Back to GetFilings.com
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, 1996
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _________ to _________.
Commission File Number 0-22844
SYLVAN LEARNING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1492296
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Lancaster Street, Baltimore Maryland 21202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410)843-8000
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
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 $453 million as of March 17, 1997.
The registrant had 24,516,623 shares of Common Stock outstanding as of March 17,
1997.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this Form 10-K will be filed by
amendment on Form 10-K/A, which will be filed with the Securities and Exchange
Commission not later than April 30, 1997.
INDEX
Page No.
--------
PART I.
Item 1. Business................................................ 3
Item 2. Properties.............................................. 10
Item 3. Legal Proceedings....................................... 11
Item 4. Submission of Matters to a Vote of Security Holders..... 11
PART II.
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters................ 12
Item 6. Selected Financial Data................................. 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................ 16
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. will be filed by
amendment on Form 10-K/A which will be
filed with the Securities and Exchange
Commission not later than April 30, 1997....................... 24
PART IV.
Item 14. Exhibits, Financial Statements, Schedules,
and Reports on Form 8-K............................... 24
SIGNATURES
2
PART I.
ITEM 1. BUSINESS
Sylvan Learning Systems, Inc. ("The Company" or "Sylvan") is a leading
international provider of educational and testing services. The Company delivers
a broad array of supplemental and remedial educational services and
computer-based testing services through three principal segments. Through its
Core Educational Services segment, the Company designs and delivers
individualized tutorial services to school-age children and adults through its
network of 620 franchised and Company-owned Sylvan Learning Centers in 49
states, five Canadian provinces, Hong Kong, South Korea and Guam. Sylvan
Prometric, the Company's testing services segment, administers computer-based
tests for major corporations, professional associations and governmental
agencies through its network of certification centers which are located
throughout the world. In addition, the Company's Contract Educational Services
segment now serves 72 schools and over 10,000 students by providing educational
services to public and non-public school districts receiving funding under
federal and state programs and provides contract educational and training
services on-site to employees of large corporations. In 1996, total systemwide
revenues were approximately $285.5 million, composed of $165.1 million from core
educational services ($139.5 million from franchised Learning Centers and $25.6
million from Company-owned Learning Centers, product sales and franchise sales
fees), $87.0 million from testing services and $33.4 million from contract
educational services. In December 1996, the Company acquired Wall Street
Institute International, B.V. and its commonly-controlled affiliates. Wall
Street and its affiliates teach the English language in Europe and Latin America
through a network of over 170 franchised and company-owned centers. Note 19 of
the 1996 audited financial statements contains additional disclosures regarding
the Company's business and geographic segments. As discussed further below, the
Company, in March 1997, announced a proposed merger with National Education
Corporation.
Proposed Merger With National Education Corporation
In March 1997, the Company announced a proposed merger with National
Education Corporation ("NEC") in a stock-for-stock transaction. NEC is a
publicly-held provider of distance learning services, supplemental multimedia
educational materials, and professional training products and services. Under
the terms of the merger, the Company would issue 0.58 shares of its common stock
for each share of NEC common stock. Following the transaction, which is expected
to be accounted for as a pooling-of-interests, shareholders of NEC would hold
approximately 47% on a fully-diluted basis of the common stock of the combined
company. The transaction is expected to be completed in the third quarter of
1997 and has been approved by the boards of directors of both companies. The
transaction is subject to federal anti-trust review and approval by the
shareholders of both companies.
Core Educational Services: Sylvan Learning Centers
Sylvan is widely recognized as providing high quality educational services
with consistent, quantifiable results, and has delivered its core educational
service to more than 1,000,000 students primarily in grades three through eight
over the past 17 years. The Company's core educational service segment provides
supplemental instruction in reading, mathematics and reading readiness,
featuring an extensive series of standardized diagnostic tests, individualized
instruction, a student motivational system and continued involvement from both
parents and the child's regular school teacher.
Typically, a parent contacts a Sylvan Learning Center because the parent
believes that his or her child may have insufficient reading or mathematics
skills. Parents learn about Sylvan from the Company's media advertising, from a
referral from another parent or from school personnel. Learning Center personnel
ask the parent to bring the student to the Learning Center to complete a series
of standardized diagnostic tests and to receive educational consultation.
Approximately 35% of phone inquiries result in a visit to a Learning Center. The
Learning Center's Sylvan-trained educators use test results to diagnose
students' weaknesses and to design an individual learning program for each
student. After the initial testing and consultation, the Company estimates that
more than 90% of parents enroll the student in a full course of study. The
program typically requires four to six months to complete and comprises
3
approximately 36 to 60 hours of instruction. Instruction is generally given
twice a week for one hour per visit. Sylvan requires that all instructors be
certified teachers. The cost of the tests and initial consultation ranges from
$95 to $250, and fees average $35 per hour. The Company estimates that the
typical program costs approximately $1,500.
Learning Centers range from 1,000 to 3,500 square feet. Instruction is
given at U-shaped tables designed to ensure that teachers work with no more than
three students at a time. The student's individualized one hour lesson includes
a five segment mastery approach. There are special incentives, such as tokens
redeemable for novelties and toys, to motivate the student to achieve the
program's objectives and to strengthen the student's enthusiasm for learning.
Personal computers at each Learning Center are used by the student as a
supplementary learning tool. The Learning Center's Director of Education
monitors the progress of each student after each hour of instruction.
Instructors schedule parent conferences after every 12 hours of a student's
program. Throughout a student's course of study, the Learning Center tests the
student using the same standardized diagnostic tests, and 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, 1996, there were a total of 620
Learning Centers in 49 states, five Canadian provinces, Hong Kong, South Korea
and Guam operated by the Company or its franchisees. As of that date, there were
434 franchisees operating 581 Sylvan Learning Centers. During 1996, 55
franchised Learning Centers were opened and 6 were closed. In addition, during
1996, 11 franchisee-owned Learning Centers were acquired by the Company. Fewer
than 2% of franchisees are currently more than three months in arrears in the
payment of franchise royalties, and the Company does not believe that the
closing of any or all of the Learning Centers of these franchisees would have a
material adverse effect on the Company because the royalties earned from these
franchisees only represented approximately 1% of total franchise royalties
earned by the Company in 1996.
The Company licenses franchisees to operate Sylvan Learning Centers in a
specified territory, the size of which depends on the number of school-age
children and average household incomes in the area. 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. Most Learning Centers are
located in suburban areas and have approximately 10 employees, two of whom are
typically full-time employees and eight of whom are part-time instructors. The
cost to open a typical franchised Learning Center ranges from approximately
$79,000 to $145,000, including the franchise license fee, furniture, equipment
and an initial supply of certain items required to be purchased under the
Company's franchise agreement.
The Company actively manages its franchise system. The Company requires
franchisees and their employees to attend two weeks of 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.
Sylvan operates a quality assurance review program to maintain the quality
of Sylvan Learning Centers. Sylvan's field operations managers confirm
franchisee compliance with the Company's standards, including training
requirements, exclusive use of approved educational materials and programs,
correct administration of testing materials, proper execution of supervisory
procedures, sufficient time spent in parent/teacher conferences, staffing and
Learning Center appearance. Sylvan's consultants counsel franchisees that fail
to meet the Company's quality or financial performance standards and assist
these franchisees in developing a plan to improve their Learning Centers'
performance. When necessary, the Company assists franchisees in selling their
franchises.
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 246 territories in North America, primarily in smaller
markets, in which there are no Learning
4
Centers. The Company is actively seeking franchisees for a number of these
territories. Approximately 38 new territories were sold in 1996.
The Company has sold franchise rights for the operation of Learning Centers
in South Korea, Hong Kong, China and Israel. Franchisees in these countries
offer the English version of the Sylvan program, and may not offer a foreign
language version of the program without paying additional fees to the Company to
subsidize the additional development costs. In pricing international franchise
rights, the Company takes into account estimates of the number of centers that
could be opened in an area.
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 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.
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 ranges from
$34,000 to $42,000, depending on factors such as the number of school-age
children in the territory. Royalties are either 8% or 9% of gross revenues of
the Learning Center, and the royalty rate depends upon the demographics of the
territory and is specified in the License Agreement. Advertising spending
requirements range from $1,000 to $3,500 per month, or up to 6% of gross
revenues, whichever is greater. The License Agreement has been revised
periodically, and several franchisees are operating under older agreements with
variations from the above terms. Approximately 10% of franchisees operate under
older agreements with royalties as low as 6% and without any requirement to
contribute to the national advertising fund. The remaining 90% of the
franchisees are required to contribute a minimum of 1.0% to 1.5% of gross
revenues to the national advertising fund. The fund is administered by the
Sylvan National Advertising Committee, Inc., which is owned equally by the
Company and the Sylvan Franchise Owners Association. Franchisees must submit
monthly financial data to the Company.
Company-owned Learning Centers. As of December 31, 1996, Sylvan owned and
operated 39 Learning Centers: five in Baltimore, six in Dallas, six in Los
Angeles, five in the greater Philadelphia area, six in South Florida, six in the
greater Washington, D.C. area and five in the greater Minneapolis area. The
Company's operation of Learning Centers enables it to test new educational
programs, marketing plans and Learning Center management procedures. As of
December 31, 1996, nine of the Company-owned Learning Centers contained
Technology Centers for computer-based testing. Company-owned Learning Centers in
Baltimore, Dallas, Los Angeles, Philadelphia, South Florida, greater Washington
D.C. and greater Minneapolis give the Company a local presence in key markets,
which has been helpful in marketing the Company's services to school districts
utilizing Title I funds and to employers interested in the Sylvan-At-Work and
PACE programs (see "Contract Educational Services" on page 7). The Company may
consider selected acquisitions of additional Learning Centers now operated by
franchisees.
Sylvan Prometric
Sylvan has established 221 testing centers which are located in existing
Learning Centers, 20 stand-alone testing centers and, with the acquisition of
Drake in September 1995, added an additional 990 testing centers, 594 of which
are located in North America and the remainder in 95 foreign countries. In
addition, Sylvan acquired contract rights from the National Association of
Securities Dealers ("NASD") and assumed management of 56 NASD testing centers in
April 1996. Pursuant to the contract, the Company is in the process of reducing
the number of these testing centers. The Learning Center and stand-alone sites
contain up to 20 networked computers. The Company believes that it can increase
capacity by adding workstations at existing testing centers, as well as by
opening new testing centers. Opening a new testing center has taken, on average,
30 to 60 days. Computer-based tests, which can be offered during regular school
hours and on weekends, increase utilization of Learning Centers. Testing also
increases public awareness of Sylvan Learning Centers and the Company's core
educational services.
Sylvan provides the supporting infrastructure and administration, including
computer equipment and software systems in each testing center and where
appropriate, registration and scheduling of candidates, downloading of
individual tests and training of Learning Center personnel in accordance with
procedures established by the sponsoring
5
testing organization. The franchisee provides the space and Learning Center
personnel for staffing the testing center. The Company provides training and
certification of the Testing center personnel as computer-based test
administrators. The Company enters into contracts directly with the testing
organization, such as Educational Testing Services ("ETS"), under which Sylvan
receives a fee based upon the number of tests given. The Company has entered
into a separate agreement with each franchisee that operates a testing center,
whereby the franchisee receives a fee per test that decreases as the volume of
the tests delivered increases. The independently owned and managed testing
centers must meet certain criteria established by the Company for administering
computer-based testing. The owners of the testing centers are required to
furnish the space, equipment and personnel needed for their operation and
receive compensation for test delivery in various forms including hardware
obsolescence guarantees and marketing assistance for their core business.
Principal customers in the information technology ("IT") industry are
Novell, Inc. and Microsoft Corp. IT customers sponsor worldwide certification
programs for various professionals such as network administrators and engineers,
service technicians, instructors, application specialists and developers, and
system administrators, operators and engineers. Certification testing for Novell
and Microsoft accounted for $40.6 million, or 47%, of Sylvan Prometric's
revenues in fiscal 1996.
ETS, a leading educational testing firm, develops and administers more than
9.5 million tests each year, including the Graduate Record Exam ("GRE"), the
Graduate Management Admissions Test ("GMAT"), The Test of English as a Foreign
Language ("TOEFL"), the National Teachers Exam ("NTE") and the Advanced
Placement Program, sponsored by organizations such as the College Board. The
largest tests administered by ETS are the SAT, which is given annually to over
1.6 million college-bound students, and the PSAT, which is given annually to all
students in grade 10 or 11. As one of the largest and most influential test
developers and administrators, ETS is leading the conversion of tests to
computer-based format from pencil and paper versions.
The Company developed a working relationship with ETS as a result of a
joint venture between ETS and a predecessor of the Company in the late 1980s.
This relationship facilitated the Company's entering into a master agreement
with ETS (the "ETS Agreement"), under which the Company is the exclusive
commercial provider of computer-based tests administered by ETS. This
exclusivity provision does not apply to the SAT, PSAT and Achievement Tests
which are sponsored by the College Board.
During 1996, the Company recognized approximately $19.6 million, or 23% of
Sylvan Prometric's revenues in fiscal 1996, from services for ETS. The Company
provides testing services through contracts with ETS both domestically and
internationally. In April 1994, the Company entered into a ten year contract
with ETS to develop test sites and provide computer-based tests internationally.
During 1996, the Company expanded international testing for ETS to 88 permanent
and temporary sites in 54 countries. The terms of the contract stipulate that
the Company will be compensated for its services through a fee equal to approved
costs, plus 10 percent, and the Company recognizes revenues accordingly. The
Company also will be reimbursed for its cost of capital and any foreign exchange
losses. During 1996, the Company recognized revenues of approximately $7.6
million under this contract.
Sylvan has been designated as the exclusive commercial provider of
computer-based tests administered by ETS (excluding tests not currently offered
by the College Board in computer-based format) so long as Sylvan is able to
provide sufficient capacity to meet the demand of candidates seeking to take
computer-based versions of tests, as determined in accordance with criteria set
forth in the ETS Agreement. The ETS Agreement provides that ETS may establish
ETS-operated testing centers, client-specific testing locations or testing
centers at colleges. However, ETS has agreed that Sylvan will receive at least
one-half of ETS' U.S. volume of computer-based tests covered by the ETS
Agreement. At present, there are no ETS-operated testing centers in existence.
Under the ETS Agreement, the Company began offering computer-based versions
of ETS' PRAXIS examination, which is used to license beginning teachers, in
September 1992, and the GRE, which is used by graduate schools to evaluate
applicants, in October 1992. In August 1992, Sylvan and ETS were jointly awarded
a contract by the National Council of State Boards of Nursing to develop and
deliver exclusively a computer-based licensing examination (NCLEX) for
registered and practical nurses. Beginning in April 1994, the test has been
offered exclusively in the computer-based version.
6
In addition to the tests offered through its partnership with ETS, the
Company is one of two entities licensed by the FAA to deliver computer-based
versions of various pilot and mechanic licensing tests for private aviation. In
addition to FAA testing, the Company provides testing services for organizations
in many other fields, such as for computer professionals, medical laboratory
technicians, and military candidates.
Effective December 1, 1996, the Company purchased the privately held Wall
Street Institute International, B.V. and its commonly controlled affiliates
(collectively, "WSI"), a European based franchisor and operator of learning
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. With more than 170 franchised centers in operation
throughout Europe and Latin America, WSI had revenues of approximately $14.0
million for the fiscal year ended August 31, 1996.
The acquisition of WSI is an important step in Sylvan's strategy to
increase its services to the adult education marketplace and to expand
internationally. Sylvan began building a global network for the delivery of
computer-based testing services in early 1994 through an exclusive international
alliance with ETS. In addition to offering the English language programs, WSI
locations can be utilized by Sylvan to administer certain computer-based testing
programs throughout Europe and Latin America.
WSI, which started franchising in 1991, has 82 centers in Spain with the
remainder in France, Germany, Italy, Portugal, Switzerland, Mexico, Chile, and
Venezuela. WSI 's international expansion was accomplished by selling Master
Licensing agreements, with each Master Licensor obtaining franchisees to open
centers in their development areas. Sylvan plans to continue this strategy to
expand WSI's presence globally, with a focus on Asia and the Pacific Rim region.
Contract Educational Services: Public and Non-Public School Based Programs
Funded by Federal Title I and state-based programs; PACE and Sylvan-At-Work
Title I and state-based programs. The federal government and various state
and local governmental agencies allocate funds to local school districts to
provide supplemental and remedial education to academically and economically
disadvantaged students. The main program is the Title I (formerly Chapter I)
program, administered by the U.S. Department of Education. Federal law now
contains minimum student performance standards for each school district
receiving Title I funds. The Company believes that, because of its proven record
of achieving measurable improvement in the reading and mathematics skills of its
students nationwide, it is positioned to provide supplemental educational
services to school districts receiving Title I and similar state funds. As of
December 31, 1996, the Company had contracts to provide remedial educational
services to the following public schools: 22 Baltimore schools, 10 District of
Columbia schools, seven schools in four districts in Texas and Maryland, 14
schools in Chicago, three schools in Newark, five St. Paul schools, two schools
in Broward County, Florida, and one school in New Orleans. In January, 1997 the
Company was awarded contracts to provide services in public schools in the
districts of Charleston, Oklahoma City, and Richmond. In 1996, approximately 14%
of total revenues for the contract educational services segment were derived
from the contracts with the Baltimore City Schools.
Using Company personnel, Sylvan offers virtually the same core educational
services to students in schools as is offered at Sylvan Learning Centers. The
school designates a classroom to be the Learning Center for the duration of the
contract and modifies the classroom to resemble a typical Learning Center.
Sylvan personnel administer standardized diagnostic tests and, based on the
results, prescribe an individualized learning program for each child. Students
typically receive two hours of instruction per week, which includes use of
personal computers as in a Learning Center. The Company can provide these
services to students after school, on Saturdays, during the summer or as a
"pullout" program during the regular school day, which is the method currently
prescribed by all current contracts. There is a high degree of individual
attention, with student to teacher ratios of no more than three to one. The
program is designed to include a high degree of parental involvement, and
teachers make a special effort to involve parents.
Under most of its contracts, the Company has guaranteed that each student
who receives instruction in the Sylvan program and meets prescribed attendance
requirements will achieve some minimum measure of improvement required
7
by the school districts, as measured by standardized tests. Improvement is
measured using various standardized measures, including normal curve equivalents
("NCE's"), a generally accepted statistical measure of student performance. The
typical minimum improvement required is two NCE's per year. If a student does
not achieve the required improvement, the Company will provide 12 hours of
remedial instruction to that student during the following summer or school year
without charge. The Company has not incurred significant expense related to this
guarantee. Under the contracts, the school districts pay the Company a set fee
for all services, materials and equipment. The contracts have terms of one to
three years, with the latest expiring in June 1998. All of the contracts contain
provisions for cancellation by school district officials based on funding
constraints.
The Company is actively seeking contracts to provide its core educational
program to other school systems, offering to tailor its program to the system's
specific needs, and is in discussions with several other major school districts.
In addition to serving public school students, Sylvan can provide its service to
parochial or private school students through contracts with public school
districts. Public school districts are responsible for administering the Title I
funding for the non-public schools. Because government-funded services to any
parochial school students generally cannot legally be provided in the parochial
school, Sylvan offers the flexibility of conducting the program at a nearby
Learning Center, or providing temporary facilities.
PACE. In March 1995, the Company acquired The PACE Group ("PACE"), a
provider of educational and training services to large corporations throughout
the United States. Services offered by PACE include racial and gender workplace
diversity training and skills improvement programs such as writing, advanced
reading, listening and public speaking. This acquisition complements the
Company's Sylvan-At-Work program and extends the core educational services the
Company offers to adults in the corporate workplace. PACE provides educational
and training services, typically on-site, to businesses throughout the United
States and generated $10.1 million in revenues for the year ended December 31,
1996. Management believes PACE is capitalizing on the trend toward outsourcing
of training services by large corporations. PACE licenses most of these programs
from the individuals who developed them and pays royalties ranging from 5% to
15% of the revenues generated from the programs. These programs are typically
offered on-site from one to several days at a time and are conducted by trained
instructors employed by PACE, or, in some cases, PACE will train the customer's
employees to conduct the programs. Additionally, a corporation may purchase a
site license to offer a particular PACE program. PACE currently has 26 sales
offices throughout the United States and markets the programs locally through
its sales force. PACE customers include Ford Motor Company, IBM, BankOne,
General Motors and AT&T.
Sylvan-At-Work. The Company's Sylvan-At-Work program, which has been
offered since 1990, is a modified version of Sylvan's core educational service
provided to businesses on-site. Programs are currently offered for Motorola,
Inc. at one site in Austin, Texas; for Texas Instruments Incorporated at three
sites in the Dallas area; and, for Martin Marietta Energy Systems, Inc. at one
site in Tennessee.
Marketing
The Company and its franchisees market Sylvan's core educational service 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 spots on morning and
evening news on the national networks. Sylvan's advertising campaign
demonstrates the benefits of its personalized educational services through
testimonials of actual parents and Sylvan teachers. It positions Sylvan 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,
Geometry, Study Skills, SAT/ACT College Prep, and Writing.
The Company is actively involved in marketing computer-based testing
services to national and international academic testing organizations, such as
ETS, and licensing and professional certification organizations. The Company's
network of testing centers, centralized registration capability and
computer-based testing experience offer
8
important competitive advantages. The Company markets its school-based
educational services to several public school systems and state education
departments. In 1995 and 1996, 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.
Marketing efforts for the PACE programs are focused on large corporations
seeking to outsource their training and educational programs, through PACE's 26
sales offices throughout the United States. PACE's strategy is to offer
solutions to the customer's training needs rather than marketing specific
products.
Competition
The Company is aware of only two direct national corporate competitors in
its core educational services segment: Huntington Learning Centers, Inc. and
Kumon Educational Institute. 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, the
primary competition is from individual tutors. State and local education
agencies also fund tutoring by individuals, which competes with the Company's
core educational services segment.
The Company is not aware of any other private businesses competing to
provide Title I programs for public school students, and the Company'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.
Sylvan Prometric also has a small number of direct competitors. These
competitors include organizations that have opened centers to offer specific
computer-based tests under contracts with the administrators of those tests.
Government Regulation
Title I. Title I school districts are responsible for implementing Title I
in carrying out their educational programs. Final Title I regulations, which
were issued July 3, 1995, 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, under the Baltimore City Schools' contract, 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.
Franchise. The sale of franchises is regulated by various state authorities
as well as the Federal Trade Commission (the "FTC"). The FTC requires that
franchisors 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
franchisor 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.
9
Trademarks
The Company has a federal trademark registration for the words "Sylvan
Learning Center" and distinctive logo (a reading child), a service mark for the
words "Sylvan Prometric" and various other trademarks and service marks and has
applications pending for a number of other distinctive phrases. The Company also
has obtained Canadian 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.
Employees
As of December 31, 1996, the Company had approximately 2,850 employees,
1,250 of whom were classified as full-time and 1,600 of whom were classified as
part-time. Most of the Company's part-time employees are teachers in
school-based programs, Company-owned Learning Centers and Sylvan-At-Work
programs. None of the Company's employees is represented by a union, and the
Company considers its relationship with its employees to be good.
Backlog
The Company supplies its educational and testing services when requested;
consequently, the Company has not experienced any backlog of services.
Effect of Environmental Laws
The Company is in compliance with all environmental laws. Future compliance
with environmental laws is not expected to have a material effect on the
business.
ITEM 2. PROPERTIES
The Company leases approximately 108,000 square feet of space in Baltimore,
Maryland for its administrative offices. In addition, the Company leases
approximately 55,000 square feet in Minneapolis, Minnesota for general office
space and a registration center. The Company also leases space for the 39
Company-owned Learning Centers in Maryland, Texas, California, Pennsylvania,
Delaware, New Jersey, Florida, Minnesota and Virginia, ranging from 1,500 to
3,500 square feet per Learning Center. The Company began leasing space for
Technology Centers in areas where there is no Learning Center franchise or
centers acquired from NASD. These spaces range from 500 to 3,500 square feet.
The Company had 80 Technology Centers leased as of December 31, 1996. The
Company leases 29 international testing sites ranging from 500 to 5,000 square
feet with the lease terms from three to five years.
10
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may be a party to routine litigation
incidental to its business. At this time, 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 purchase
of contract rights to administer testing services for the National Association
of Securities Dealers, Inc. ("NASD"). ACT has asserted that the Company
tortiously interfered with ACT's relations, contractual and quasi-contractual,
with the NASD, 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. The Company believes that all of ACT's
claims are without merit.
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 a vote of security holders during the fourth
quarter ended December 31, 1996.
11
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has traded on the NASDAQ Stock Market since its
initial public offering on December 9, 1993. It's trading symbol is SLVN. The
high and low trade prices for 1995 and 1996 for the Company's common stock are
set out in the following table. These prices are as reported by NASDAQ, and
reflect inter-dealer price quotations, without retail mark-up, mark down or
commission and may not necessarily represent actual transactions. All amounts
reported in the 1996 Annual Report on Form 10-K and in the 1996 audited
financial statements have been retroactively restated to reflect the effects of
a 3 for 2 stock split which occurred in November 1996.
1995 High Low
---- ------ -----
1st Quarter $13.17 $11.17
2nd Quarter $14.33 $11.09
3rd Quarter $21.67 $14.33
4th Quarter $21.17 $15.33
1996 High Low
---- ------ -----
1st Quarter $26.17 $18.00
2nd Quarter $27.50 $21.33
3rd Quarter $27.50 $18.67
4th Quarter $33.00 $24.25
No dividends were declared on the Company's Common Stock during the years
ended December 31, 1996 and 1995, and the Company does not anticipate paying
dividends in the foreseeable future.
The number of registered shareholders of record as of March 17, 1997 was
213.
During the year ended December 31, 1996, the Company issued 861,500 shares
of its common stock that were not registered under the Securities Act of 1933.
On November 8, 1996, the Company issued 824,000 shares to JLC Learning
Corporation pursuant to a Securities Purchase Agreement. On October 23, 1996,
the Company issued 37,500 shares to Jannick Education, Inc. for the purchase of
five franchised learning centers.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Sylvan is the successor to Sylvan Learning Corporation (the "Predecessor").
The Predecessor was founded in 1979 to develop the Sylvan Learning Centers
concept. In April 1985, Kinder-Care Learning Centers, Inc. ("Kinder-Care")
acquired the Predecessor and in July 1985, completed an initial public offering
of the Predecessor's common stock. The Predecessor operated as a public company
until February 1988, when Kinder-Care repurchased all of the publicly-held
shares of the Predecessor.
On February 1, 1991, the Predecessor and KEE, Incorporated ("KEE"), a
computer training software development business owned by a group of investors
including Messrs. Hoehn-Saric and Becker, entered into a joint venture by
contributing substantially all of their assets to Sylvan KEE Systems, a Maryland
general partnership (the "Partnership"), each in exchange for a 50% interest in
the Partnership. Messrs. Hoehn-Saric and Becker assumed management
responsibility for the Partnership. The Partnership operated the business
through January 26, 1993, when KEE purchased all of the Predecessor's
outstanding common stock from Kinder-Care. The $8.0 million purchase price was
paid with $4.5 million in cash and KEE's $3.5 million 12% promissory note. The
cash portion of the purchase price came from the net proceeds of KEE's private
placement of $10.0 million of Series A Preferred Stock.
Following KEE's purchase of the stock of the Predecessor, the Partnership
was dissolved, and all of its assets and liabilities were transferred to KEE.
KEE changed its name to Sylvan KEE Systems, Inc. and later to Sylvan Learning
Systems, Inc. in contemplation of the disposition of the assets of the KEE
division. During 1993, Sylvan sold all of KEE's assets and liabilities for $2.2
million to Computer Innovations Distribution Inc., which operates
12
under the name Computerland of Canada and is a subsidiary of SHL Systemhouse
Inc. Sylvan realized a gain of approximately $364,000 from this transaction.
KEE's business had generated operating losses for all periods and is presented
in the Statements of Operations as a discontinued operation.
The following combined statement of operations data for the twelve months
ended December 31, 1992 are unaudited and consist of the operations of the
Partnership which was formed on February 1, 1991. On January 26, 1993, Sylvan
acquired the Predecessor and dissolved the Partnership. The selected statement
of operations data for the year ended December 31, 1993 consists of the results
of the Partnership for the month of January 1993 plus the results of Sylvan for
the eleven months ended December 31, 1993. The selected financial data for the
years ended December 31, 1994, 1995 and 1996 have been derived from Sylvan's
financial statements which have been audited by Ernst & Young LLP. The financial
data should be read in conjunction with the historical Financial Statements and
Notes thereto.
On February 17, 1995, the Company acquired by merger all of the outstanding
stock of Remedial Education and Diagnostic Services, Inc. and READS, Inc.
(collectively, "READS"). READS is based in Philadelphia, Pennsylvania and
provides remedial and education services, psychological, diagnostic and
counseling services, career awareness training, and a variety of consulting
services. Services are delivered under contracts with school districts,
county-wide educational agencies and municipalities in the Eastern United
States. During 1994, the Company acquired by merger all of the outstanding stock
of Learning Services, Inc. ("LSI") and all of the outstanding stock of Loralex
Corporation ("Loralex"). These companies owned and operated a total of nine
Sylvan Learning Centers located in the Northeast United States and Florida,
respectively. All of these acquisitions have been accounted for by the Company
as poolings-of-interests and, accordingly, the Company's financial statements
have been restated for all periods prior to these acquisitions to include the
results of operations of READS, LSI and Loralex. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Background." The
selected statements of operations data include the operations of PACE from March
1, 1995 and the operations of Drake from October 1, 1995, the respective periods
each of these subsidiaries were owned by the Company, as further described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Background". The selected statements of operations data include the
operations of Wall Street Institute International B.V. ("WSI") from December 1,
1996 through December 31, 1996, the period that WSI was owned by the Company, as
further described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Background".
13
Partnership
and Sylvan Sylvan
Partnership Combined ---------------------------------------
Year Year Year Year Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
1992(1) 1993(1) 1994(1) 1995 1996
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Statements of Operations Data:
Revenues:
Franchise royalties .............................. $ 5,695 $ 6,510 $ 7,921 $ 9,223 $ 11,160
Franchise sales fees ............................. 352 1,008 1,256 2,132 3,184
Company-owned learning center
services ...................................... 3,692 7,246 8,605 11,520 18,528
Product sales .................................... 1,537 1,297 2,234 3,188 3,927
Testing services ................................. 1,300 3,572 13,665 34,566 86,951
Contract educational services .................... 7,124 9,989 13,563 27,362 33,366
Other ............................................ 481 -- -- -- --
--------- --------- --------- --------- ---------
Total revenues ................................ 20,181 29,622 47,244 87,991 157,116
--------- --------- --------- --------- ---------
Cost and expenses:
Franchise services ............................... 2,195 2,778 3,84 15,875 6,532
Company-owned learning center
expense ....................................... 3,400 6,873 7,655 10,369 16,073
Cost of product sales ............................ 1,782 1,009 1,759 2,431 2,952
Testing service expense .......................... 2,022 3,052 14,025 30,348 71,518
Contract educational services
expense ....................................... 6,316 8,751 11,880 25,120 29,071
General and administrative expense(4) ............ 5,433 6,255 4,998 6,206 8,755
Loss on impairment of assets ..................... -- -- -- 3,316 --
--------- --------- --------- --------- ---------
Total cost and expenses ....................... 21,148 28,718 44,158 83,665 134,901
--------- --------- --------- --------- ---------
Operating income (loss) .............................. (967) 904 3,086 4,326 22,215
Non-operating income (expense) ....................... (112) (171) 224 391 363
Interest income (expense), net ....................... (307) (999) 152 (960) 1,015
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before income taxes and
extraordinary items .............................. (1,386) (266) 3,462 3,757 23,593
Income taxes ......................................... (8) (7) (76) (209) (8,850)
--------- --------- --------- --------- ---------
Income (loss) from continuing
operations before extraordinary
items ............................................ (1,394) (273) 3,386 3,548 14,743
Discontinued operations(2):
Loss from operations, net of tax ................. (1,700) (375) -- -- --
Gain on disposal ................................. 427 580 -- -- --
--------- --------- --------- --------- ---------
Income (loss) from discontinued
operations .................................... (1,273) 205 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary
items ............................................ (2,667) (68) 3,386 3,548 14,743
Extraordinary items(3) ............................... -- (177) -- -- --
--------- --------- --------- --------- ---------
Net income(loss) ................................. $ (2,667) $ (245) $ 3,386 $ 3,548 $ 14,743
========= ========= ========= ========= =========
Income (loss) from continuing
operations per share(5) .......................... $ (0.02) $ 0.23 $ 0.22 $ 0.60
========= ========= ========= =========
Net income (loss) per share(5) ....................... $ (0.02) $ 0.23 $ 0.22 $ 0.60
========= ========= ========= =========
Weighted average shares outstanding(5) ............... 11,553 15,119 15,972 23,582
========= ========= ========= =========
Balance Sheet Data (at period end):
Net working capital (deficit) ........................ $ (2,559) $ 12,869 $ 11,530 $ 38,317 $ 28,387
Intangible assets and deferred contract
costs ............................................ 149 7,000 7,932 82,849 122,932
Total assets ......................................... 9,979 32,242 42,499 165,407 250,579
Long-term debt and capital leases .................... 1,690 2,899 6,168 4,416 4,049
Stockholders' or partners' equity (deficit) .......... (210) 23,971 31,834 136,464 179,591
(footnotes on next page)
14
- ----------
(1) Prior to February 1, 1991, the Sylvan Learning Centers business was
conducted by Sylvan Learning Corporation (the "Predecessor"). On February
1, 1991, the Predecessor contributed the Sylvan Learning Centers business
to Sylvan KEE Systems, a Maryland general partnership (the "Partnership")
in exchange for a 50% partnership interest, and Sylvan contributed its
computer training software development business to the Partnership in
exchange for the other 50% partnership interest. On January 26, 1993,
Sylvan acquired the Predecessor and dissolved the Partnership. On September
3, 1993, Sylvan sold its computer training software development business.
On February 17, 1995, Sylvan acquired by merger all of the outstanding
stock of Remedial Education and Diagnostic Services, Inc. and READS, Inc.
(collectively, "READS"). READS is based in Philadelphia, Pennsylvania and
provides remedial and education services, psychological, diagnostic and
counseling services, career awareness training, and a variety of consulting
services. Services are delivered under contracts with school districts,
county-wide educational agencies and municipalities in the Eastern United
States.
During 1994, Sylvan acquired by merger all of the outstanding stock of
Learning Services, Inc. ("LSI") and all of the outstanding stock of Loralex
Corporation ("Loralex"). These companies owned and operated a total of nine
Sylvan Learning Centers located in the Northeast United States and Florida.
The READS, Loralex and LSI acquisitions have been accounted for by Sylvan
as poolings-of-interests and, accordingly, Sylvan's financial statements
have been restated for all periods presented to include the results of
operations of READS, LSI and Loralex. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Background."
(2) Represents Sylvan's computer training software development business which
was sold in September 1993; a Canadian computer training business, 80.1% of
which was sold in 1992; and Sylvan's tuition financing subsidiary which was
sold in October 1991.
(3) Represents the $350,000 gain on extinguishment of a $3.5 million debt to
Learning Centers, Inc., and a $527,000 loss on an extinguishment of $5.0
million of notes payable to stockholders.
(4) The Company has reclassified certain operating expenses previously included
in general and administrative expense to division-specific expense
categories. This change has been reflected for all periods presented.
(5) All share and per share data have been restated to retroactively reflect a
3-for-2 stock split of the Company's common stock for stockholders of
record on November 7, 1996.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS, INCLUDING BUT NOT
LIMITED TO, STATEMENTS REGARDING THE ANTICIPATED IMPACT OF UNCOLLECTIBLE
ACCOUNTS RECEIVABLE ON FUTURE LIQUIDITY, EXPENDITURES TO DEVELOP LICENSING AND
CERTIFICATION TESTS UNDER EXISTING CONTRACTS, THE COMPANY'S CONTINGENT PAYMENT
OBLIGATIONS RELATING TO THE PACE AND DRAKE ACQUISITIONS, FUTURE CAPITAL
REQUIREMENTS, POTENTIAL ACQUISITIONS AND THE COMPANY'S FUTURE DEVELOPMENT PLANS
ARE BASED ON CURRENT EXPECTATIONS. THESE STATEMENTS ARE FORWARD LOOKING IN
NATURE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY
DIFFER MATERIALLY. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY ARE THE FOLLOWING: CHANGES IN THE FINANCIAL RESOURCES OF THE
COMPANY'S CLIENTS; TIMING AND EXTENT OF TESTING CLIENTS' CONVERSIONS TO
COMPUTER-BASED TESTING; AMOUNT OF REVENUES EARNED BY THE COMPANY'S PACE AND
DRAKE OPERATIONS; THE AVAILABILITY OF SUFFICIENT CAPITAL TO FINANCE THE
COMPANY'S BUSINESS PLAN ON TERMS SATISFACTORY TO THE COMPANY; GENERAL BUSINESS
AND ECONOMIC CONDITIONS; AND OTHER RISK FACTORS DESCRIBED IN THE COMPANY'S
REPORTS FILED FROM TIME TO TIME WITH THE COMMISSION. THE COMPANY WISHES TO
CAUTION READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD LOOKING
STATEMENTS, WHICH STATEMENTS ARE MADE PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1955 AND, AS SUCH, SPEAK ONLY AS OF THE DATE MADE.
Background
In April 1991, the Partnership acquired a computer training business from
Computerland of Canada through a subsidiary, Learning Technologies of Canada,
Inc. ("LTC"). In June 1992, the Partnership sold 80.1% of the stock of LTC to
Computerland of Canada. Computerland of Canada purchased the remaining 19.9% of
LTC's stock in connection with Sylvan's sale of the entire KEE business in 1993.
The Partnership recognized a net gain of $427,000 upon the sale of 80.1% of
LTC's stock in 1992, and Sylvan recognized a gain of $216,000 upon the sale of
the remaining 19.9% of LTC's stock in 1993.
During 1994, Sylvan acquired by merger all of the outstanding shares LSI
and Loralex. These companies owned and operated a total of nine Sylvan Learning
Centers located in the greater Philadelphia area and Southern Florida,
respectively. On February 17, 1995, in exchange for 525,108 shares of Sylvan's
Common Stock (having a then market value of approximately $6.0 million), Sylvan
acquired READS, a Philadelphia, Pennsylvania-based contract provider of various
remedial education, diagnostic and consulting services to non-public schools.
Each of these acquisitions has been accounted for by Sylvan as a
pooling-of-interests and, accordingly, Sylvan's financial statements have been
restated for all prior periods presented to include the results of operations of
LSI, Loralex and READS. In 1994, the LSI and Loralex Learning Centers generated
an aggregate of $4.1 million of revenues and $834,000 of operating income.
READS' revenues for 1994 totaled $7.7 million (including $2.6 million from a
related not-for-profit entity) and operating income of $630,000. Effective
February 28, 1995, Sylvan acquired PACE, a provider of educational services to
large corporations. The acquisition was accounted for using the purchase method
of accounting, and Sylvan's results of operations from March 1, 1995 include the
operations of PACE. PACE had total revenues of $9.6 million and $1.4 million of
operating income in 1994.
On December 13, 1995 Sylvan consummated the purchase of privately-held
Drake, a leading provider of computer-based certification, licensure and
assessment testing, at which time the Company transferred an initial purchase
price valued at approximately $70.0 million to the Sellers. The transaction was
effective September 30, 1995. An additional amount of $8.1 million is payable to
the Sellers based on the 1996 financial results of the Sylvan Prometric
division. Additional consideration may be payable to the Sellers if defined
future operating results of the computer-based testing business are achieved.
16
Effective December 1, 1996, Sylvan acquired Wall Street Institute
International B.V. and its commonly-controlled affiliates ("WSI"), a
European-based franchisor and operator of learning centers that teach the
English language. This transaction was accounted for using the purchase method
of accounting and Sylvan's results of operations from December 1, 1996 include
the operations of WSI. WSI had total revenues of $14.3 million and $4.2 million
of operating income for its most recent fiscal year which ended August 31, 1996.
Sylvan paid $4.9 million of the approximately $20.0 million purchase price in
cash and the remainder in 714,884 shares of Sylvan common stock. Sylvan has
agreed to register 209,520 of such shares under the Securities Act of 1933, as
amended on April 28, 1997.
The discussion of Sylvan's results of operations herein relates to the
continuing operations of Sylvan. The results of operations discussion of PACE is
included for the period from March 1, 1995. The results of operations discussion
of Drake is included for the period from October 1, 1995. The results of
operations discussion of WSI is included for the period December 1, 1996 through
December 31, 1996.
Sylvan generates revenues from three business segments: core educational
services which primarily consist of franchise sales, royalties and Sylvan-owned
Learning Center revenues; testing services, which consist of computer-based
testing fees paid to Sylvan primarily by test administrators; and contract
educational services, which consist of revenues attributable to providing
supplemental and remedial education services to school districts and major
corporations.
Results of Operations
Comparison of results for the year ended December 31, 1996 to the year ended
December 31, 1995.
Revenues. Total revenues increased by $69.1 million, or 79%, to $157.1
million for the year ended December 31, 1996, compared to the same period in
1995. This increase resulted from higher revenues in all business segments --
core educational services, testing services and contract educational services.
Core educational services revenues increased by $10.7 million, or 41%, to
$36.8 million for 1996. Franchise royalties increased $1.9 million or 21%, for
1996. This increase in franchise royalties was due to an overall 19% increase in
revenues at existing Learning Centers open for more than one year combined with
a net increase of 49 new full and satellite Centers opened in 1996. A satellite
Center is a center operating within an existing franchise territory.
Franchise sales fees increased by $1.1 million, or 49%, to $3.2 million for
the year ended December 31, 1996 compared to the same period in 1995. For the
year ended December 31, 1996, there were four area development agreements sold
for $1.7 million and 38 franchise Center licenses sold, as compared to 43
franchise Center licenses and two area development agreements sold for $550,000
in the same period in 1995.
Revenues from Company-owned Learning Centers increased by $7.0 million, or
61%, to $18.5 million during 1996. Revenue growth related to student enrollment
increases for Centers operating over 12 months as of December 31, 1996 resulted
in $3.4 million, or 30%, of the increase for 1996 compared to 1995.
Approximately $3.2 million of the revenue increase resulted from the acquisition
of eleven centers from two franchisees. The opening of one new Center after
December 31, 1995 resulted in an additional $350,000 of revenue during 1996.
Product sales increased by $739,000, or 23%, to $3.9 million for 1996 resulting
from overall student enrollment increases at franchised Centers.
Contract educational services revenue increased by $6.0 million, or 22%, to
$33.4 million for the year ended December 31, 1996. Revenue from public and
non-public school contracts increased by $4.1 million for the year
17
ended December 31, 1996. Revenue from PACE accounted for $1.9 million of the
increase for 1996. The PACE increase results from the fact that the acquisition,
accounted for as a purchase, was effective February 28, 1995, and as such the
1995 results only reflect ten months of PACE results.
Revenue from public and non-public school contracts obtained after December
31, 1995 contributed $2.2 million to revenue for 1996. Revenue from existing
public school public and non-public contracts increased by $2.8 million in 1996,
primarily related to the contracts being in effect for a full year in 1996.
Revenue from existing public and non-public school contracts decreased by $0.9
million in 1996 due to non-recurring revenues included in the 1995 period.
Testing services revenue increased by $52.4 million, or 152%, to $87.0
million during the year ended December 31, 1996, compared to the year ended
December 31, 1995. The significant increase in testing services revenues
resulted primarily from the acquisition of Drake which provided increased
revenues from information technology (IT) clients. Increased services under
Educational Testing Service (ETS) contracts, including the cost-plus
international contract and GRE, and other professional testing revenue
increases, including the implementation of a management contract with the
National Association of Securities Dealers, Inc. ("NASD"), also contributed to
the increase in testing services revenues. Effective March 1, 1996, the Company
entered into a management contract with the NASD to operate their testing
centers delivering computer-based testing to securities brokers and dealers. The
Company has a 10 year contract to provide testing for the NASD.
Cost and Expenses. Franchise services expense increased by $0.7 million, to
$6.5 million or 46% of franchise royalties and sales for the year ended December
31, 1996, compared to $5.9 million, or 52% of franchise royalties and sales for
the year ended December 31, 1995. The increased margin in 1996 primarily relates
to the effects of leveraging the fixed costs of supporting this line of business
over a larger revenue base.
Company-owned Learning Center expense increased by $5.7 million, to $16.1
million or 87% of Company-owned Learning Center services revenues for the year
ended December 31, 1996, compared to $10.4 million, or 90% of Company-owned
Learning Center services revenues for the year ended December 31, 1995. $3.1
million of the increase relates to the acquisition of 11 Learning Centers. The
remaining increase in expenses were primarily advertising, labor and general
overhead associated with increased Center enrollment. Expenses for Centers
operating over 12 months as of December 31, 1996 accounted for $2.2 million of
the increase for 1996, and represent 64% of incremental same Center revenue. The
opening of one new Company-owned Learning Center since December 31, 1995
increased expenses by $375,000, or 107% of the revenue of that Center for the
year ended December 31, 1996.
Contract educational services expense increased by $4.0 million to $29.1
million, or 87% of contract educational services revenues during 1996, compared
to $25.1 million, or 92% of contract educational services revenues during 1995.
The decline in contract educational services expenses as a percentage of revenue
resulted from increased revenues without corresponding increases in overhead.
Operating expenses for Title I schools increased $2.9 million for the year ended
December 31, 1996, while operating expenses for PACE accounted for $1.1 million
of the increase for the same period. The PACE increase results from the fact
that the acquisition, accounted for as a purchase, was effective February 28,
1995, and as such the 1995 results only reflect ten months of PACE results.
Testing services expenses for the year ended December 31, 1996 increased by
$41.2 million to $71.5 million, or 82% of total testing services revenue,
compared to $30.3 million, or 88% of total testing services revenue for the year
ended December 31, 1995. The increase resulted primarily from the acquisition of
Drake and the increased registration and delivery costs associated with
additional volume of tests. 1996 expenses include $2.4 million of amortization
of contract rights related to the Drake acquisition. 1995 expenses included $4.1
million of amortization of contract rights, imputed interest and salary
termination charges related to the Drake acquisition. Excluding non-
18
recurring charges, testing services expenses as a percentage of testing services
revenues increased to 79% in 1996 from 76% in 1995. The principal reasons for
the percentage increase in 1996 are the full year of amortization of goodwill
associated with the Drake acquisition and the partial year amortization of
certain deferred contract costs and contract rights in 1996 and increased
staffing levels required to meet the growth in business volumes that occurred
during 1996 and expected growth in business volumes in 1997.
General and administrative expense increased by $2.6 million to $8.8
million during 1996 from $6.2 million during 1995, but decreased as a percentage
of revenues from 7% to 6%. The percentage decline resulted from increased
revenues from all segments without corresponding increases in overhead. Interest
expense decreased by $1.3 million to $0.5 million during 1996 from $1.8 million
during 1995 due principally to the $1.1 million of interest expense imputed on
the purchase of Drake discussed in the following section.
Comparison of results for the year ended December 31, 1995 to the year ended
December 31, 1994.
Revenues. Total revenues increased by $40.8 million, or 86%, to $88.0
million for the year ended December 31, 1995, compared to the same period in
1994. This increase resulted from higher revenues in all business segments--core
educational services, testing services and contract educational services.
Core educational services revenues increased by $6.1 million, or 30%, to
$26.1 million for 1995. Franchise royalties increased $1.3 million or 16%, for
1995. This increase in franchise royalties was due to a net increase of 31 new
Centers in new territories and 15 new satellite Centers (Centers operating
within existing franchise territories) in 1995, combined with an overall 14%
increase in revenues at existing Learning Centers open for more than one year.
Franchise sales fees increased $876,000 to $2.1 million for the year ended
December 31, 1995 compared to the same period in 1994. For the year ended
December 31, 1995, there were two area development agreements sold for $550,000
and 43 franchise Center licenses sold, as compared to 31 franchise Center
licenses and one $117,000 area development agreement sold in the same period in
1994.
Revenues from Company-owned Learning Centers increased $2.9 million, or
34%, to $11.5 million during 1995. The increase primarily resulted from same
center revenue growth related to student enrollment increases. Product sales
increased $954,000 or 43%, to $3.2 million for 1995. Approximately $338,000 of
the increase in product sales was due to sales of new versions of Math and
Algebra programs (which began in the second half of 1994) with the remainder
resulting from overall increases in student enrollment.
Contract educational services revenue increased by $13.8 million to $27.4
million for the year ended December 31, 1995. Revenues from public and
non-public school contracts increased $5.4 million for the year ended December
31, 1995, due to $2.8 million in revenue from new public and non-public school
contracts obtained after December 31, 1994, and by a $2.6 million increase in
revenues from public and non-public school contracts existing in 1994 accounted
for using the percentage of completion method. Revenues from PACE accounted for
$8.3 million of the increase. The PACE acquisition, accounted for as a purchase,
was effective February 28, 1995.
Testing service revenues increased $20.9 million to $34.6 million for the
year ended December 31, 1995. Testing services revenues accounted for
approximately 39% of total revenues for the year ended December 31, 1995,
compared to 29% of total revenues for the same period in 1994. Revenues from
Drake, acquired as of September 30, 1995, accounted for $11.7 million of the
increase and consisted primarily of revenues from information technology
clients. Revenue from the ETS international contract accounted for $3.7 million
of the increase resulting from the fact that the contract was in effect during
the entire 1995 period, as compared to six
19
months in 1994, as well as increasing activity in international development.
During 1995, Sylvan sold the exclusive development rights for testing centers in
India for $500,000 and in the Middle East for $500,000. The remaining increase
in testing services revenues for the year ended December 31, 1995 was
attributable to a $1.7 million increase in revenue from the NCLEX test for the
licensing of registered and practical nurses, which began in April 1994,
$769,000 of revenue from test development fees for ASVAB (the Armed Services
Vocational Aptitude Battery tests) and other test volume increases in the GRE,
PRAXIS and FAA tests.
Cost and Expenses. Franchise services expense increased by $2.0 million, to
$5.9 million or 52% of franchise royalties and sales for the year ended December
31, 1995, compared to $3.9 million, or 42% of franchise royalties and sales for
the year ended December 31, 1994. The reduced margin in 1995 primarily relates
to increased marketing and advertising costs incurred to produce a new national
advertising campaign.
Company-owned Learning Center expense increased $2.7 million, to $10.4
million or 90% of Company-owned Learning Center services revenues for the year
ended December 31, 1995, compared to $7.7 million, or 89% of Company-owned
Learning Center services revenues for the year ended December 31, 1994. The
increased expenses were primarily advertising, labor and general overhead
associated with increased Center enrollment.
Contract educational services expense increased $13.2 million to $25.1
million, or 92% of contract educational services revenues during 1995, compared
to $11.9 million, or 88% of contract educational services revenues during 1994.
Operating expenses for public and non-public school contracts increased $5.4
million for the year ended December 31, 1995, while operating expenses for PACE
accounted for $7.5 million for the same period. The increase in contract
educational services expense as a percent of related revenues during the year
resulted from the following three factors: (i) 1994 included consulting fee
revenues of $500,000 with no associated costs; (ii) higher total cost estimates
relating to contracts obtained from READS accounted for under the percentage of
completion method and (iii) PACE operating margins of approximately 10% during
1995 reduced overall segment margins.
Testing services expense for 1995 increased $16.3 million to $30.3 million,
or 88% of total testing service revenues, compared to $14.0 million, or 103% of
total testing services revenues for 1994. The decrease in testing services
expense as a percentage of testing services revenues was attributable to several
factors, including the fixed and semi-variable nature of test delivery and
registration costs included in this segment. In addition, Sylvan recognized $1
million of testing revenues in the 1995 period related to the sale of exclusive
development rights for testing centers in India and the Middle East and $769,000
of testing revenues related to the contract to develop the ASVAB test. These
revenues have significantly higher margins than fees for test delivery and
registration services. The ability of Sylvan to generate fees in the future from
the sale of development rights and test development services cannot be assured.
Testing services expenses during the fourth quarter of 1995 included
amortization expense of $2.1 million related to contract rights recorded upon
the acquisition of Drake, which is primarily composed of amortization related to
two contracts which will be fully amortized by June 1996, and $1.1 million of
non-recurring interest expense imputed on the unpaid purchase price from
September 30, 1995 to December 13, 1995, the closing date for the acquisition.
The Company also paid salaries to Drake employees which have been identified and
notified of their termination totalling approximately $800,000 in the fourth
quarter of 1995.
General and administrative expense increased by $1.2 million to $6.2
million during 1995 from $5.0 million during 1994, but decreased as a percentage
of revenues from 11% to 7%. The percentage decline resulted from increased
revenues from all segments without corresponding increases in overhead. Interest
expense increased by $1.2 million to $1.8 million during 1995 from $0.6 million
during 1994 due principally to the $1.1 million of interest expense imputed on
the purchase of Drake discussed above.
20
During 1995 Sylvan recorded a non-recurring loss on impairment of assets of
$3.3 million associated with the Drake acquisition. The Drake acquisition and
resulting consolidation of operations resulted in the determination that certain
assets in this division are not recoverable and, therefore, have been written
down to their realizable value.
During 1995 the Company reduced its valuation allowance relating to
deferred income tax assets by $3.1 million. Approximately $1.1 million of this
reduction was recorded through the allocation of the Drake purchase price. The
remaining decrease of $2.0 million reduced the Company's effective tax rate by
54%.
Liquidity and Capital Resources
Cash provided by operating activities was $23.3 million for the year ended
December 31, 1996 as compared to cash used in operating activities of $3.0
million in the comparable period of 1995. Cash flow from operations before
working capital changes increased from $14.8 million in the 1995 period to $29.2
million in the 1996 period, primarily as a result of significant overall growth
in Company operations before considering non-cash charges, which primarily
consist of depreciation, amortization and deferred income taxes.
Sylvan's investment in working capital has significantly reduced cash flow,
particularly as a result of the growth in accounts and notes receivable. The
$9.0 million increase in accounts and notes receivable is the result of a 79%
increase in revenue during 1996. Of the $9.0 million cash flow reduction
attributable to an increase in accounts and notes receivable, $4.9 million is
related to Sylvan's expanding testing contracts and $1.1 million is related to
new and expanded public school contracts. The increase in amounts due from
expanding testing contracts resulted from higher domestic testing volumes and a
significant increase in billings under the international contract with ETS to
establish overseas testing capacity. Payments are typically made by ETS monthly
for domestic activity and quarterly for international services. Accounts
receivable from public school-based programs have increased due to billings
under new contracts obtained in 1996. Increases in revenue for all business
segments contributed to the remaining accounts and note receivable increase of
$3.0 million. Sylvan believes that uncollectible accounts receivable will not
have a significant effect on future liquidity, as a significant portion of its
accounts receivable are due from enterprises with substantial financial
resources, such as ETS and governmental units.
Sylvan continues to incur expenditures for additions to property and
equipment, which totaled $13.3 million in the 1996 period. These additions
consist primarily of furniture and equipment for general business expansion,
including expenditures for new public school-based programs' classrooms and
equipment needed for overseas testing centers operated by Sylvan. Under the
international testing contract with ETS, Sylvan is reimbursed for overseas
equipment expenditures as the equipment is depreciated. This reimbursement
includes a financing charge over the reimbursement period. Sylvan may spend up
to $1.8 million over the next 18 months to develop licensing and certification
tests under contracts with various testing organizations.
The increase in other investments resulted primarily from the purchase of
non-voting convertible preferred stock in Jostens Learning Corporation for $21.9
million by issuance of 824,000 shares of the stock of the Company.
The Company's accounts payable and accrued expenses have increased by $13.7
million to $26.0 million at December 31, 1996 from $12.3 million at December 31,
1995. Approximately $3.3 million of the increase relates to the 1996 acquisition
of WSI, which was accounted for under the purchase method of accounting. In
addition, $4.9 million of the increase relates to accrued payments due to
non-affiliated testing centers as discussed in Note 2 to the 1996 audited
financial statements. The remaining $5.5 million increase relates to the overall
increase in expense levels due to the Company's growth. The Company's deferred
revenue has increased by $2.9 million
21
to $9.4 million at December 31, 1996 from $6.5 million at December 31, 1995.
Approximately $1.6 million of the increase relates to the acquisition of WSI.
The remaining increase of $1.3 million relates to the overall increase in
business volumes due to the Company's growth. The noncurrent liabilities due to
former shareholders of Drake and Wall Street Institute will be satisfied through
issuance of common stock in 1997.
The Company paid the NASD $4.9 million during the year ended December 31,
1996 pursuant to an agreement related to the management of the NASD testing
centers and the acquisition of contract rights to provide testing based on a ten
year contract with the NASD. The Company also acquired the computer equipment in
the NASD testing centers.
During the year ended December 31, 1996, the Company incurred $10.4 million
in costs to obtain new contracts with certain Drake Authorized Testing Centers
to deliver computer-based testing. These expenditures were recorded as deferred
contract costs and are being amortized over the contract terms of three years.
The Company has entered into a loan agreement with a bank, (hereinafter the
"credit line") that provides an unsecured revolving line of credit. The credit
line allows the Company to borrow a maximum of $15.0 million through the
expiration date of May 31, 1998, at which time the total outstanding principal
balance can be converted into a term loan, at the option of the Company. The
term loan would be repaid over 24 months from the time of issuance. The credit
line and the term loan both bear interest at a floating rate equal to the 30 day
London Interbank Offered Rate ("LIBOR") plus 1.15% per annum. The credit line
had no outstanding borrowings at December 31, 1996. During 1996 the Company
repaid $3.5 million of borrowings made under a previous line of credit
agreement.
During 1996, Sylvan received $5.1 million of cash as a result of the
exercise of stock options and warrants to purchase 661,700 shares of Common
Stock.
Sylvan believes that its capital resources will be sufficient over the next
12 to 24 months to fund expected expansion of its business, including working
capital needs and expected investments in property and equipment.
Sylvan continues to review other companies in the education or
computer-based testing industries for potential acquisitions. Additional capital
resources may be necessary to acquire and thereafter operate additional
businesses.
Contingent Matters
In connection with the PACE acquisition, Sylvan will be required to make a
contingent payment equal to 6.5 times PACE's 1997 earnings before interest and
income taxes ("EBIT"). If PACE's EBIT is less than $2.7 million for 1997, the
PACE shareholders may elect to have the payment calculation based on EBIT for
either calendar year 1998 or 1999. The contingent payment is payable partially
in cash and partially in Common Stock. The amount of any contingent payment to
the PACE Stockholders will be capitalized as goodwill when paid and amortized
over the remaining estimated recovery period. PACE is expected to meet its cash
needs from its operations. PACE provides most of its services to large
corporations with favorable credit histories. PACE operations are not capital
intensive and historically have generated positive cash flow from operations.
The agreement with Drake provides for future contingent payments based on
achievement of certain specified revenue targets between 1997 and 1998 (or 1999
at election of the Sellers). The contingent payment of up to $40.0 million, if
earned, is payable 12.5% in cash (or more at discretion of the Company) with the
remainder in shares of Common Stock. The amount of any contingent payments will
be capitalized as goodwill when paid and amortized over the remaining estimated
recovery period. Based on testing revenues earned by the Company in
22
1996, 20% of the Revenue Escrow Shares have been earned. These 357,143 Revenue
Escrow Shares will be released to the sellers in April 1997. At December 31,
1996, an additional $8.1 million of goodwill which relates to the earned shares
was recorded which will be amortized over the remaining life of 24 years.
Effects of Inflation
Inflation has not had a material effect on Sylvan's revenues and income
from continuing operations in the past three years. Inflation is not expected to
have a material future effect.
Quarterly Fluctuations
Sylvan's revenues and operating results have varied substantially from
quarter to quarter and may continue to vary, depending upon the timing of
implementation of new computer-based testing contracts and contracts funded
under Title I or similar programs. Based on Sylvan's limited experience,
revenues generated by computer-based testing services may vary based on the
frequency or timing of delivery of individual tests and the speed of test
administrators' conversion of tests to computer-based format. Revenues or
profits in any period will not necessarily be indicative of results in
subsequent periods.
ITEM 8. FINANCIAL STATEMENTS
The financial statements of the Company are included on pages 30 through 60
of the report as indicated on page 29.
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 under the caption "Directors and Executive Officers of
Sylvan Learning Systems, Inc." will be included in the Form 10-K/A, which will
be filed by April 30, 1997.
Information required pertaining to compliance with Section 16 (a) of the
Securities and Exchange Act of 1934 under the caption "Directors and Executive
Officers of Sylvan Learning Systems, Inc." will be included in the Form 10-K/A,
which will be filed by April 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information required under the caption "Executive Compensation" will be
included in the Form 10-K/A, which will be filed by April 30, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under the caption "Security Ownership of Certain
Beneficial Owners and Management" will be included in the Form 10-K/A, which
will be filed by April 30, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required is set forth under the caption "Certain Relationships
and Related Transactions" will be included in the Form 10-K/A, which will be
filed by April 30, 1997.
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.
24
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Financial Statements and Schedules Omitted:
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
inapplicable and therefore have been omitted.
(b) Reports on Form 8-K:
The following reports on Forms 8-K and 8-K/A were filed by the Registrant
during the fourth quarter ended December 31, 1996:
1) Report on Form 8-K dated November 8, 1996 and amended under Form 8-K/A
on December 9, 1996 relating to a Securities Purchase Agreement dated
November 1, 1996 by and between Registrant and JLC Holdings, Inc.,
Software Systems Corp and JLC Learning Corporation.
2) Report on Form 8-K dated November 18, 1996 relating to a complaint
filed against Registrant by ACT, Inc.
25
3. Exhibits
(a) Exhibits:
Exhibit
Number Description
------ -----------
3.01 Articles of Amendment and Restatement of the Charter.(b)
3.02 Amended and Restated Bylaws.(b)
3.03 Amended and Restated Bylaws dated September 27, 1996.
4.01 Specimen Common Stock Certificate.(b)
4.02 Registration Rights Agreement dated as of January 26, 1993
by and among Sylvan KEE Systems, Inc., the holders of Junior
Preferred Stock and the investors listed on Exhibit A
hereto.(b)
4.03 Form of Warrant to Purchase Common Stock of Sylvan KEE
Systems, Inc. dated January 26, 1993.(b)
4.04 Form of Warrant to Purchase Common Stock of Sylvan KEE
Systems, Inc. dated July 14, 1993.(b)
4.05 Form of Option to Purchase Common Stock dated July 27,
1995.(a)
4.06 Rights Agreement by and between Registrant and State Street
Bank & Trust Company dated as of October 1, 1996.(i)
5.01 Opinion of Piper & Marbury L.L.P.(a)
10.01 Agreement of Lease by and between Rouse & Associates-Quarry
and KEE Systems, Inc. dated May 15, 1990.(b)
10.02 Agreement of Lease by and between Rouse & Associated-Quarry
and KEE Systems, Inc. dated May 6, 1990.(b)
10.03 Lease Agreement between Harbor East Parcel G-Office, LLC and
Sylvan Learning Systems, Inc. dated August 24, 1995.(c)
10.04 Master Agreement Between Educational Testing Service and
Sylvan Learning Systems, Inc. for Computer-Based Testing
Services at Sylvan Technology Centers dated September 1,
1993. (Portions of this document have been omitted pursuant
to a request for confidential treatment.)(b)
10.05 Term Lease Master Agreement between Sylvan Learning Systems
and IBM Credit Corporation dated March 31, 1992.(b)
10.06 Director Stock Option Plan.(b)
10.07 Employee Stock Option Plan.(b)
10.08 Management Stock Option Plan.(b)
10.19 KEE, Incorporated Non-Qualified Stock Option Plan.(b)
10.10 Sylvan Employee Confidentiality and Non-Disclosure Agreement
and Covenant Not to Compete.(b)
10.11 $2.5 Million Revolving Loan, $3.76 Million Term Loan and
$5.0 Million Revolving Loan with NationsBank.(d)
10.12 Indemnification Agreement by and between Sylvan KEE Systems,
Tom D. Wippman and David H. Jacobson dated September 17,
1992.(b)
10.13 Guaranty Agreement by Sylvan KEE Systems in favor of
Encyclopedia Britannica, Inc. dated October 1, 1992.(b)
10.14 Form of Non-Competition Agreement by and between Sylvan KEE
Systems, Inc. and Douglas L. Becker dated January 26,
1993.(b)
10.15 Certification and Testing Services Agreement by and between
TRO Learning, Inc. and Sylvan Learning Systems, Inc. dated
August 31, 1993.(b)
10.16 Plato Educational Products Purchase and License Agreement by
and between TRO Learning, Inc. and Sylvan Learning Systems,
Inc. dated August 31, 1993.(b)
10.17 Form of Franchise Agreement.(b)
10.18 Form of Technology Center Agreement.(b)
10.19 Agreement and Plan of Reorganization dated July 14, 1994 by
and between Registrant and Learning Services, Inc.(e)
26
10.20 Agreement and Plan of Reorganization dated July 14, 1994 by
and between Registrant and Loralex Learning, Inc.(e)
10.21 Agreement and Plan of Reorganization dated February 17, 1995
by and between Registrant and Remedial Education and
Diagnostic Services, Inc.(f)
10.22 Agreement and Plan of Reorganization dated as of March 1,
1995, by and between Registrant and the PACE Group.(g)
10.23 Agreement and Plan of Reorganization dated as of July 28,
1995, by and between Registrant and Drake Prometric, L.P.(h)
10.24 Lease Agreement dated August 24, 1995, First Amendment dated
May 13, 1996 and Second Amendment dated November 11, 1996 by
and between Registrant and Harbor East, LLC.
10.25 Revolving Credit Note to NationsBank, N.A. dated December
31, 1996.
10.26 Senior Management Option Plan dated March 29, 1996.
10.27 Securities Purchase Agreement by and between Registrant and
JLC Holdings, Inc., Software Systems Corporation and JLC
Learning Corporation dated November 1, 1996.(j)
11.00 Statement re: Computation of Per Share Earnings.
21.00 Subsidiaries of the Registrant.
23.01 Consent of Ernst & Young LLP.
(a) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 dated February 26, 1996.
(b) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 (Registration No. 33-69558).
(c) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 as amended by a Registration Statement on Form S-1
(No. 33-97870).
(d) Incorporated by reference from the Exhibits to the Company's Quarterly
Report for the Quarter ended September 30, 1995.
(e) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 20, 1994.
(f) Incorporated by reference to the Company's Current Report on Form 8-K dated
February 27, 1995.
(g) Incorporated by reference to the Company's Current Report on Form 8-K dated
May 5, 1995.
(h) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 21, 1995.
(i) Incorporated by reference to the Company's Current Report on Form 8-K dated
September 27, 1996.
(j) Incorporated by reference to the Company's Current Report on Form 8-K dated
November 1, 1996.
27
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 26, 1997.
SYLVAN LEARNING SYSTEMS, INC.
(Registrant)
By: /s/ R. Christopher Hoehn-Saric
------------------------------
R. Christopher Hoehn-Saric
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 and on March 26, 19967
Signature Capacity
- --------- --------
/s/ R. Christopher Hoehn-Saric Director and Chairman of
- ----------------------------------- the Board
R. Christopher Hoehn-Saric
/s/ Douglas L. Becker Secretary
- -----------------------------------
Douglas L. Becker
/s/ B. Lee McGee Vice President and Chief
- ----------------------------------- Financial Officer
B. Lee McGee
/s/ Donald Berlanti Director
- -----------------------------------
Donald Berlanti
/s/ Phillip Samper Director
- -----------------------------------
Phillip Samper
/s/ James H. McGuire Director
- -----------------------------------
James H. McGuire
28
Item 14 (a) (1)
INDEX TO FINANCIAL STATEMENTS
Page
----
The Company:
Report of Independent Auditors.......................................................................................... 30
Consolidated Balance Sheets as of December 31, 1995 and December 31, 1996............................................... 31
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996.............................. 33
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994, 1995
and 1996.............................................................................................................. 34
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996.............................. 35
Notes to Consolidated Financial Statements.............................................................................. 36
Item 14 (a) 2 - Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts......................................................................... 61
29
Report of Independent Auditors
The Board of Directors and Stockholders
Sylvan Learning Systems, Inc.
We have audited the accompanying consolidated balance sheets of Sylvan Learning
Systems, Inc. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 provide a reasonable basis for our opinion.
In our opinion, 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, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ Ernst & Young
Baltimore, Maryland
February 27, 1997
30
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, December 31,
1995 1996
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 2,528,865 $ 11,082,263
Available-for-sale securities 30,379,065 16,298,988
Receivables:
Accounts receivable 20,578,345 31,518,862
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,028,558 3,565,201
Notes receivable 1,583,843 3,000,190
------------- -------------
25,190,746 38,084,253
Allowance for doubtful accounts (1,466,027) (1,378,854)
------------- -------------
23,724,719 36,705,399
Inventory 3,639,392 4,469,577
Deferred income taxes 1,271,925 619,553
Prepaid expenses 1,942,806 2,643,885
------------- -------------
Total current assets 63,486,772 71,819,665
Notes receivable, less current portion 1,875,359 474,043
Costs and estimated earnings in excess of billings
on uncompleted contracts, less current portion 673,181 549,448
Property and equipment:
Furniture and equipment 19,564,005 30,556,702
Leasehold improvements 1,958,236 5,427,734
------------- -------------
21,522,241 35,984,436
Accumulated depreciation (6,142,009) (11,271,237)
------------- -------------
15,380,232 24,713,199
Intangible assets:
Goodwill 74,653,356 103,986,427
Contract rights 7,857,346 13,881,337
Other 2,451,091 2,570,091
------------- -------------
84,961,793 120,437,855
Accumulated amortization (4,640,450) (10,736,219)
------------- -------------
80,321,343 109,701,636
Deferred contract costs, net of accumulated amortization
of $684,177 as of December 31, 1995 and $2,066,893 as of
December 31, 1996 2,528,029 13,230,340
Investments in affiliates 182,320 3,895,602
Other investments 338,681 24,219,888
Other assets 620,754 1,975,030
------------- -------------
Total assets $ 165,406,671 $ 250,578,851
============= =============
31
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, December 31,
1995 1996
------------- -------------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 12,253,614 $ 25,962,463
Bank lines of credit 3,500,000 --
Current portion of long-term debt 1,895,567 2,474,607
Billings in excess of costs and estimated earnings
on uncompleted contracts 237,644 65,465
Due to former shareholders of Wall Street Institute -- 4,920,565
Deferred revenue 6,487,134 9,413,183
Other current liabilities 795,967 596,311
------------- -------------
Total current liabilities 25,169,926 43,432,594
Long-term debt, less current portion 2,520,512 1,574,682
Deferred income taxes 884,612 2,338,154
Due to former shareholders of Drake -- 8,142,856
Due to former shareholders of Wall Street Institute -- 15,150,115
Other long-term liabilities 367,790 349,771
Commitments and contingent liabilities -- --
Stockholders' equity:
Preferred stock, par value $.01 per share--authorized
10,000,000 shares, no shares issued and
outstanding as of December 31, 1996 and 1995 -- --
Common stock, par value $.01 per share--authorized
40,000,000 shares, issued and outstanding shares of
20,930,193 as of December 31, 1995 and 22,566,215
as of December 31, 1996 209,302 225,662
Additional paid-in capital 139,793,913 168,555,237
Foreign currency translation adjustments 70,000 (4,131)
Retained earnings (accumulated deficit) (3,609,384) 10,813,911
------------- -------------
Total stockholders' equity 136,463,831 179,590,679
------------- -------------
Total liabilities and stockholders' equity $ 165,406,671 $ 250,578,851
============= =============
See accompanying notes.
32
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December,31,
-----------------------------------------------------------
1994 1995 1996
-----------------------------------------------------------
Revenues
Franchise royalties $ 7,920,666 $ 9,222,996 $ 11