UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the quarter ended MARCH 31, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from __________ to
__________.
COMMISSION FILE NUMBER 0-22844
SYLVAN LEARNING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-1492296
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1001 FLEET STREET, BALTIMORE, MARYLAND 21202
-------------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410)843-8000
-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]. No [ ].
The registrant had 37,799,177 shares of Common Stock outstanding as of May 7,
2001.
SYLVAN LEARNING SYSTEMS, INC.
INDEX
PAGE NO.
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PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2001 and
December 31, 2000.......................................3
Consolidated Statements of Operations - Three months ended
March 31, 2001 and March 31, 2000.......................5
Consolidated Statements of Cash Flows - Three months ended
March 31, 2001 and March 31, 2000........................6
Notes to Consolidated Financial Statements - March 31, 2001..7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................14
Item 3. Quantitative and Qualitative Disclosure of Market Risk......20
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................22
SIGNATURES...........................................................22
2
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2001 2000
----------------- -------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 66,306 $ 116,490
Available-for-sale securities 123,673 202,077
Receivables:
Accounts receivable 58,995 68,468
Costs and estimated earnings in excess of billings on
uncompleted contracts 1,032 2,613
Notes receivable from tuition financing 8,283 7,489
Other notes receivable 13,597 13,317
Other receivables 14,206 15,549
----------------- -------------------
96,113 107,436
Allowance for doubtful accounts (6,735) (5,554)
----------------- -------------------
89,378 101,882
Inventory 5,798 5,832
Deferred income taxes 3,960 3,936
Prepaid expenses and other current assets 19,983 20,955
----------------- -------------------
Total current assets 309,098 451,172
Notes receivable from tuition financing, less current portion 9,518 8,313
Other notes receivable, less current portion 4,839 2,378
Property and equipment:
Land and buildings 90,235 94,151
Furniture, computer equipment and software 101,356 94,249
Leasehold improvements 27,448 22,407
----------------- -------------------
219,039 210,807
Accumulated depreciation (46,387) (38,965)
----------------- -------------------
172,652 171,842
Intangible assets:
Goodwill 293,412 296,422
Other 4,757 2,611
----------------- -------------------
298,169 299,033
Accumulated amortization (23,544) (21,078)
----------------- -------------------
274,625 277,955
Investments in and advances to affiliates 81,021 57,999
Other investments 25,601 25,935
Deferred costs, net of accumulated amortization of $2,485
and $1,969 at March 31, 2001 and December 31, 2000, respectively 11,067 7,200
Other assets 15,126 14,169
----------------- -------------------
Total assets $903,547 $1,016,963
================= ===================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31, DECEMBER 31,
2001 2000
------------------ ------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,076 $ 20,108
Accrued expenses 39,801 40,452
Income taxes payable 14,046 119,511
Current portion of long-term debt 10,979 20,292
Due to shareholders of acquired companies 27,050 40,195
Deferred revenue 39,986 42,483
Other current liabilities 21,161 10,673
------------------ ------------------
Total current liabilities 171,099 293,714
Long-term debt, less current portion 129,727 128,575
Deferred income taxes 4,724 4,824
Other long-term liabilities 9,435 3,707
------------------ ------------------
Total liabilities 314,985 430,820
Minority interest 51,148 32,880
Stockholders' equity:
Preferred stock, par value $0.01 per share - - authorized
10,000 shares, no shares issued and outstanding as of
March 31, 2001 and December 31, 2000 - -
Common stock, par value $0.01 per share - - authorized
90,000 shares, issued and outstanding shares of
37,741 as of March 31, 2001 and 37,278 as of
December 31, 2000 377 373
Additional paid-in capital 211,349 205,343
Retained earnings 348,648 360,232
Accumulated other comprehensive loss (22,960) (12,685)
------------------ ------------------
Total stockholders' equity 537,414 553,263
------------------ ------------------
Total liabilities and stockholders' equity $903,547 $1,016,963
================== ==================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
2001 2000
(Restated)
-------------------------------------------
(Unaudited)
REVENUES $120,446 $ 75,540
COST AND EXPENSES
Direct costs 108,074 64,428
Sylvan Ventures operating costs 5,577 1,382
General and administrative expenses 5,986 4,801
-------------------- -------------------
Total expenses 119,637 70,611
-------------------- -------------------
Operating income 809 4,929
OTHER INCOME (EXPENSE)
Investment and other income 3,327 2,819
Interest expense (2,229) (1,918)
Sylvan Ventures investment losses (400) -
Equity in net loss of affiliates:
Sylvan Ventures (19,786) (280)
Other (126) (596)
--------------------- ---------------------
(19,912) (876)
Minority interest in consolidated subsidiaries:
Sylvan Ventures 1,291 -
Other (1,420) (752)
--------------------- ---------------------
(129) (752)
--------------------- ---------------------
Income (loss) from continuing operations before income taxes (18,534) 4,202
Income tax benefit (expense) 6,950 (793)
--------------------- -------------------
Income (loss) from continuing operations (11,584) 3,409
Loss from discontinued operations, net of income
tax expense of $163 - (3,868)
Gain on disposal of discontinued operations, net of income
tax expense of $136,762 - 288,454
---------------------- -------------------
Net income (loss) $(11,584) $287,995
====================== ===================
Earnings (loss) per common share, basic:
Income (loss) from continuing operations $(0.31) $0.07
Net income (loss) $(0.31) $5.67
Earnings (loss) per common share, diluted:
Income (loss) from continuing operations $(0.31) $0.07
Net income (loss) $(0.31) $5.58
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
THREE MONTHS ENDED MARCH 31,
2001 2000
------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ (11,584) $287,995
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 5,603 6,296
Amortization 3,703 3,909
Gain on disposal of discontinued operations - (288,454)
Deferred income taxes (41) 365
Loss on investments 400 -
Equity in net loss of affiliates 19,912 1,363
Minority interest in income of consolidated subsidiary 129 751
Other non-cash items 657 166
Changes in operating assets and liabilities:
Receivables 14,663 9,671
Tuition loans, net (2,533) (1,527)
Inventory, prepaid and other current assets (4,043) 1,743
Payables and accrued expenses 97 (5,210)
Income taxes payable (102,738) -
Deferred revenue and other current liabilities (461) (987)
-------------------- ------------------
Net cash provided by (used in) operating activities (76,236) 16,081
-------------------- ------------------
INVESTING ACTIVITIES
Purchase of available-for-sale securities (23,494) -
Proceeds from sale or maturity of available-for-sale securities 103,098 965
Investment in and advances to affiliates and other investments (32,203) (19,709)
Purchase of property and equipment (13,301) (9,402)
Proceeds from sale of Prometric, net of closing costs - 712,151
Cash paid for acquired businesses, net of cash received (2,630) (12,806)
Payment of contingent consideration for prior period acquisitions (13,145) (10,323)
Expenditures for deferred costs (4,395) (1,682)
Decrease (increase) in other assets (520) 59
------------------- -------------------
Net cash provided by investing activities 13,410 659,253
------------------- -------------------
FINANCING ACTIVITIES
Proceeds from exercise of options and warrants 3,806 50
Proceeds from issuance of common stock - 722
Repurchases of common stock - (9,860)
Proceeds from issuance of long-term debt 747 19,315
Payments on long-term debt (7,452) (146,894)
Cash received from members of Sylvan Ventures 16,114 -
Decrease in other long-term liabilities 572 -
-------------------- --------------------
Net cash provided by (used in) financing activities 13,787 (136,667)
-------------------- --------------------
Effect of subsidiary year-end change on cash and cash - (2,565)
equivalents
Effect of exchange rate changes on cash (1,145) (1,584)
--------------------- -------------------
Net increase (decrease) in cash and cash equivalents (50,184) 534,518
Cash and cash equivalents at beginning of period 116,490 20,410
-------------------- -------------------
Cash and cash equivalents at end of period $66,306 $554,928
==================== ===================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, 2001
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month period ended March 31, 2001 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2001. The
traditional semester programs in the education industry, with a summer break,
result in unusually large seasonality in the operating results of Sylvan
Learning Systems, Inc. ("the Company"). The consolidated balance sheet at
December 31, 2000 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required
by generally accepted accounting principles for complete financial
statements. For further information, refer to the audited consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 2000.
Certain amounts previously reported for 2000 have been reclassified to conform
with the 2001 presentation.
NOTE 2 - ADOPTION OF NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which was adopted
effective January 1, 2001. Because of the Company's minimal use of derivatives,
the adoption of the new standard did not have any effect on the Company's
consolidated financial position and results of operations.
NOTE 3 - DISCONTINUED OPERATIONS
On October 6, 2000, the Company sold its English Language immersion business,
Aspect, ("Aspect") for $19,794 in cash. The gain on the disposition recognized
in the year ended December 31, 2000 was $22,353, which includes an income tax
benefit of $3,047. The Company has estimated the domestic and foreign income
taxes resulting from the sale based on the expected allocation of proceeds to
subsidiaries that are parties to the transaction and the tax laws of the
jurisdictions in which these subsidiaries operate, assuming that undistributed
gains outside the United States will be reinvested outside the United States.
On March 3, 2000, the Company sold its computer-based testing division, Sylvan
Prometric ("Prometric") for approximately $775,000 in cash. The gain on the
disposition recognized in the year ended December 31, 2000 was approximately
$288,454, net of income taxes of $136,762. The final proceeds from the sale may
change based on contractual provisions that provide for certain adjustments to
the sale price, including an adjustment for changes in working capital of
Prometric between November 30, 1999 and March 3, 2000. The Company and the buyer
have not completed the process required to provide for a final settlement of the
sale proceeds. However, management believes that any future adjustments will be
immaterial to the Company's financial position and results of operations. The
Company has estimated the domestic and foreign income taxes resulting from the
sale based on the expected allocation of proceeds to subsidiaries that are a
party to the transaction and the tax laws
7
NOTE 3 - DISCONTINUED OPERATIONS (CONTINUED)
of the jurisdictions in which these subsidiaries operate, assuming that
undistributed gains outside the United States will be reinvested outside the
United States.
Summarized operating information of the Company's discontinued operations,
including both Prometric and Aspect for the period owned in 2000, is as follows
for the three months ended March 31, 2000:
Revenues $47,655
-----------------
Loss before income taxes (3,705)
Income tax expense 163
------------------
Net loss $ (3,868)
==================
Included in income from discontinued operations for the three month period ended
March 31, 2000 is an allocation of corporate interest expense of $678, based
upon a percentage of the net equity investment in discontinued operations to the
net equity of the Company including the discontinued operations.
NOTE 4 - INVESTMENTS IN AND ADVANCES TO AFFILIATES
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, affiliates of Apollo Management L.P. ("Apollo") and certain members
of Sylvan's management ("management investors") joined the Company to
form Sylvan Ventures, LLC, with total committed funds of $400,000. Of the
$400,000 commitment, the Company has committed $285,000, including
investments in portfolio companies valued at $65,000; Apollo has committed
$100,000; and the management investors have committed $15,000. 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 entitle the recipients to
receive an aggregate allocation of up to 20% of any cumulative net profits.
As of March 31, 2001, 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, subject to certain
limitations. Beginning January 1, 2001, net losses are being allocated on a
pro rata basis only to the common membership interest holders until their
capital account balances have been reduced to zero, at which time any losses
will be allocated to Apollo until its capital account balance has been
reduced to zero. Thereafter, any losses will be allocated on a pro rata basis
to all membership interest holders. Any profits earned after January 1, 2001
will first be allocated to Apollo until it has recovered its 2000 allocated
losses and then to the common membership interest holders to recover
previously allocated losses. After all previously allocated losses have been
recovered through profit allocations, any additional net profits will be
allocated on a pro rata basis to all interest holders, including the plan
membership profit interest holders.
8
NOTE 4 - INVESTMENTS IN AND ADVANCES TO AFFILIATES (CONTINUED)
CONSOLIDATED INVESTMENTS
eSylvan, Inc. ("eSylvan") is a start-up organization designed to distribute
the Company's learning center tutoring product to students at home via
computer. Sylvan Ventures owns 88% of eSylvan. eSylvan had not generated
significant revenue through March 31, 2001, and its operating expenses have
been included in the 2001 and 2000 consolidated statement of operations as a
component of Sylvan Ventures' operating costs. Sylvan Ventures has committed
additional funding of $10,000 as of March 31, 2001 for eSylvan development
and operating costs in 2001. During the quarter ended March 31, 2001 eSylvan
issued common stock representing an 11% ownership interest to franchisees of
Sylvan Learning Centers.
INVESTMENT IN AFFILIATES (EQUITY METHOD INVESTMENTS):
The Company's investment in and advances to affiliates consist of investments in
and loans to companies in the initial or early stages of development. These
companies are frequently illiquid or experiencing cash flow deficits from
operations. Further, investments are generally unsecured and subordinated to the
claims of other creditors. Accordingly, the Company's investments in and
advances to affiliates are subject to a high degree of investment and credit
risk. The Company has made estimates of the recoverability of loans and advances
to its affiliates, and due to the inherent uncertainty of the operations of
these affiliates, it is reasonably possible that these estimates may change in
the near term.
Investments in and advances to affiliates consist principally of investments in
common stock and preferred stock, as follows as of March 31, 2001 and December
31, 2000, respectively:
MARCH 31, OWNERSHIP DECEMBER 31, OWNERSHIP
2001 INTEREST 2000 INTEREST
------------------ ----------------- --------------------- ----------------
Walden E-Learning, Inc. $32,657 41% - -
Chancery Software Limited 13,248 42% $14,224 42%
Classwell Learning Group, Inc. 10,879 42% 13,045 42%
Caliber Learning Network, Inc. 9,039 35% 15,123 34%
HigherMarkets, Inc. 4,880 31% 6,694 31%
ilearning, Inc. 4,331 27% 5,568 29%
Mindsurf, Inc. 2,770 50% 1,109 47%
Other 3,217 - 2,236 -
------------------ ---------------------
Total $81,021 $57,999
================== =====================
Each period in the tables 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 such affiliates for the entire
quarter.
MARCH 31, 2001 DECEMBER 31, 2000
-------------------- --------------------
Current assets $46,321 $44,420
Other assets 68,410 67,191
Current liabilities 40,175 37,902
Long-term and other liabilities 10,392 7,149
Redeemable convertible preferred stock 87,179 77,643
9
NOTE 4 - INVESTMENTS IN AND ADVANCES TO AFFILIATES (CONTINUED)
THREE MONTHS ENDED MARCH 31,
------------------------------------------------
2001 2000
-------------------- --------------------
Net sales $ 10,623 $ 5,070
Gross profit 6,753 2,981
Net loss (28,988) (6,142)
The Caliber Learning Network, Inc. ("Caliber") investment includes a note
payable, secured by Caliber assets, to the Company for management services in
the amounts of $6,150 and $7,150 as of March 31, 2001 and December 31, 2000,
respectively. The Company has also guaranteed certain future non-cancelable
lease obligations relating to Caliber totaling $5,154. Caliber is currently
seeking additional long-term financing to provide for its anticipated cash
needs. There can be no assurance that such efforts by Caliber will be
successful.
Sylvan Ventures has committed additional funding of $21,150 to Mindsurf, Inc.
("Mindsurf") if specified performance targets are achieved.
The Company's allocable share of losses related to the investments in affiliates
for the quarters ended March 31, 2001 and 2000 was $19,912 and $876,
respectively. At March 31, 2001, the difference between the carrying amount of
equity method investments and the amount of underlying equity in net assets of
these investments was $42,697. This amount is being amortized for each
investment primarily over a three-year period as a component of the Company's
allocable share of income or loss. For the quarter ended March 31, 2001, equity
in net loss of affiliates includes $2,805 of amortization.
NOTE 5 - DUE TO SHAREHOLDERS OF ACQUIRED COMPANIES
Due to shareholders of acquired companies consists of the following amounts
payable in cash:
MARCH 31, DECEMBER 31,
2001 2000
--------------------- --------------------
Amounts payable to former shareholders of Canter $ - $13,145
Amounts payable to former shareholders of Prometric 3,050 3,050
Amounts payable to former shareholders of WSI franchises 12,000 12,000
Amounts payable to former shareholders of UDLA 12,000 12,000
--------------------- --------------------
$27,050 $40,195
===================== ====================
In connection with the Company's acquisition of Canter, cash consideration of
$13,145 was paid in a final settlement with the former shareholders of Canter
during the quarter ended March 31, 2001. The liability and additional goodwill
were recorded at December 31, 2000.
NOTE 6 - INCOME TAXES
The tax provisions for the three month periods ended March 31, 2001 and 2000
were based on the estimated effective tax rates applicable for the full
years, after giving effect to significant unusual items related specifically
to the interim periods. The Company's income tax provisions for all periods
consist of federal, state, and foreign income taxes. The Company's effective
tax rate from continuing operations was 37.5% for the three months ended
March 31, 2001. The Company estimates that its effective income tax rate from
continuing operations for the year ended December 31, 2001 will be 37.5%.
The Company's effective tax rate from continuing operations in 2000 was
significantly affected by the inability to utilize tax benefits from certain
investment losses of Sylvan Ventures, the impact of minority interests and
timing of recognition of corporate level tax benefits from subsidiary losses.
Because of these factors, the 2000 effective tax rate varied substantially from
the statutory rate.
10
NOTE 7 - STOCKHOLDERS' EQUITY
The components of stockholders' equity are as follows:
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS INCOME (LOSS) EQUITY
-------------- --------------- -------------- --------------------- -------------------
Balance at December 31, 2000 $373 $205,343 $360,232 $(12,685) $553,263
Options exercised for purchase
of 456 shares of common
stock, including income tax
benefit of $2,078 4 5,880 5,884
Other equity activity 126 126
Comprehensive income (loss):
Net loss for the three
months ended March 31, 2001 (11,584) (11,584)
Unrealized gain on available-
for-sale securities 23 23
Foreign currency translation
adjustment (10,298) (10,298)
--------------------
Total comprehensive loss (21,859)
-------------- --------------- -------------- ---------------------- -------------------
Balance at March 31, 2001 $377 $211,349 $348,648 $(22,960) $537,414
============== =============== ============== ====================== ===================
NOTE 8 - COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), net of related tax, are as
follows:
THREE MONTHS ENDED MARCH 31,
2001 2000
--------------- ---------------
Net income (loss) $(11,584) $287,995
Foreign currency translation adjustment (10,298) (3,488)
Unrealized gain (loss) on available-for-sale securities 23 (1,424)
---------------- ---------------
Comprehensive income (loss) $(21,859) $283,083
================ ===============
11
NOTE 9 - EARNINGS (LOSS) PER SHARE
The following table summarizes the computations of basic and diluted earnings
(loss) per common share:
THREE MONTHS ENDED MARCH 31,
2001 2000
------------- --------------
Numerator used in basic and diluted earnings (loss) per common share:
Income (loss) from continuing operations $(11,584) $ 3,409
Loss from discontinued operations, net of tax - (3,868)
Gain on disposal of discontinued operations, net of tax - 288,454
------------- --------------
Net income (loss) $(11,584) $287,995
============= ==============
Denominator:
Weighted average common shares outstanding 37,441 50,802
Net effect of dilutive stock options based on treasury stock
method using average market price - 768
Effect of convertible debentures - -
------------- --------------
Weighted average common shares outstanding and additional
dilution from common stock equivalents 37,441 51,570
============= ==============
Earnings (loss) per common share, basic:
Income (loss) from continuing operations $(0.31) $0.07
Loss from discontinued operations, net of tax - (0.08)
Gain on disposal of discontinued operations, net of tax - 5.68
------------- --------------
Net income (loss) $(0.31) $5.67
============= ==============
Earnings (loss) per common share, diluted:
Income (loss) from continuing operations $(0.31) $0.07
Loss from discontinued operations, net of tax - (0.08)
Gain on disposal of discontinued operations, net of tax - 5.59
------------- --------------
Net income (loss) $(0.31) $5.58
============= ==============
Stock options and the convertible debentures were not dilutive for the quarter
ended March 31, 2001 as the Company reported a net loss from continuing
operations.
NOTE 10 - CONTINGENCIES
On November 18, 1996, ACT, Inc. filed suit against the Company alleging that
the Company violated federal antitrust laws and committed various state law
torts in connection with the operations of its computer-based testing
operations and in obtaining a testing services contract from the NASD. The
Company believes the grounds of the lawsuit are without merit and is
defending 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 the Company's consolidated
financial position.
On November 18, 1998, James Jinsoo and Christine Choi filed suit against the
Company seeking damages and recission under the Development Agreement they
had entered into for Korea in 1995 and which had been terminated by the
Company due to their default under the Development Agreement. The dispute
will be decided by arbitration pursuant to the terms of the Agreement. The
Company believes the grounds of the lawsuit are without merit and is
defending 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 the Company's consolidated
financial position.
The Company is subject to other legal actions arising in the ordinary course
of its business. In management's opinion, the Company has adequate legal
defenses and/or insurance coverage with respect to the eventuality of such
actions and does not believe any settlement would materially affect the
Company's financial position.
12
NOTE 11 - BUSINESS SEGMENT INFORMATION
THREE MONTHS ENDED MARCH 31,
2001 2000
----------------- -----------------
Operating revenues:
Sylvan Learning Centers $ 27,842 $22,659
Sylvan Education Solutions 26,770 25,945
Sylvan English Language Instruction 13,017 12,435
Sylvan International Universities 52,817 14,501
Sylvan Ventures - -
----------------- -----------------
$120,446 $75,540
================= =================
Segment profit (loss):
Sylvan Learning Centers $ 5,690 $ 5,002
Sylvan Education Solutions 1,675 1,867
Sylvan English Language Instruction 688 1,558
Sylvan International Universities 4,319 2,685
Sylvan Ventures (25,763) (1,662)
------------------ -----------------
$(13,391) $ 9,450
================== =================
MARCH 31, DECEMBER 31,
Segment assets: 2001 2000
------------------ -----------------
Sylvan Learning Centers $ 90,169 $ 84,895
Sylvan Education Solutions 109,429 120,756
Sylvan English Language Instruction 128,414 135,857
Sylvan International Universities 239,762 239,166
Sylvan Ventures 94,303 82,006
------------------ -----------------
$662,077 $662,680
================== =================
Segment profit (loss) is calculated as net operating profit (loss) for operating
segments. Segment profit for Sylvan Ventures is calculated as the sum of the
operating costs, net investment gain (loss) and equity in net loss of
affiliates. There are no significant intercompany sales or transfers. The
following table reconciles the reported information on segment profit (loss) to
income (loss) from continuing operations before income taxes reported in the
consolidated statements of operations:
THREE MONTHS ENDED MARCH 31,
2001 2000
--------------- --------------------
Total profit (loss) for reportable segments $(13,391) $ 9,450
Corporate general and administrative expense (5,986) (4,801)
Other income (expense) and minority interest, net 843 (447)
--------------- --------------------
Income (loss) from continuing operations before income taxes $(18,534) $ 4,202
=============== ====================
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Sylvan Learning Systems, Inc. ("the Company" or "Sylvan") generates revenues
from four business segments: Sylvan Learning Centers, which earns primarily
franchise royalties, franchise sales fees and Company-owned Learning Center
revenues; Sylvan Education Solutions, which earns revenues from providing
supplemental remedial education services to public and non-public schools as
well as providing teacher training services; Sylvan English Language
Instruction, which earns primarily franchise royalties, company-owned center
revenue and franchise sales fees; and Sylvan International Universities,
which earns tuition and dormitory fees paid by the students of Universidad
Europea de Madrid CEES ("UEM"), Swiss Hotel Association Hotel Management
School Les Roches ("Les Roches"), Universidad del Valle de Mexico ("UVM") and
Universidad de Las Americas ("UDLA"). A fifth segment, Sylvan Ventures,
invests in and develops companies to bring technology solutions to the
education and training marketplace. Sylvan Ventures has not generated
revenues since its inception in 2000, but costs have been incurred to oversee
and develop the investments.
The following table sets forth the percentage relationships of operating
revenues and direct costs for each division, as well as certain income statement
line items expressed as a percentage of total revenues for the periods
indicated:
THREE MONTHS ENDED MARCH, 31
2001 2000
--------------- ---------------
Revenues:
Sylvan Learn ing Centers 23% 30%
Sylvan Education Solutions 22% 34%
Sylvan English Language Instruction 11% 17%
Sylvan International Universities 44% 19%
--------------- ---------------
Total revenues 100% 100%
Direct costs:
Sylvan Learning Centers 18% 23%
Sylvan Education Solutions 21% 32%
Sylvan English Language Instruction 10% 14%
Sylvan International Universities 40% 16%
--------------- ---------------
Total direct costs 89% 85%
General and administrative expenses 5% 6%
Sylvan Ventures operating costs 5% 2%
--------------- ---------------
Operating income 1% 7%
Non-operating expense (including equity in net loss of Ventures affiliates) 16% 1%
---------------- ---------------
Income (loss) from continuing operations (15%) 6%
Income tax benefit (expense) 5% (1%)
--------------- ---------------
Income (loss) from continuing operations (10%) 5%
================ ===============
RESULTS OF OPERATIONS
Sylvan is a leading international provider of educational services to
families and schools. The Company provides lifelong educational services
through five separate business segments. The Sylvan Learning Centers segment
designs and delivers individualized tutorial programs to school age children
through franchised and Company-owned Learning Centers. This segment also
includes the operations of Schulerhilfe, a major provider of tutoring
services in Germany. The Sylvan Education Solutions segment principally
provides educational programs to students of public and non-public school
districts through contracts funded by Title 1 and state-based programs. This
segment also
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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, Kft., ("WSI"), a
European-based franchiser and operator of learning centers that teach the
English language to professionals. Sylvan International Universities segment
owns or maintains controlling interests in four private, for-profit universities
located in Spain, Switzerland, Mexico and Chile. The Company's newest segment,
Sylvan Ventures, invests in and develops companies that are creating emerging
technology solutions for the education marketplace.
Consistent with the stated goal of focusing resources and management's efforts
on the core business of educational services, and in order to fund expansion of
technology applications in educational and training services, the Company
consummated the sale of Prometric, a computer-based testing business and Aspect
Language Schools, B.V. ("Aspect"), an English Language immersion business in
2000. Unless specifically noted, all discussion of financial results excludes
the results Prometric and Aspect except as disclosed as discontinued operations.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 TO RESULTS FROM
THE THREE MONTHS ENDED MARCH 31, 2000.
REVENUES. Total revenues from continuing operations increased by $44.9 million,
or 59%, to $120.4 million in 2001 from $75.5 million in 2000. Included in the
total revenues from continuing operations in 2001 were $36.7 million of revenues
from Les Roches, UVM and UDLA, which were acquired in the third and fourth
quarters of 2000. Total revenues from continuing operations increased 11%,
excluding the increase due to the Les Roches, UVM and UDLA acquisitions.
SYLVAN LEARNING CENTERS revenue increased by $5.2 million, or 23%,
to $27.8 million for the quarter ended March 31, 2001, compared to $22.7
million in the same period in 2000. Revenues from Company-owned learning
centers increased $1.7 million, or 15%, to $12.8 million during the first
quarter of 2001. Same center revenues increased 7%, or $0.8 million, with the
remaining revenue increase of $0.9 million generated from five Company-owned
centers acquired from franchise owners and a net of one new center opened
during the past year. In May of 2000, the Company acquired Ivy West, an SAT
preparation company based in California. The acquisition of Ivy West resulted
in additional revenue of $1.9 million for the three months ended March 31,
2001. Franchise sales increased by $0.3 million primarily due to increased
territory sales in the U.S. and Canada. Franchise royalties increased by $0.9
million, or 17%, in the first quarter of 2001 as a result of a net increase
of forty-nine new Learning Centers opened after March 31, 2000, and a 12%
increase in same center revenue. International revenues, primarily
Schulerhilfe, remained constant at $4.0 million in the first quarter of 2001
and 2000. Operating revenue for Sylvan Learning Centers represents 23% of
total revenues from continuing operations of the Company for the three month
period ended March 31, 2001.
SYLVAN EDUCATION SOLUTIONS revenue increased by $0.8 million, or 3%, to
$26.8 million for the quarter ended March 31, 2001, compared to the same period
in 2000. Career Starters (formerly known as "Sylvan At Work") revenue increased
$1.0 million over the same period in 2000 as a result of new contracts signed
since March 31, 2000. Canter revenue decreased $0.2 million to $5.2 million for
the quarter ended March 31, 2001 from $5.4 million in the same period in 2000,
primarily as a result of timing differences of shipments of materials to
students between periods. Operating revenue for Sylvan Education Solutions
represents 22% of total revenues from continuing operations of the Company for
the three month period ended March 31, 2001.
SYLVAN ENGLISH LANGUAGE INSTRUCTION revenue increased $0.6 million, or
5%, to $13.0 million for the quarter ended March 31, 2001, compared to the same
period in 2000. This increase was almost entirely the result of increased
tuition revenues from Company-owned centers along with improved sales volumes in
existing franchised centers. Operating revenue for Sylvan English Language
Instruction segment represents
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11% of total revenues from continuing operations of the Company for the three
month period ended March 21, 2001.
SYLVAN INTERNATIONAL UNIVERSITIES revenue for the first quarter of
2001 increased $38.3 million, or 264%, to $52.8 million, compared to the same
period in 2000. International Universities revenue increased $36.7 million
due to the acquisitions of controlling interests of Les Roches, UVM and UDLA,
which occurred in the third and fourth quarters of 2000 and are, therefore,
not included in revenue for the quarter ended March 31, 2000. Seasonality of
university semesters significantly impacts these operating revenues as
evidenced by the semester break at UDLA in the first quarter which results in
limited class schedules for the summer break during the first two months of
the first quarter. Operating revenue for Sylvan International Universities
represents 44% of total revenues from continuing operations of the Company
for the three month period ended March 31, 2001.
DIRECT COSTS. Total direct costs of revenues excluding Sylvan Ventures increased
68% to $108.1 million in 2001 from $64.4 million in 2000. Included in direct
costs in the first quarter of 2001 were $33.9 million of costs of Les Roches,
UVM and UDLA, which were acquired in the third and fourth quarters of 2000.
Total direct costs increased $9.7 million, or 15%, excluding the costs related
to Les Roches, UVM and UDLA. Direct costs as a percentage of total revenues
increased to 90% in 2001 from 85% in 2000. This increase in direct costs as a
percentage of revenues is primarily due to the expenses related to the expansion
of the International Universities and the impact of seasonality in acquired
universities.
SYLVAN LEARNING CENTERS expenses increased $4.5 million to $22.2
million, or 80% of Learning Centers revenue for 2001, compared to $17.7
million, or 78% of Learning Centers revenue for the same period in 2000.
Approximately $1.7 million of the increase in the first quarter of 2001
relates to expenses incurred in Company-owned learning centers due to the
acquisition of franchised learning centers and variable costs associated with
higher revenues at existing Company-owned centers. The acquisition of Ivy
West resulted in $1.6 million of increased cost during the three months ended
March 31, 2001. The remaining cost increase for the quarter relates to
additional franchise support costs. Despite this increase, franchise support
costs actually decreased as a percentage of franchise royalty revenue to 55%
compared to 58% for the first quarter of 2000.
SYLVAN EDUCATION SOLUTIONS expenses increased by $1.0 million to $25.1
million, or 94% of Sylvan Education Solutions revenue for the quarter ended
March 31, 2001, compared to $24.1 million or 93% of Sylvan Education Solutions
revenue for the same period in 2000. The increase in expenses as a percentage of
revenue for the quarter ended March 31, 2001 is primarily due to investments
made in Canter personnel and technology systems to provide the necessary
infrastructure to support Canter's expected future growth.
SYLVAN ENGLISH LANGUAGE INSTRUCTION expenses increased by $1.4
million to $12.3 million or 95% of Sylvan English Language Instruction
revenues for the three month period ended March 31, 2001, compared to $10.9
million or 88% of Sylvan English Language Instruction revenues for the same
period in 2000. The increase in expenses as a percentage of revenue for the
three months ended March 31, 2001 is primarily the result of increasing
overhead costs related to the future internal expansion of the international
network of centers.
SYLVAN INTERNATIONAL UNIVERSITIES expenses increased by $36.7
million to $48.4 million, or 92% of Sylvan International Universities revenue
for the three month period ended March 31, 2001, compared to $11.1 million or
81% of Sylvan International Universities revenue for the same period in 2000.
This increase is primarily due to the acquisition of controlling interests of
Les Roches, UVM and UDLA in the third and fourth quarters of 2000, as well as
an increase in headquarter expenses to support the expansion of the
university network. Closure of UDLA for the summer break in January and
February was the primary reason for the division's decreased operating
margins in comparison to the first quarter of 2000.
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OTHER EXPENSES. General and administrative expenses increased by $1.2 million
during the three month period ended March 31, 2001, compared to the same period
in 2000. The increase was primarily due to performance-based bonus recognition
and moving costs incurred in 2001. General and administrative expenses decreased
to 5% of total revenues for the three month period ended March 31, 2001,
compared to 6% of revenues for the same period in 2000.
Sylvan Ventures operating costs increased by $4.2 million to $5.6
million for the three months ended March 31, 2001, compared to $1.4 million
for the same period in 2000. eSylvan, a subsidiary of Sylvan Ventures,
incurred $3.6 million of expenses related to the development of its
Internet-based tutoring operations. Sylvan Ventures incurred management
expenses of $2.0 million in connection with research, evaluation and
management of its portfolio companies.
Sylvan Ventures equity in net losses of affiliates increased by
$19.5 million to $19.8 million for the first quarter of 2001, compared to
$0.3 million for the same period in 2000. These losses relate to Sylvan
Ventures' share of operating losses generated by the early stage enterprises
in the investment portfolio and the amortization of the difference between
the initial carrying amount of equity method investments and the underlying
equity in net assets of these investments at the time of purchase. Sylvan
Ventures investment losses of $0.4 million consisted of impairment charges
related to portfolio investments. Minority interests' share of Sylvan
Ventures losses totaled $1.3 million for the first quarter of 2001.
Other non-operating items remained constant at $0.4 million for the
quarter ended March 31, 2001, compared to the same period in 2000. The
increase in interest and other income and decrease in equity in net loss of
other affiliates of $0.4 million and $0.5 million, respectively, were partially
offset by an increase in other minority interest of $0.7 million.
The Company's effective tax rate from continuing operations was 37.5%
for the three month period ended March 31, 2001. The reported effective income
tax rate from continuing operations differs from the U.S. federal statutory tax
rate due to the impact of state income taxes, minority interests, foreign income
taxed at lower rates and the inability to utilize tax benefits from certain
investment losses of Sylvan Ventures. The Company anticipates that its effective
income tax rate from continuing operations for the year ending December 31, 2001
will be 37.5%.
The Company's effective tax rate from continuing operations in 2000
was signifcantly affected by the inability to utilize tax benefits from
certain investment losses of Sylvan Ventures, the impact of minority
interests and timing of recognition of corporate level tax benefits from
subsidiary losses. Because of these factors, the 2000 effective tax rate
varied substantially from the statutory rate.
INCOME (LOSS) FROM CONTINUING OPERATIONS. Income from continuing operations
decreased by $15.0 million, to a loss of $11.6 million for the three months
ended March 31, 2001. The decrease is primarily the result of additional Sylvan
Ventures related costs and investment losses totaling $14.5 million in the
quarter ended March 31, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash used by operations was $76.2 million for the three month period
ended March 31, 2001, a decrease of $92.3 million as compared to the three
months ended March 31, 2000. The reported net loss of $11.6 million was
offset by significant non-cash items such as depreciation and amortization
charges of $9.3 million and equity in net loss of affiliates, primarily due
to Sylvan Ventures, of $19.9 million. Working capital related decreases in
liquidity of $95.0 million consisted primarily of income tax payments of
$95.0 million, primarily resulting from the sale of Prometric in the first
quarter of 2000, which were not payable until 2001.
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Cash provided by investing activities was $13.4 million in the three
month period ended March 31, 2001 compared to cash provided by investing
activities of $659.3 million in 2000. The 2001 investment activity was
primarily the result of proceeds from the net sale of available-for-sale
securities ($79.6 million) partially offset by increases in investments in
and advances to affiliates primarily related to Sylvan Ventures ($32.2
million), purchases of property and equipment ($13.3 million) and the payment
of contingent consideration for a prior acquisition ($13.1 million). The
significant investing proceeds received in 2000 related primarily to the sale
of the Prometric division ($712.2 million). At March 31, 2001, the Company
has accrued obligations payable in cash of $27.1 million related to
contingent consideration for certain prior acquisitions. The amounts are
expected to be paid later in 2001.
Cash provided by financing activities was $13.8 million in the three
month period ended March 31, 2001 compared to cash used by financing activities
of $136.7 million in 2000. The 2001 financing activity related primarily to cash
received from the minority interest members of Sylvan Ventures ($16.1 million)
and proceeds from the exercise of options ($3.8 million) partially offset by net
payments of long-term debt ($6.7 million). Cash used by financing activities of
$136.7 million in 2000 related primarily to the repayment of the Company's
borrowings under its revolving credit facility ($127.6 million) and the
repurchase of shares of its common stock ($9.9 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 expansion of its existing business, fund
International University acquisitions, pay contingent consideration and fund
Sylvan Ventures investments and operating costs. Sylvan Ventures has
outstanding commitments to provide certain additional funding totaling $21.2
million to certain portfolio companies. The Company continues to examine
opportunities in the educational services industry for potential synergistic
acquisitions.
EURO CONVERSION
On January 1, 1999, certain countries of the European Union established
fixed conversion rates between their existing currencies and one common
currency, the Euro. The Euro is now traded on currency exchanges and may be used
in business transactions. The Company encountered no difficulties related to the
initial adoption of the Euro in 1999. Beginning in January 2002, new
euro-denominated currencies will be issued and the existing currencies will be
withdrawn from circulation. The Company is currently evaluating the systems and
business issues raised by the euro conversion. These issues include the need to
adapt computer and other business systems and equipment and the competitive
impact of cross-border transparency. At present, management does not believe the
Euro conversion will have a material impact on the Company's financial condition
or results of operations.
CONTINGENT MATTERS
In connection with the Company's acquisition of Les Roches, variable
amounts of contingent consideration are payable to the seller if specified
levels of earnings are achieved in 2001 and 2002. The Company will record the
contingent consideration when the contingencies are resolved and the additional
consideration is payable.
In connection with the Company's acquisition of UDLA, variable amounts
of contingent consideration are payable to the seller in 2006 and 2007 if
specified levels of earnings are achieved in 2004, 2005 and 2006. The Company
will record the contingent consideration when the contingencies are resolved and
the additional consideration is payable.
The Company has entered into agreements with certain franchisees of
Sylvan Learning Centers and Wall Street Institute that allow the franchisees
to require that the Company purchase the centers back at a predetermined
multiple of operating results if specified operating results thresholds are
achieved. When the
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Company can assess 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 effect in the foreseeable future.
SEASONALITY IN RESULTS OF OPERATIONS
The Company experiences seasonality in results of operations primarily
as a result of changes in the level of student enrollments and the timing of
semester cycles, particularly in the International Universities segment. Timing
of semester breaks at the International Universities results in the most
favorable operating performance being achieved in the second and fourth quarters
of the year. Other factors that impact the seasonality of operating results
include: timing of contracts funded under Title I, timing of franchise license
fees and the timing of Sylvan Ventures' development costs. Revenues and profits
in any period will not necessarily be indicative of results in subsequent
periods.
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS, INCLUDING BUT
NOT LIMITED TO, STATEMENTS REGARDING THE COMPANY'S CONTINGENT PAYMENT
OBLIGATIONS RELATING TO ACQUISITIONS, FUTURE CAPITAL REQUIREMENTS, POTENTIAL
ACQUISITIONS, AND THE COMPANY'S FUTURE DEVELOPMENT PLANS ARE BASED ON CURRENT
EXPECTATIONS. THESE STATEMENTS ARE FORWARD LOOKING IN NATURE AND INVOLVE A
NUMBER OF RISKS AND UNCERTAINTIES. POLITICAL, ECONOMIC, CURRENCY, TAX,
REGULATORY, TECHNOLOGICAL, COMPETITIVE AND OTHER FACTORS DESCRIBED IN THE
COMPANY'S REPORTS FILED FROM TIME TO TIME WITH THE COMMISSION COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FORM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS. THE COMPANY CAUTIONS READERS NOT TO PLACE UNDUE
RELIANCE ON ANY SUCH FORWARD LOOKING STATEMENTS, WHICH STATEMENTS ARE MADE
PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND, AS
SUCH, SPEAK ONLY AS OF THE DATE MADE.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or
to future cash flows that may result from the changes in the price of financial
instruments. The Company is exposed to financial market risks, including changes
in foreign currency exchange rates, interest rates and investment values. The
Company occasionally uses derivative financial instruments to protect against
adverse currency movements related to significant foreign acquisitions. Exposure
to market risks related to operating activities is managed through the
Company's regular operating and financing activities.
FOREIGN CURRENCY RISK
The Company derives approximately 58% of its revenues from continuing
operations from customers outside the United States. This business is
transacted through a network of international subsidiaries, generally in the
local currency that is considered the functional currency of that foreign
subsidiary. Expenses are also incurred in the foreign currencies to match
revenues earned and minimize the Company's exchange rate exposure to operating
margins. A hypothetical 10% adverse change in average annual foreign currency
exchange rates would reduce net income and cash flows for the quarter ended
March 31, 2001 by $0.8 million. The Company generally views its investment in
the majority of its foreign subsidiaries as long-term. The effects of a change
in foreign currency exchange rates on the Company's net investment in foreign
subsidiaries are reflected in other comprehensive income. A 10% depreciation in
functional currencies relative to the U.S. dollar would result in a decrease in
consolidated stockholders' equity at March 31, 2001 of approximately $15.5
million.
INTEREST RATE RISK
The Company holds its cash and cash equivalents in high quality
short-term fixed income securities. Consequently, the fair value of the
Company's cash and cash equivalents would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due to the
short-term nature of the Company's portfolio. The Company's long-term revolving
credit facility bears interest at variable rates, and the fair value of this
instrument is not significantly affected by changes in market interest rates.
The Company's convertible debentures bear interest at 5%, which presently
approximates the market rate and therefore the fair value approximates the
recorded value of this liability. A 100 basis point decrease in interest rates
would impact net interest income and interest expense by reducing pretax income
for the quarter ended March 31, 2001 by $0.4 million.
INVESTMENT RISK
The Company's investment portfolio contains debt securities that mature
within one year. A hypothetical 10% adverse change in the fair value of the debt
securities would not materially adversely effect earnings or cash flows because
of the Company's ability to hold the debt securities until maturity.
In addition to the debt securities, the Company also has an investment
portfolio that consists of direct investment positions in education technology
companies through Sylvan Ventures as well as short-term investments in
available-for-sale debt and equity securities. The Company's investment
portfolio is exposed to risks arising from changes in these investment values.
The Company's investment portfolio includes a number of holdings of
non-publicly traded companies in the educational services industry. The
Company accounts for these investments using either the cost method (cost
less impairment, if any) or the equity method of accounting. Equity method
investments are specifically excluded from the scope of this disclosure.
Non-public investments where the Company owns less than a 20% interest are
subject to fluctuations in market value, but their current illiquidity
reduces the exposure to
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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 position at March 31, 2001. Actual results
may differ materially.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three month
period ended March 31, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
Sylvan Learning Systems, Inc.
Date: May 11, 2001 /s/ Sean Creamer
------------------------------------------
Sean Creamer, Vice President Corporate Finance
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