certain future non-cancelable
lease obligations relating to Caliber totaling $6,315.
Chancery Software Limited is a provider of an enterprise student information
system for schools that includes tracking of grading, attendance, and other
school and student communications.
44
NOTE 6 - INVESTMENTS (CONTINUED)
Classwell Learning Group, Inc. is a start-up organization which aims to
establish a definitive K-12 learning community organized around a comprehensive
set of tools and branded content.
iLearning, Inc. provides to businesses and organizations the ability to convert,
host, and monetize their existing training business into an ASP environment with
little internal expertise.
HigherMarkets Inc. is developing an e-procurement solution for universities
and other educational institutions.
Mindsurf, Inc. is a start-up organization aimed at improving communication
between teachers, students, and parents by providing students with computing and
communication resources though low cost, wireless handheld devices. Sylvan
Ventures has committed additional funding of $28,200 to Mindsurf if specified
performance targets are achieved.
The Company's allocable share of losses related to the investments in affiliates
for the years ended December 31, 2000 and 1999 was $22,203 and $2,356,
respectively. At December 31, 2000, the difference between the carrying amount
of equity method investments and the amount of underlying equity in net assets
of these investments was $25,305. This amount is being amortized for each
investment over a three-year period as a component of the Company's allocable
share of income or loss. For the year ended December 31, 2000, equity in net
loss of affiliates includes $3,793 of amortization.
OTHER INVESTMENTS (COST METHOD 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 cost unless a decline in estimated
fair value is determined to be permanent. Other investments consisted of the
following at December 31:
2000 1999
-------------- ---------------
ClubMom.com. Inc. $7,000 $ -
Chauncey Group International, Ltd. 8,000 8,000
Frontline Group, Inc. 7,000 7,000
Other 3,935 10,933
-------------- ---------------
Total $25,935 $25,933
============== ===============
REALIZED INVESTMENT LOSSES
During the years ended December 31, 2000 and 1999, the Company incurred realized
investment losses of $11,441 and $13,370, respectively.
Sylvan Ventures incurred a $3,051 realized loss in 2000 upon the disposal of its
$4,912 investment in the common stock of ZapMe! for cash proceeds of $1,861.
Sylvan Ventures also recorded realized investment losses of $8,390 in 2000 based
on an assessment that two investments were permanently impaired due to
significant deterioration in operating results and concerns regarding the
ability of these companies to successfully implement their business plan.
During 1999, the Company recorded investment losses of $13,370, principally
related to the redemption of the Company's $26,600 investment in JLC Learning
Corporation ("JLC") for proceeds of $15,200 in cash and purchase credits for JLC
products. In 1999, the Company determined that the remaining amount of the
purchase credit would not be realized as a result of the inability to use the
credit to purchase products consistent with its customers' needs. The Company
wrote-off the remaining product credit and the 1999 realized loss on investments
include an aggregate loss of $11,400 related to the sale of the JLC investment.
45
NOTE 7 - LONG-TERM DEBT
Long-term debt consists of the following at December 31:
2000 1999
------------- -------------
Long-term revolving credit facility with banks $ - $122,991
Convertible debentures 100,000 -
Mortgages, notes payable and lines of credit related to UEM
bearing interest at variable rates ranging from 4.75% to 6.34% 27,313 37,170
Note payable related to Les Roches bearing interest at 4.65% 11,143 -
Note payable related to UDLA bearing interest at 10.65% 8,781 -
Mortgages and notes payable bearing interest at fixed rates ranging
from 5.00% to 8.00% 1,630 249
------------- -------------
148,867 160,410
Less: current portion of long-term debt 20,292 14,315
------------- -------------
Total long-term debt $128,575 $146,095
============= =============
At December 31, 1999, the Company had a revolving credit facility (the
"Facility") with a group of five banks, which allowed the Company to borrow
up to an aggregate of $150,000 at variable rates. Effective March 2000, the
Company entered into an amendment to the Facility agreement reducing the
aggregate amount available to $100,000. Outstanding borrowings under the
Facility are unconditionally guaranteed by a pledge of the capital stock of
the Company's domestic subsidiaries. Debt covenants of the Facility require
the Company to maintain certain debt-to-earnings and interest coverage
ratios. Other provisions require maintenance of minimum net worth levels and
restrict advances, investments, loans, capital expenditures and dividends. At
December 31, 2000 the Company was in compliance with the covenants under the
Facility.
On June 30, 2000, the Company issued $100,000 of ten-year convertible
subordinated debentures to Apollo Management Group. The debentures bear interest
at a fixed rate of 5.00%, payable semi-annually, and are convertible at any time
into the Company's common stock at $15.735 per share. The debentures mature on
June 30, 2010.
The outstanding borrowings assumed as part of the UEM, Les Roches and UDLA
acquisitions are secured by the underlying property and fixed assets of the
universities.
Aggregate maturities of Company's borrowings are as follows: 2001 - $20,292;
2002 - $5,769; 2003 - $5,644; 2004 - $4,715; 2005 - $1,875 and thereafter
$110,572.
NOTE 8 - DUE TO SHAREHOLDERS OF ACQUIRED COMPANIES
Due to shareholders of acquired companies consists of the following amounts
payable in cash at December 31:
2000 1999
------------- -------------
Amounts payable to former shareholders of Schulerhilfe $ - $10,424
Amounts payable to former shareholders of Canter 13,145 9,000
Amounts payable to former shareholders of Prometric 3,050 3,050
Amounts payable to former shareholders of WSI franchises 12,000 -
Amounts payable to former shareholders of UDLA 12,000 -
------------- -------------
$40,195 $22,474
============= =============
46
NOTE 9 - LEASES
The Company conducts significant operations from leased facilities. These
facilities include the Company's corporate headquarters and other office
locations, warehouse space, and Company-owned learning centers. The terms of
substantially all of these leases are five years or less, with the exception of
the Company's corporate headquarters facilities, which have lease terms ending
in November 2006 and August 2009, and generally contain renewal options. The
Company also leases certain equipment under non-cancelable operating leases, the
majority of which are for terms of 36 months or less. Future minimum lease
payments related to continuing operations at December 31, 2000, by year and in
the aggregate, under all non-cancelable operating leases are as follows:
Years ending December 31:
2001 $18,749
2002 17,378
2003 15,893
2004 13,929
2005 12,180
Thereafter 20,501
-------------
$98,630
=============
The Company has entered into sublease agreements with the purchaser of Prometric
for leased space at three locations, approximating 70,000 square feet, for an
annual fee of $2,750, adjusted annually for increases in gross operating rent
and related expenses. The subleases extend from March 3, 2000 through lease
expiration in December 2007.
Rent expense, net of sub-lease income, included in income from continuing
operations for all cancelable and non-cancelable leases was approximately
$16,708, $13,505, and $8,259 for the years ended December 31, 2000, 1999 and
1998, respectively.
NOTE 10 - STOCKHOLDERS' EQUITY
On May 5, 2000, upon conclusion of a Company sponsored tender offer, the Company
purchased 8,507 shares of common stock at $15.25 per share. The cost of the
shares purchased was approximately $130,097, including transaction costs.
On September 13, 2000, upon conclusion of a second Company sponsored tender
offer, the Company purchased 4,658 shares of common stock at $15.00 per share.
The cost of the shares purchased was approximately $71,651, including
transaction costs.
As of December 31, 2000, the Company has reserved 17,389 shares of common stock
for future issuance upon the exercise of all outstanding stock options and the
conversion of debentures.
NOTE 11 - CONTINGENCIES
LOSS 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.
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 will be decided by
arbitration pursuant to the terms of the Agreement. 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.
47
NOTE 11 - 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.
CONTINGENT PAYMENTS AND BUSINESS COMBINATIONS
During 1999, the Company issued 510 shares of restricted common stock as partial
payment of contingent consideration due related to the Company's acquisition of
Canter. The shares are restricted through December 31, 2001. At December 31,
2001, the Company is obligated to issue additional shares of common stock if the
market value of the restricted common stock on that date is less than
three-quarters of the market value at the date of issuance ($21.885 per share).
In the normal course of business the Company is party to option agreements with
franchisees that allow, under specified circumstances, the repurchase of
operating franchises at predetermined multiples of operating results. These
options may be at the Company's or the franchisee's discretion based upon the
individual agreement and specific operating criteria. None of these option
agreements would be individually material and operating results of the Company
would not be materially impacted for the current period if the options were
exercised.
NOTE 12 - 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, due to shareholders of acquired companies, and
short and long-term debt, approximate their carrying amounts reported in the
consolidated balance sheets.
It is not practical to estimate the fair value of the Company's investments in
affiliates and 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.
NOTE 13 - EMPLOYEE BENEFIT PLANS
STOCK OPTIONS PLANS
The Board of Directors may grant options under five stock option plans to
selected employees, officers and directors of the Company to purchase shares of
the Company's common stock at a price not less than the fair market value of the
stock at the date of the grant. The 1998 Stock Incentive Plan ("1998 Plan") is
the only plan with significant stock option awards available for grant. The 1998
Plan allows for the grant of up to 3,750 shares of common stock in the form of
incentive and non-qualified stock options, stock appreciation rights, stock
awards, phantom stock awards, convertible securities and performance awards that
expire six or ten years after the date of grant. Options outstanding under all
five of the Company's stock option plans have been granted at prices which are
equal to or exceed the market value of the stock on the date of grant and vest
ratably over periods not exceeding six years.
The following table summarizes the stock option activity of the Company for the
years ended December 31:
2000 1999 1998
-------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------------- ------------ ------------ ------------ ------------ ------------
Outstanding at beginning of year 10,380 $18.13 9,067 $18.24 6,935 $13.74
Granted 679 14.31 1,737 17.07 2,989 26.77
Exercised (91) 5.42 (243) 9.93 (659) 9.92
Forfeited (1,029) 22.27 (181) 24.62 (198) 17.03
------------- ------------ ------------ ------------ ------------ ------------
Outstanding at end of year 9,939 $17.52 10,380 $18.13 9,067 $18.24
============= ============ ============ ============ ============ ============
Exercisable at end of year 5,675 $15.88 4,402 $14.17 3,584 $10.80
============= ============ ============ ============ ============ ============
48
NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- -------------------------------------
WEIGHTED AVERAGE
RANGE OF EXERCISE NUMBER OF WEIGHTED AVERAGE REMAINING NUMBER OF WEIGHTED AVERAGE
PRICES SHARES EXERCISE PRICES CONTRACTUAL LIFE SHARES EXERCISE PRICES
------------------------ ------------- ------------------- ------------------- ---------------- --------------------
$3.48-$6.08 1,087 $4.61 2.8 1,053 $ 4.60
$6.78-$13.11 1,696 11.47 7.0 686 9.61
$13.55-$19.77 3,404 14.93 5.8 2,223 15.14
$21.15-$32.38 3,752 26.34 6.5 1,713 26.30
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION ("Statement No. 123"), defines a fair-value-based method of
accounting for an employee stock option. However, it allows an entity to
continue to measure compensation cost for those instruments using the
intrinsic-value-based method of accounting prescribed by APB Opinion No. 25. As
permitted by Statement No. 123, the Company elected to retain the
intrinsic-value-based method of accounting for stock options. Statement No. 123
requires certain additional disclosures about stock-based compensation
arrangements regardless of the method used to account for them. In accordance
with Statement No. 123, the Black-Scholes option-pricing model is one technique
allowed to determine the fair value of the options. However, the derived fair
value estimates cannot be substantiated by comparison to independent markets.
For the years ended December 31, 2000, 1999 and 1998, pro forma net income and
earnings per share information required by Statement No. 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
the Black-Scholes option pricing model with the following weighted average
assumptions for 2000, 1999 and 1998: risk-free interest rate of 5.5%, 5.5% and
6% respectively, dividend yield of 0%, volatility factors of the expected market
price of the Company's common stock of .460, .443 and .360, respectively, and an
expected life of granted options from four to six years depending upon the
vesting period.
The Black-Scholes option-pricing 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. The weighted average estimated fair values of stock
options granted during fiscal years 2000, 1999, and 1998 were $6.12, $7.37, and
$11.26 respectively.
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 for the years ended December 31 is as follows:
2000 1999 1998
------------- -------------- ------------
Pro forma income (loss) from continuing operations before $ (8,446) $ 4,176 $10,140
cumulative effect of change in accounting principle
Pro forma net income (loss) $298,393 $(21,234) $25,446
Pro forma earnings (loss) per share, basic:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ (0.19) $0.08 $0.21
Net income (loss) $ 6.86 $(0.41) $0.52
Pro forma earnings (loss) per share, diluted:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $ (0.19) $0.08 $0.20
Net income (loss) $ 6.86 $(0.41) $0.50
49
NOTE 13 - EMPLOYEE BENEFIT PLANS (CONTINUED)
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 up to 15% of their salary, subject to certain annual
limitations. The Company may at its discretion make matching contributions,
which are allocated to eligible participants. All employees are eligible after
meeting certain service requirements. The Company made discretionary
contributions to this plan of $1,218, $461 and $315 during the years ended
December 31, 2000, 1999 and 1998, respectively.
EMPLOYEE STOCK PURCHASE PLAN
During 1998, the Company adopted an employee stock purchase plan that allows
eligible employees to purchase shares of common stock at a 15% discount to the
lower of the fair market value on the first day or the last day of the annual
offering period. Employees may authorize the Company to withhold up to 10% of
their compensation during any offering period, subject to certain limitations.
During fiscal 2000, 1999, and 1998, shares totaling 62, 41, and 27 were issued
under the plan at an average price of $12.61, $23.23, and $19.74, respectively.
MANAGEMENT OWNERSHIP INTERESTS
Executives of the Company have been granted options to purchase common stock in
the Company's subsidiary operating its International University segment. The
options represent 12% of the total outstanding shares and are exercisable at an
exercise price 10% greater than estimated fair value at the grant date. The
options were fully vested at the grant date and expire three years from the date
of issuance.
In June 2000, executives of the Company were granted membership profits interest
in Sylvan Ventures upon formation in the amount of 15% of total outstanding
units. These memberships profits interests entitle the holders to a share of
profits upon the occurrence of a profit event and shall be converted into common
stock of the corporate successor in the event of a qualified initial public
offering of Sylvan Ventures.
NOTE 14 - INVESTMENT AND OTHER INCOME
The Company's investment and other income consists of the following as of
December 31:
2000 1999 1998
-------------- --------------- -------------
Interest and other income $22,068 $1,170 $3,470
Gain (loss) on foreign exchange (2,029) (48) 518
-------------- --------------- -------------
$20,039 $1,122 $3,988
============== =============== =============
Gain (loss) on foreign exchange in 2000 includes a $3,149 loss related to the
settlement of a foreign exchange contract in August 2000. The foreign exchange
contract was entered into to protect against the impact of fluctuations in the
exchange rate between the U.S. dollar and the Mexican Peso on the amount of U.S.
dollars required for the UVM acquisition.
50
NOTE 15 - INCOME TAXES
Significant components of the provision for income taxes on earnings from
continuing operations for the years ended December 31 are as follows:
2000 1999 1998
-------------- ----------- --------------
Current:
Federal ($4,018) $ (180) $1,084
Foreign 6,591 2,114 834
State (2,242) (1,801) 860
------------ ----------- --------------
331 133 2,778
Deferred:
Federal (3,129) (2,087) 1,345
Foreign (202) 176 1,813
State (1,308) 494 688
------------ ----------- --------------
(4,639) (1,417) 3,846
------------ ----------- --------------
Total provision (benefit) $(4,308) $(1,284) $6,624
============ =========== ==============
For the years ended December 31, 2000, 1999 and 1998, foreign income from
continuing operations before income taxes was $20,997, $14,028 and $10,693,
respectively.
Significant components of the Company's deferred tax assets and liabilities
arising from continuing operations as of December 31 are as follows:
2000 1999
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $5,658 $ -
Deferred revenue 1,729 1,655
Allowance for doubtful accounts 1,355 401
Deferred compensation 591 398
Equity share of losses of affiliates 18,017 4,377
Charitable contributions carryforward - 672
Non deductible reserves 2,191 2,223
Tax credit carryforward 500 31
Capital loss carryforward - 3,475
Other 146 1,067
----------- -----------
Total deferred tax assets $30,187 $14,299
=========== ===========
Deferred tax liabilities:
Advertising costs 1,389 (86)
Prepaid expenses 871 -
Depreciation 6,933 4,381
Amortization of intangible assets 3,093 773
Deferred income 12,840 12,329
Unbilled receivables 1,113 1,377
Other 979 714
----------- -----------
Total deferred tax liabilities 27,218 19,488
----------- -----------
Net future income tax benefits (liabilities) 2,969 (5,189)
Valuation allowance for net deferred tax assets (3,857) -
----------- ------------
Net deferred tax liability $ (888) $ (5,189)
=========== ============
At December 31, 2000, undistributed earnings from continuing operations of
non-U.S. subsidiaries totaled $57,100. 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 $16,700.
51
NOTE 15 - INCOME TAXES (CONTINUED)
The net operating loss carryforwards at December 31, 2000 are related to
subsidiaries of the Company, and are available only to offset future taxable
income of those subsidiaries. These net operating loss carryforwards will begin
to expire 2005. Investment tax credits are related to a subsidiary of the
Company, and are available only to offset future taxes of that subsidiary. The
investment tax credit expires in 2001 and is expected to be fully utilized.
The reconciliation of the reported income tax expense to the amount that would
result by applying the U.S. federal statutory tax rate of 35% to income from
continuing operations before income taxes and cumulative effect of change in
accounting principle for the years ended December 31 is as follows:
2000 1999 1998
------------- ------------- ------------
Tax expense at U.S. statutory rate $(2,073) $ 2,186 $9,645
Expense (benefit) attributable to minority interest (3,542) 154 -
Permanent differences (155) 927 (477)
State income tax expense, net of federal tax effect (949) (1,196) 767
Tax effect of foreign income taxed at lower rate (1,676) (2,950) (2,822)
Change in valuation allowance 3,857 - -
Utilized tax credits - (433) -
Other 230 28 (489)
------------- ------------- ------------
Total tax provision (benefit) $ (4,308) $(1,284) $6,624
============= ============= ============
NOTE 16 - EARNINGS (LOSS) PER SHARE
The following table summarizes the computations of basic and diluted earnings
per share for the years ended December 31:
2000 1999 1998
-------------- ------------ --------------
Numerator used in basic and diluted earnings (loss) per common share:
Income (loss) from continuing operations, before
cumulative effect of change in accounting principle $(1,617) $ 8,339 $19,440
Income (loss) from discontinued operations, net of tax (3,968) 4,964 16,269
Gain (loss) on disposal of discontinued operations, net of tax 310,807 (26,968) -
Cumulative effect of change in accounting principle, net of tax - (1,323) -
-------------- ------------ --------------
Net income (loss) $305,222 $ (14,988) $35,709
============== ============ ==============
Denominator for basic earnings (loss) per share -
weighted-average common shares outstanding 43,501 51,553 48,962
Net effect of dilutive stock options based on treasury stock method - 1,604 2,324
-------------- ------------ --------------
Denominator for diluted earnings (loss) per share - weighted
average common shares outstanding and assumed conversions 43,501 53,157 51,286
============== ============ ==============
Earnings (loss) per common share, basic:
Income (loss) from continuing operations, before
cumulative effect of change in accounting principle $(0.04) $0.16 $0.40
Income (loss) from discontinued operations, net of tax (0.08) 0.10 0.33
Gain (loss) on disposal of discontinued operations, net of tax 7.14 (0.52) -
Cumulative effect of change in accounting principle, net of tax - (0.03) -
-------------- ------------ --------------
Earnings (loss) per common share, basic $7.02 $(0.29) $0.73
============== ============ ==============
Earnings (loss) per common share, diluted:
Income (loss) from continuing operations, before
cumulative effect of change in accounting principle $(0.04) $0.16 $0.38
Income (loss) from discontinued operations, net of tax (0.08) 0.09 0.32
Gain (loss) on disposal of discontinued operations, net of tax 7.14 (0.51) -
Cumulative effect of change in accounting principle, net of tax - (0.02) -
-------------- ------------ --------------
Earnings (loss) per common share, diluted $7.02 $(0.28) $0.70
============== ============ ==============
52
NOTE 16 - EARNINGS (LOSS) PER SHARE (CONTINUED)
Stock options and the convertible outstanding debentures (see Note 7) were not
dilutive for the year ended December 31, 2000 as the Company reported a net loss
from continuing operations.
NOTE 17 - BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION
The Company is organized on the basis of educational services provided. The
Company's segments are business units that offer distinct services. The segments
are managed separately as they have different customer bases and delivery
channels. Reportable segments are as follows:
SYLVAN LEARNING CENTERS provides personalized instructional services to students
of all ages and skill levels, through its network of franchised and
Company-owned learning centers.
SYLVAN EDUCATION SOLUTIONS provides educational programs to students of public
and non-public school districts through contracts funded by Federal Title I and
State-based programs, and professional development services to teachers.
SYLVAN ENGLISH LANGUAGE INSTRUCTION provides English language instruction
through a combination of computer-based and live instruction through its network
of franchised and Company-owned learning centers.
SYLVAN INTERNATIONAL UNIVERSITIES provides post-secondary instruction and degree
programs through its network of fully accredited universities located in Spain,
Switzerland, Mexico and Chile. The segment commenced operations in the second
quarter of 1999 with the acquisition of a controlling interest in UEM. During
2000, the Company also acquired a controlling interest in Les Roches, UVM and
UDLA.
SYLVAN VENTURES began operations in the first quarter of 2000. Sylvan Ventures
invests in and incubates companies developing emerging technology solutions for
the education and training marketplace.
The Company evaluates performance and allocates resources based on operating
income before corporate general and administrative expenses and income taxes.
There are no significant intercompany sales or transfers. Segment profit is net
operating profit (loss) for the operating segments. Segment profit for Sylvan
Ventures is calculated as the sum of net development costs, net investment
income (loss) and equity in net loss of affiliates.
The following table sets forth information on the Company's reportable segments
for the years ending December 31:
SYLVAN
SYLVAN SYLVAN ENGLISH SYLVAN
LEARNING EDUCATION LANGUAGE INTERNATIONAL SYLVAN
2000 CENTERS SOLUTIONS INSTRUCTION UNIVERSITIES VENTURES
-------------------------- -------------- --------------- -------------- -------------- --------------
Revenues $98,943 $105,177 $49,949 $62,582 $ -
Segment profit (loss) 22,105 16,132 2,818 4,977 (50,846)
Segment assets 84,895 120,756 135,857 239,166 82,006
Long-lived assets 5,820 9,890 9,614 127,098 3,728
SYLVAN
SYLVAN SYLVAN ENGLISH SYLVAN
LEARNING EDUCATION LANGUAGE INTERNATIONAL SYLVAN
1999 CENTERS SOLUTIONS INSTRUCTION UNIVERSITIES VENTURES
-------------------------- -------------- --------------- -------------- -------------- --------------
Revenues $90,664 $101,263 $52,848 $32,275 -
Restructuring charges 170 2,537 - 447 -
Segment profit 21,768 17,371 11,742 2,408 -
Segment assets 71,097 105,273 121,408 69,042 -
Long-lived assets 5,041 10,582 7,491 80,862 -
53
NOTE 17 - BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
SYLVAN
SYLVAN SYLVAN ENGLISH SYLVAN
LEARNING EDUCATION LANGUAGE INTERNATIONAL SYLVAN
1998 CENTERS SOLUTIONS INSTRUCTION UNIVERSITIES VENTURES
-------------------------- -------------- --------------- -------------- -------------- --------------
Revenues $64,755 $86,293 $27,754 - -
Segment profit 19,339 14,339 7,747 - -
Segment assets 56,841 96,438 70,198 - -
Long-lived assets 3,823 14,656 4,290 - -
The following tables reconcile the reported information on segment profit and
assets to income (loss) before income taxes and cumulative effect of change in
accounting principle and total assets reported in the statements of operations
and balance sheets for the years ended December 31:
2000 1999 1998
------------- --------------- -------------
Total profit for reportable segments $(4,814) $53,289 $41,425
Corporate general and administrative expense (20,306) (27,270) (15,530)
Other income (expense) 19,195 (18,964) 169
------------- ---------------- -------------
Income (loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle ($5,925) $7,055 $26,064
============= =============== =============
2000 1999 1998
-------------- --------------- -------------
Segment assets $ 662,680 $366,820 $223,477
Unallocated corporate assets 354,283 117,518 100,783
Net assets of discontinued operations - 280,287 278,150
-------------- --------------- -------------
Total assets $1,016,963 $764,625 $602,410
============== =============== =============
Two of the Company's segments include revenues generated from both Company-owned
and franchised centers. The following table sets forth the components of total
revenues of these segments at December 31:
SYLVAN SYLVAN
LEARNING CENTERS ENGLISH LANGUAGE INSTRUCTION
--------------------------------------------- ----------------------------------------------
2000 1999 1998 2000 1999 1998
------------ ------------ ------------- ------------- ------------- ------------
Company-owned centers $53,639 $53,011 $36,166 $31,545 $30,848 $6,876
Franchise centers 45,304 37,653 28,589 18,404 22,000 20,878
------------ ------------ ------------- ------------- ------------- ------------
Total revenues $98,943 $90,664 $64,755 $49,949 $52,848 $27,754
============ ============ ============= ============= ============= ============
Direct costs for these segments relate primarily to the Company-owned centers.
Costs related to the franchised centers are included in the Company's general
segment expenses. It is not practical to quantify these costs separately.
54
NOTE 17 - BUSINESS AND GEOGRAPHIC SEGMENT INFORMATION (CONTINUED)
Revenue and long-lived assets information by geographic area for the years ended
December 31 is as follows:
2000 1999 1998
------------- -------------- --------------
REVENUES
United States $188,582 $167,851 $148,668
Spain 71,012 63,346 22,737
Other foreign countries 57,057 45,853 7,397
------------- -------------- --------------
Consolidated total $316,651 $277,050 $178,802
============= ============== ==============
LONG-LIVED ASSETS
United States $34,948 $27,220 $29,379
Spain 81,590 85,965 4,265
Switzerland 23,665 - -
Other foreign countries 31,639 2,633 224
------------- -------------- --------------
Consolidated total $171,842 $115,818 $33,868
============= ============== ==============
Revenues are attributed to countries based on the location of the customer.
Revenues in individual foreign countries other than Spain and long-lived assets
in individual foreign countries other than Spain and Switzerland did not exceed
10% of consolidated amounts in any of the years presented.
NOTE 18 - RESTRUCTURING
During the fourth quarter of 1999, the Company completed an analysis of its
operating structure to improve operating efficiency and to enhance shareholder
value. As a result of this analysis, management approved a formal restructuring
plan in 1999, and the Company recorded a restructuring charge to operations of
approximately $5,100. The restructuring plan was comprised of employee
termination and facility exit costs resulting primarily from the Company's plan
to exit certain activities outside the core business of providing educational
instruction. The Company eliminated 58 professional and administrative positions
as a result of the plan. Facility exit costs include approximately $3,500 of
costs to close schools and school-based facilities. The Company completed the
implementation of the plan by the end of fiscal 2000. During the years ended
December 31, 2000 and 1999, the Company paid $2,160 and $2,967, respectively
related to the restructuring plan.
NOTE 19 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash flow information for the Company reflects the total cash flows including
continuing operations and discontinued operations.
Interest payments were approximately $2,981, $5,090 and $900 for the years ended
December 31, 2000, 1999 and 1998, respectively. Income tax payments were
$25,112, $15,514 and $7,654 for the years ended December 31, 2000, 1999, and
1998, respectively.
In connection with the 2000 acquisitions of Ivy West, Les Roches, UVM, and UDLA
for combined net cash consideration of $72,072, the Company acquired assets with
a fair value of $150,926 and assumed debt and liabilities of $78,854.
In connection with the 1999 acquisitions of UEM and WSI franchise businesses,
for aggregate net cash consideration of $62,000 paid in 1999 and $18,700 paid in
2000, the Company acquired assets with a fair value of $177,033 and assumed
liabilities of $96,333.
In connection with the 1998 acquisitions of Canter and Schulerhilfe for combined
consideration of $44,082, the Company acquired assets with a fair value of
$50,465 and assumed liabilities of $6,383.
55
NOTE 20 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following 2000 financial information reflects all normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. All periods' results have been
restated to separately disclose discontinued operations. Summarized operating
data is as follows:
QUARTER ENDED
2000 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- --------- ------------- -----------
Revenues $75,539 $82,229 $59,969 $98,913
------------- ---------- ---------- ------------
Operating income (loss) 4,929 5,062 (3,790) 1,342
------------- ---------- ---------- ------------
Income (loss) from continuing operations before
Cumulative effect of change in accounting principle 3,410 6,626 (3,337) (8,316)
Income (loss) from discontinued operations, net of tax (3,868) (1,957) 1,903 (46)
Gain on disposal of discontinued operations, net of tax 288,454 - - 22,353
------------- ---------- ---------- ------------
Net income (loss) $287,996 $4,669 $ (1,434) $13,991
============= ========== ========== ============
Earnings (loss) per common share, basic:
Income (loss) from continuing operations before
Cumulative effect of change in accounting principle $ 0.07 $ 0.14 $(0.08) $(0.22)
Income (loss) from discontinued operations (0.08) (0.04) 0.05 -
Gain on disposal of discontinued operations 5.68 - - 0.60
------------- ---------- ---------- ------------
Net income (loss) $ 5.67 $ 0.10 $(0.03) $0.38
============= ========== =========== ============
Earnings (loss) per common share, diluted:
Income (loss) from continuing operations before
Cumulative effect of change in accounting principle $ 0.07 $ 0.14 $(0.08) $(0.22)
Income (loss) from discontinued operations (0.08) (0.04) 0.05 -
Gain on disposal of discontinued operations 5.59 - - 0.60
------------- ---------- ---------- ------------
Net income (loss) $ 5.58 $ 0.10 $(0.03) $ 0.38
============= ========== =========== ============
Shares used in computation:
Basic 50,802 45,110 41,084 37,274
============= ========== =========== ============
Diluted 51,570 45,825 41,084 37,274
============= ========== =========== ============
56
NOTE 20- QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
QUARTER ENDED
----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- ---------- ------------- ------------
1999
----
Revenues $57,217 $76,841 $66,748 $76,244
----------- ---------- ---------- -----------
Operating income (loss) 5,178 12,431 17,659 (9,249)
----------- ---------- ---------- -----------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle 4,405 8,365 12,574 (17,005)
Income (loss) from discontinued operations, net of tax 2,402 3,018 3,358 (3,814)
Loss on disposal of discontinued operations, net of tax - - (25,082) (1,886)
Cumulative effect of change in accounting principle (1,323) - - -
----------- ---------- ---------- -----------
Net income (loss) $5,484 $11,383 $ (9,150) $(22,705)
=========== ========== ========== ===========
Earnings (loss) per common share, basic:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $0.09 $0.16 $0.24 $(0.34)
Income (loss) from discontinued operations 0.05 0.06 0.06 (0.07)
Loss on disposal of discontinued operations - - (0.48) (0.04)
Cumulative effect of change in accounting principle (0.03) - - -
----------- ---------- ---------- -----------
Earnings (loss) per common share, basic $0.11 $0.22 $(0.18) $(0.45)
=========== ========== ========== ===========
Earnings (loss) per common share, diluted:
Income (loss) from continuing operations before
cumulative effect of change in accounting principle $0.08 $0.16 $0.24 $(0.34)
Income (loss) from discontinued operations 0.04 0.05 0.06 (0.07)
Loss on disposal of discontinued operations - - (0.47) (0.04)
Cumulative effect of change in accounting principle (0.02) - - -
----------- ---------- ---------- -----------
Net income (loss) $0.10 $0.21 $(0.17) $(0.45)
=========== ========== ========== ===========
Shares used in computation:
Basic 51,666 51,841 51,897 50,907
=========== ========== ========== ===========
Diluted 53,945 53,574 53,284 50,907
=========== ========== ========== ===========
During the quarter ended December 31, 1999, the Company recognized restructuring
costs of $3,569. Additionally, the Company also recognized significant
non-recurring operating charges during the fourth quarter of 1999, which totaled
$9,978. These charges principally related to asset impairment charges, which
resulted from management's focus on simplification of the business model and a
return to the core business strengths. Losses recorded on disposal of
investments in the fourth quarter of 1999 also resulted in $13,400 of
non-recurring charges during the period. The cumulative effect of these
significant, unusual charges was to reduce income from continuing operations by
$26,947 during the fourth quarter of 1999.
Earnings per share are computed independently for each of the quarters present.
Therefore, the sum of the quarterly net earnings per share will not necessarily
equal the total for the year.
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