LAUR

Business Context and Reporting Period

This Form 10-Q covers Sylvan Learning Systems, Inc. (Note: The metadata lists "Laureate Education, Inc.", but the filing text identifies the registrant as Sylvan Learning Systems, Inc.) for the quarter and nine months ended September 30, 1999. The company operates four primary segments: Sylvan Prometric (computer-based testing), Sylvan Contract Educational Services, Sylvan Learning Centers, and the newly acquired Sylvan International Universities (Universidad Europea de Madrid).

Key Financial Metrics

Margins: Operating income margin for the nine months ended September 30, 1999, was approximately 14.3%. Direct costs represented 82% of total revenues for the nine-month period.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 28% ($30.1 million) for the quarter and 41% ($117.6 million) for the nine months compared to the prior year periods. Growth was driven by all segments, particularly Sylvan Prometric and Sylvan Learning Centers.
• Discontinued Operations: The company recorded a significant loss on disposal of discontinued operations of $25.1 million related to the planned sale of the PACE Group corporate training business. This charge turned a profitable quarter into a net loss for the three-month period.
• Acquisitions: The company acquired a 54% controlling interest in Universidad Europea de Madrid (UEM) in Q2 1999, creating the new "Sylvan International Universities" segment. It also acquired Schulerhilfe (Germany) and various WSI franchise locations.
• Debt Levels: Long-term debt increased significantly to $142.3 million (from $13.6 million in Dec 1998) to fund acquisitions and operations, primarily through a $100 million revolving credit facility.

Guidance, Outlook, and Risks

• Outlook: Management expects available cash, operating cash flow, and existing credit facilities to meet near-term operating requirements. The company continues to seek acquisition opportunities in educational services and computer-based testing.
• Disposal of PACE: A formal plan to dispose of the PACE Group was adopted in Q3 1999, with a sale anticipated by the first half of 2000. The $25.1 million loss on disposal is a one-time charge.
• Contingent Consideration: The company faces potential additional payments for prior acquisitions (Canter and Schulerhilfe) based on future earnings performance, totaling up to $13.3 million for Schulerhilfe and variable amounts for Canter.
• Legal Risks: The company is a defendant in antitrust litigation filed by ACT, Inc. regarding testing services. While management believes the claims are without merit, an adverse ruling could require the disposal of the Sylvan Prometric division or limit expansion.
• Year 2000: Remediation is 95% complete with an estimated total cost of $4.5 million. The company does not anticipate material disruption but notes risks regarding third-party service providers.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the final sale price and timing of the PACE Group disposal to confirm the accuracy of the $25.1 million loss estimate.
• Debt Covenants: Review the terms of the $100 million revolving credit facility and the UEM-related debt to ensure compliance with covenants given the increased leverage.
• ACT Litigation Status: Monitor the court's ruling on motions expected in Q4 1999, as an adverse outcome could materially impact the Sylvan Prometric segment.
• UEM Integration: Assess the performance of the new International Universities segment, noting its seasonality and current operating losses.
• Contingent Payments: Track the earnings performance of Canter and Schulerhilfe to estimate future cash outflows for contingent consideration.