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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON,
Washington, D.C. 20549


FORM 10-Q /X/ Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the quarter ended JUNE 30, 2001 or / / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________. COMMISSION FILE NUMBER


/x/

Quarterly Report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 for the quarter ended
September 30, 2001 or

/ /

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period fromto.

Commission File Number  0-22844 ------- SYLVAN LEARNING SYSTEMS, INC. ----------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

MARYLAND
SYLVAN LEARNING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization)


52-1492296 ------------------------------- ------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.

(I.R.S. Employer
Identification No.)

1001 FLEET STREET, BALTIMORE, MARYLAND Fleet Street, Baltimore, Maryland

(Address of principal executive offices)


21202 -------------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:

Registrant's telephone number, including area code:(410)843-8000 -------------

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/./x/  No / /. /

The registrant had 38,525,28638,728,401 shares of Common Stock outstanding as of August 6,November 2, 2001.




SYLVAN LEARNING SYSTEMS, INC.


INDEX

PAGE NO. --------


Page No.
PART I. - FINANCIAL INFORMATION

Item 1.


Financial Statements (Unaudited)





Consolidated Balance Sheets - JuneSheets—September 30, 2001 and December 31, 2000.................................... 2000


3



Consolidated Statements of Operations - Operations—Three months ended JuneSeptember 30, 2001 and JuneSeptember 30, 2000...................... 2000


5



Consolidated Statements of Operations - SixOperations—Nine months ended JuneSeptember 30, 2001 and JuneSeptember 30, 2000...................... 2000


6



Consolidated Statements of Cash Flows - SixFlows—Nine months ended JuneSeptember 30, 2001 and JuneSeptember 30, 20007........................... 2000


7



Notes to Consolidated Financial Statements - JuneStatements—September 30, 2001


8

Item 2.


Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 17 Operations


19

Item 3.


Quantitative and Qualitative Disclosure of Market Risk.... 26 Risk


29

PART II. - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders....... 28



Item 6.


Exhibits and Reports on Form 8-K.......................... 29 SIGNATURES......................................................... 29 8-K


31

SIGNATURES


31





2


SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31, 2001 2000 --------------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 92,251 $ 116,490 Available-for-sale securities 89,419 202,077 Receivables: Accounts receivable 60,255 68,468 Costs and estimated earnings in excess of billings on uncompleted contracts - 2,613 Notes receivable from tuition financing 9,127 7,489 Other notes receivable 10,953 13,317 Other receivables 13,339 15,549 ----------------- ------------------- 93,674 107,436 Allowance for doubtful accounts ( 7,542) (5,554) ----------------- ------------------- 86,132 101,882 Inventory 6,691 5,832 Deferred income taxes 4,083 3,936 Prepaid expenses and other current assets 21,020 20,955 ----------------- ------------------- Total current assets 299,596 451,172 Notes receivable from tuition financing, less current portion 10,458 8,313 Other notes receivable, less current portion 4,792 2,378 Property and equipment: Land and buildings 91,577 94,151 Furniture, computer equipment and software 106,668 94,249 Leasehold improvements 30,850 22,407 ----------------- ------------------- 229,095 210,807 Accumulated depreciation (50,438) (38,965) ----------------- ------------------- 178,657 171,842 Intangible assets: Goodwill 293,888 296,422 Other 4,753 2,611 ----------------- ------------------- 298,641 299,033 Accumulated amortization (26,386) (21,078) ----------------- ------------------- 272,255 277,955 Investments in and advances to affiliates 64,664 57,999 Other investments 25,601 25,935 Deferred costs, net of accumulated amortization of $2,510 and $1,969 at June 30, 2001 and December 31, 2000, respectively 7,970 7,200 Other assets 15,989 14,169 ----------------- ------------------- Total assets $879,982 $1,016,963 ================= ===================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

Consolidated Balance Sheets

(Dollar and share amounts in thousands, except per share data)

 
 September 30,
2001

 December 31,
2000

 
 
 (Unaudited)

  
 
Assets       
Current assets:       
 Cash and cash equivalents $90,437 $116,490 
 Available-for-sale securities  58,621  202,077 
 
Receivables:

 

 

 

 

 

 

 
  Accounts receivable  71,765  68,468 
  Costs and estimated earnings in excess of billings on uncompleted contracts  2,115  2,613 
  Notes receivable from tuition financing  8,447  7,489 
  Other notes receivable  18,990  13,317 
  Other receivables  44,322  15,549 
  
 
 
   145,639  107,436 
    Allowance for doubtful accounts  (9,397) (5,554)
  
 
 
   136,242  101,882 
 
Inventory

 

 

6,465

 

 

5,832

 
 Deferred income taxes  3,930  3,936 
 Prepaid expenses and other current assets  19,876  20,955 
  
 
 
Total current assets  315,571  451,172 

Notes receivable from tuition financing, less current portion

 

 

10,563

 

 

8,313

 
Other notes receivable, less current portion  4,621  2,378 

Property and equipment:

 

 

 

 

 

 

 
 Land and buildings  109,441  94,151 
 Furniture, computer equipment and software  111,414  94,249 
 Leasehold improvements  29,118  22,407 
  
 
 
   249,973  210,807 
 Accumulated depreciation  (58,031) (38,965)
  
 
 
   191,942  171,842 

Intangible assets:

 

 

 

 

 

 

 
 Goodwill  311,887  296,422 
 Other  4,747  2,611 
  
 
 
   316,634  299,033 
 Accumulated amortization  (30,387) (21,078)
  
 
 
   286,247  277,955 

Investments in and advances to affiliates

 

 

44,628

 

 

57,999

 
Other investments  26,176  25,935 
Deferred costs, net of accumulated amortization of $2,843 and $1,969 at September 30, 2001 and December 31, 2000, respectively  9,436  7,200 
Other assets  16,776  14,169 
  
 
 
Total assets $905,960 $1,016,963 
  
 
 

See accompanying notes to consolidated financial statements.

3


SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31, 2001 2000 ------------------ ------------------ (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 17,127 $ 20,108 Accrued expenses 56,151 40,452 Income taxes payable 3,151 119,511 Current portion of long-term debt 13,271 20,292 Due to shareholders of acquired companies 16,511 40,195 Deferred revenue 37,785 42,483 Other current liabilities 14,406 10,673 ------------------ ------------------ Total current liabilities 158,402 293,714 Long-term debt, less current portion 127,368 128,575 Deferred income taxes 3,112 4,824 Other long-term liabilities 9,971 3,707 ------------------ ------------------ Total liabilities 298,853 430,820 Minority interest 56,795 32,880 Stockholders' equity: Preferred stock, par value $0.01 per share - - authorized 10,000 shares, no shares issued and outstanding as of June 30, 2001 and December 31, 2000 - - Common stock, par value $0.01 per share - - authorized 90,000 shares, issued and outstanding shares of 38,060 as of June 30, 2001 and 37,278 as of December 31, 2000 381 373 Additional paid-in capital 216,349 205,343 Retained earnings 335,214 360,232 Accumulated other comprehensive loss (27,610) (12,685) ------------------ ------------------ Total stockholders' equity 524,334 553,263 ------------------ ------------------ Total liabilities and stockholders' equity $879,982 $1,016,963 ================== ==================
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

Consolidated Balance Sheets (continued)

(Dollar and share amounts in thousands, except per share data)

 
 September 30,
2001

 December 31,
2000

 
 
 (Unaudited)

  
 
Liabilities and stockholders' equity       
Current liabilities:       
 Accounts payable $22,200 $23,930 
 Accrued expenses  41,482  40,452 
 Income taxes payable  5,315  119,511 
 Current portion of long-term debt  18,432  12,752 
 Due to shareholders of acquired companies  8,371  40,195 
 Deferred revenue  46,952  42,483 
 Other current liabilities  10,164  10,673 
  
 
 
Total current liabilities  152,916  289,996 

Long-term debt, less current portion

 

 

127,897

 

 

132,293

 
Deferred income taxes  3,004  4,824 
Other long-term liabilities  10,282  3,707 
  
 
 
Total liabilities  294,099  430,820 

Minority interest

 

 

58,899

 

 

32,880

 

Stockholders' equity:

 

 

 

 

 

 

 
 Preferred stock, par value $0.01 per share — authorized 10,000 shares, no shares issued and outstanding as of September 30, 2001 and December 31, 2000     
 Common stock, par value $0.01 per share — authorized 90,000 shares, issued and outstanding shares of 38,627 as of September 30, 2001 and 37,278 as of December 31, 2000  386  373 
 Additional paid-in capital  227,001  205,343 
 Retained earnings  343,582  360,232 
 Accumulated other comprehensive loss  (18,007) (12,685)
  
 
 
Total stockholders' equity  552,962  553,263 
  
 
 
Total liabilities and stockholders' equity $905,960 $1,016,963 
  
 
 

See accompanying notes to consolidated financial statements.

4


SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, 2001 2000 (Restated) ------------------------------------------- (Unaudited) REVENUES $130,395 $82,226 COST AND EXPENSES Direct costs 106,334 69,395 Sylvan Ventures operating costs 6,890 3,207 General and administrative expenses 5,901 4,566 ---------------- --------------- Total expenses 119,125 77,168 ---------------- --------------- Operating income 11,270 5,058 OTHER INCOME (EXPENSE) Investment and other income 1,737 6,825 Interest expense (2,434) (752) Sylvan Ventures investment losses (238) - Loss on investment (14,231) - Equity in net loss of affiliates: Sylvan Ventures (15,588) (829) Other (137) (282) ---------------- --------------- (15,725) (1,111) Minority interest in consolidated subsidiaries: Sylvan Ventures 1,805 - Other (2,600) (315) ---------------- --------------- (795) (315) ---------------- --------------- Income (loss) from continuing operations before income taxes (20,416) 9,705 Income tax benefit (expense) 6,982 (3,080) ---------------- --------------- Income (loss) from continuing operations (13,434) 6,625 Loss from discontinued operations, net of income tax expense of $0 in 2000 - (1,956) ---------------- --------------- Net income (loss) $ (13,434) $4,669 ================ =============== Earnings (loss) per common share, basic: Income (loss) from continuing operations $(0.35) $0.15 Net income (loss) $(0.35) $0.10 Earnings (loss) per common share, diluted: Income (loss) from continuing operations $(0.35) $0.14 Net income (loss) $(0.35) $0.10
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

Consolidated Statements of Operations

(Dollar and share amounts in thousands, except per share data)

 
 Three months ended
September 30,

 
 
 2001
 2000
 
 
 (Unaudited)

 
Revenues $107,749 $59,969 

Cost and expenses

 

 

 

 

 

 

 
Direct costs  95,735  53,227 
Sylvan Ventures operating costs  4,779  5,912 
General and administrative expenses  5,643  4,620 
  
 
 
Total expenses  106,157  63,759 
  
 
 

Operating income (loss)

 

 

1,592

 

 

(3,790

)

Other income (expense)

 

 

 

 

 

 

 
Investment and other income  2,242  4,640 
Interest expense  (2,200) (2,057)
Sylvan Ventures investment income (losses)  22,842  (3,051)

Equity in net loss of affiliates:

 

 

 

 

 

 

 
 Sylvan Ventures  (10,830) (1,229)
 Other    (105)
  
 
 
   (10,830) (1,334)

Minority interest in consolidated subsidiaries:

 

 

 

 

 

 

 
 Sylvan Ventures  (20) 2,930 
 Other  (1,021) 932 
  
 
 
   (1,041) 3,862 
  
 
 
Income (loss) from continuing operations before income taxes  12,605  (1,730)
Income tax expense  (4,236) (1,607)
  
 
 
Income (loss) from continuing operations  8,369  (3,337)
Income from discontinued operations    1,903 
  
 
 
Net income (loss) $8,369 $(1,434)
  
 
 

Earnings (loss) per common share, basic:

 

 

 

 

 

 

 
 Income (loss) from continuing operations  $0.22  $(0.08)
 Net income (loss)  $0.22  $(0.03)

Earnings (loss) per common share, diluted:

 

 

 

 

 

 

 
 Income (loss) from continuing operations  $0.20  $(0.08)
 Net income (loss)  $0.20  $(0.03)

See accompanying notes to consolidated financial statements.

5


SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30, 2001 2000 (Restated) ------------------------------------------- (Unaudited) REVENUES $250,841 $157,766 COST AND EXPENSES Direct costs 214,408 133,823 Sylvan Ventures operating costs 12,467 4,589 General and administrative expenses 11,887 9,367 -------------- ------------- Total expenses 238,762 147,779 -------------- ------------- Operating income 12,079 9,987 OTHER INCOME (EXPENSE) Investment and other income 5,064 9,644 Interest expense (4,663) (2,670) Sylvan Ventures investment losses (638) - Loss on investment (14,231) - Equity in net loss of affiliates: Sylvan Ventures (35,374) (1,109) Other (263) (878) -------------- ------------- (35,637) (1,987) Minority interest in consolidated subsidiaries: Sylvan Ventures 3,096 - Other (4,020) (1,067) -------------- ------------- (924) (1,067) -------------- ------------- Income (loss) from continuing operations before income taxes (38,950) 13,907 Income tax benefit (expense) 13,932 (3,873) -------------- ------------- Income (loss) from continuing operations (25,018) 10,034 Loss from discontinued operations, net of income tax expense - (5,824) of $163 in 2000 Gain on disposal of discontinued operations, net of income tax expense of $136,762 in 2000 - 288,454 -------------- ------------- Net income (loss) $(25,018) $292,664 ============== ============= Earnings (loss) per common share, basic: Income (loss) from continuing operations $(0.66) $0.21 Net income (loss) $(0.66) $6.10 Earnings (loss) per common share, diluted: Income (loss) from continuing operations $(0.66) $0.21 Net income (loss) $(0.66) $6.01
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

Consolidated Statements of Operations

(Dollar and share amounts in thousands, except per share data)

 
 Nine months ended
September 30,

 
 
 2001
 2000
 
 
 (Unaudited)

 
Revenues $358,590 $217,737 

Cost and expenses

 

 

 

 

 

 

 
Direct costs  310,144  187,048 
Sylvan Ventures operating costs  17,246  10,501 
General and administrative expenses  17,530  13,987 
  
 
 
Total expenses  344,920  211,536 
  
 
 

Operating income

 

 

13,670

 

 

6,201

 

Other income (expense)

 

 

 

 

 

 

 
Investment and other income  7,306  14,282 
Interest expense  (6,863) (4,727)
Sylvan Ventures investment income (losses)  22,204  (3,051)
Loss on investment  (14,231)  

Equity in net loss of affiliates:

 

 

 

 

 

 

 
 Sylvan Ventures  (46,204) (2,338)
 Other  (263) (984)
  
 
 
   (46,467) (3,322)

Minority interest in consolidated subsidiaries:

 

 

 

 

 

 

 
 Sylvan Ventures  3,076  2,930 
 Other  (5,041) (134)
  
 
 
   (1,965) 2,796 
  
 
 
Income (loss) from continuing operations before income taxes  (26,346) 12,179 
Income tax benefit (expense)  9,696  (5,480)
  
 
 
Income (loss) from continuing operations  (16,650) 6,699 

Loss from discontinued operations, net of income tax expense of $163 in 2000

 

 


 

 

(3,922

)
Gain on disposal of discontinued operations, net of income tax expense of $136,762 in 2000    288,454 
  
 
 
Net income (loss) $(16,650)$291,231 
  
 
 

Earnings (loss) per common share, basic:

 

 

 

 

 

 

 
 Income (loss) from continuing operations  $(0.44) $0.15 
 Net income (loss)  $(0.44) $6.38 

Earnings (loss) per common share, diluted:

 

 

 

 

 

 

 
 Income (loss) from continuing operations  $(0.44) $0.15 
 Net income (loss)  $(0.44) $6.02 

See accompanying notes to consolidated financial statements.

6


SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2001 2000 ------------------------------------------ (Unaudited) OPERATING ACTIVITIES Net income (loss) $ (25,018) $ 292,664 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 12,081 10,106 Amortization 6,395 6,489 Gain on disposal of discontinued operations - (288,454) Deferred income taxes (190) 370 Loss on investments 14,869 - Equity in net loss of affiliates 35,637 2,475 Minority interest in income of consolidated subsidiary 924 1,067 Other non-cash items 835 196 Changes in operating assets and liabilities: Receivables 13,526 (10,408) Tuition loans, net (3,784) (2,679) Inventory, prepaid and other current assets (2,165) 2,637 Payables and accrued expenses 167 (16,241) Income taxes payable (112,440) 16,273 Deferred revenue and other current liabilities (8,878) (23,020) ------------ ----------- Net cash used in operating activities (68,041) (8,525) ------------ ----------- INVESTING ACTIVITIES Purchase of available-for-sale securities (108,045) (58,006) Proceeds from sale or maturity of available-for-sale securities 219,759 1,272 Investment in and advances to affiliates and other investments (36,576) (20,942) Purchase of property and equipment (28,292) (13,706) Proceeds from sale of Prometric, net of closing costs - 710,312 Cash paid for acquired businesses, net of cash received (3,005) (22,164) Payment of contingent consideration for prior period acquisitions (25,145) (19,323) Expenditures for deferred costs (2,085) (2,393) Increase in other assets (730) (1,369) ------------ ----------- Net cash provided by investing activities 15,881 573,681 ------------ ----------- FINANCING ACTIVITIES Proceeds from exercise of options and warrants 6,958 263 Proceeds from issuance of common stock - 723 Repurchases of common stock - (139,957) Proceeds from issuance of debt 9,600 130,752 Payments on debt (9,412) (161,555) Cash received from minority members of Sylvan Ventures 21,899 9,302 Decrease in other long-term liabilities 699 - ------------ ----------- Net cash provided by (used in) financing activities 29,744 (160,472) ------------ ----------- Effect of subsidiary year-end change on cash and cash - (2,565) equivalents Effect of exchange rate changes on cash (1,823) (1,288) ------------ ----------- Net increase (decrease) in cash and cash equivalents (24,239) 400,831 Cash and cash equivalents at beginning of period 116,490 20,410 ------------ ----------- Cash and cash equivalents at end of period $ 92,251 $ 421,241 ============ ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

Consolidated Statements of Cash Flows

(Amounts in thousands)

 
 Nine months ended
September 30,

 
 
 2001
 2000
 
 
 (Unaudited)

 
Operating activities       
Net income (loss) $(16,650)$291,231 
 Adjustments to reconcile net income (loss) to net cash used in operating activities:       
   Depreciation  17,087  13,929 
   Amortization  11,190  7,759 
   Gain on disposal of discontinued operations    (288,454)
   Deferred income taxes  (162) 335 
   (Gain) / loss on investments  (7,973) 3,051 
   Equity in net loss of affiliates  46,467  3,809 
   Minority interest in income of consolidated subsidiary  1,965  (2,796)
   Other non-cash items  1,104  1,617 
   Changes in operating assets and liabilities:       
    Receivables  1,391  (17,163)
    Tuition loans, net  (4,496) (4,659)
    Inventory, prepaid and other current assets  710  2,067 
    Payables and accrued expenses  (4,804) (1,023)
    Income taxes payable  (112,993) (15,257)
    Deferred revenue and other current liabilities  (11,966) (4,703)
  
 
 
Net cash used in operating activities  (79,130) (10,257)
  
 
 

Investing activities

 

 

 

 

 

 

 
Purchase of available-for-sale securities  (108,045) (183,337)
Proceeds from sale or maturity of available-for-sale securities  251,118  2,033 
Investment in and advances to affiliates and other investments  (35,728) (43,279)
Purchase of property and equipment  (40,356) (18,699)
Proceeds from sale of Prometric, net of closing costs    710,312 
Cash paid for acquired businesses, net of cash received  (11,285) (31,073)
Payment of contingent consideration for prior period acquisitions  (39,491) (19,323)
Expenditures for deferred costs  (2,936) (2,603)
Increase in other assets  (1,859) (4,211)
  
 
 
Net cash provided by investing activities  11,418  409,820 
  
 
 

Financing activities

 

 

 

 

 

 

 
Proceeds from exercise of options and warrants  15,010  458 
Proceeds from issuance of common stock    785 
Repurchases of common stock    (211,014)
Proceeds from issuance of debt  23,212  135,478 
Payments on debt  (19,118) (163,149)
Cash received from minority members of Sylvan Ventures  23,272  15,741 
Increase in other long-term liabilities  736   
  
 
 
Net cash provided by (used in) financing activities  43,112  (221,701)
  
 
 
Effect of subsidiary year-end change on cash and cash equivalents    (2,565)
Effect of exchange rate changes on cash  (1,453) (2,049)
  
 
 
Net increase (decrease) in cash and cash equivalents  (26,053) 173,248 
Cash and cash equivalents at beginning of period  116,490  18,995 
  
 
 
Cash and cash equivalents at end of period $90,437 $192,243 
  
 
 

See accompanying notes to consolidated financial statements.

7 SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) JUNE


Sylvan Learning Systems, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Unaudited

(Dollar and share amounts in thousands, except per share amounts)
September 30, 2001 NOTE 1 - BASIS OF PRESENTATION

Note 1—Basis of Presentation

    The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month and sixnine month periods ended JuneSeptember 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. The traditional semester programs in the education industry, with a summer break, result in unusually large seasonality in the operating results of Sylvan Learning Systems, Inc. ("the Company"). The consolidated balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the audited consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2000. Certain amounts previously reported for 2000 have been reclassified to conform with the 2001 presentation. The accompanying consolidated statements of operations have been restated to reflect the discontinued operations discussed in

Note 3. NOTE 2 - NEW ACCOUNTING STANDARDS2—New Accounting Standards

    In June 1998, the Financial Accounting Standards Board issued Statement No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,Accounting for Derivative Instruments and Hedging Activities, which was adopted effective January 1, 2001. Because of the Company's minimal use of derivatives, the adoption of the new standard did not have any effect on the Company's consolidated financial position and results of operations.

    In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS,Business Combinations, and Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS.Goodwill and Other Intangible Assets. Under Statement No. 141, the pooling-of-interests method of accounting has been eliminated for all business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. Statement No. 141 also includes new criteria to recognize intangible assets separately from goodwill, and is effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. Under Statement No. 142, goodwill will no longer be amortized but will be subject to annual impairment tests for fiscal years beginning after December 15, 2001. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. The Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. The Company has estimated that the impact of the non-amortization provisions of the StatementsStatement No. 142 will be a decrease in amortization expense of approximately $21,200$19,300 in 2002, including approximately $8,700$7,000 related to the amortization of Sylvan Ventures equity method investments.

    In August 2001, the Financial Accounting Standards Board issued Statement No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Statement No. 144 supersedes Statement No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and provides a single accounting model for long-lived assets to be disposed of. The Company will apply the

8 NOTE 3 - DISCONTINUED OPERATIONS


new rules on accounting for the impairment or disposal of long-lived assets beginning in the first quarter of 2002. The Company will perform an evaluation of the impairment of its long-lived assets as of January 1, 2002 and has not yet determined what effect the evaluation will have on the earnings and financial position of the Company.

Note 3—Discontinued Operations

    On October 6, 2000, the Company sold its English Language immersion business, Aspect ("Aspect"), for $19,794 in cash. The gain on the disposition recognized in the year ended December 31, 2000 was $22,353, which includes an income tax benefit of $3,047. The Company has estimated the domestic and foreign income taxes resulting from the sale based on the expected allocation of proceeds to subsidiaries that are parties to the transaction and the tax laws of the jurisdictions in which these subsidiaries operate, assuming that undistributed gains outside the United States will be reinvested outside the United States.

    On March 3, 2000, the Company sold its computer-based testing division, Sylvan Prometric ("Prometric"), for approximately $775,000 in cash. The gain on the disposition recognized in the year ended December 31, 2000 was approximately $288,454, net of income taxes of $136,762. The final proceeds from the sale may change based on contractual provisions that provide for certain adjustments to the sale price, including an adjustment for changes in working capital of Prometric between November 30, 1999 and March 3, 2000. The Company and the buyer have not completed the process required to provide for a final settlement of the sale proceeds. However, management believes that any future adjustments will be immaterial to the Company's financial position and results of operations. The Company has estimated the domestic and foreign income taxes resulting from the sale based on the expected allocation of proceeds to subsidiaries that are a party to the transaction and the tax laws of the jurisdictions in which these subsidiaries operate, assuming that undistributed gains outside the United States will be reinvested outside the United States.

    Summarized operating information of the Company's discontinued operations, including both Prometric and Aspect for the period owned in 2000, was as follows:
Three months ended Six months ended June 30, 2000 June 30, 2000 ------------------ ------------------ Revenues $10,263 $57,918 ----------------- ----------------- Loss before income taxes (1,956) (5,661) Income tax expense - (163) ----------------- ----------------- Net loss $(1,956) $ (5,824) ================= =================

 
 Three months ended
September 30, 2000

 Nine months ended
September 30, 2000

 
Revenues $17,980 $75,898 
  
 
 
Income (loss) before income taxes  1,903  (3,759)
Income tax expense    (163)
  
 
 
Net income (loss) $1,903 $(3,922)
  
 
 

    Included in lossincome (loss) from discontinued operations for the three and sixnine month periods ended JuneSeptember 30, 2000 is an allocation of corporate interest expense of $45$60 and $723,$783, respectively, based upon a percentage of the net equity investment in discontinued operations to the net equity of the Company including the discontinued operations. NOTE 4 - INVESTMENTS FORMATION OF SYLVAN VENTURES

9


Note 4—Investments

Formation of Sylvan Ventures

    The Sylvan Ventures segment was established during the first quarter of 2000 to invest in and develop companies with emerging technology solutions for the education and training marketplace ("portfolio companies"). On June 30, 2000, affiliates of Apollo Management L.P. ("Apollo") and certain members of Sylvan's management ("management investors") joined the Company to form Sylvan Ventures, LLC, with total committed funds of $400,000. Of the $400,000 commitment, the Company has committed $285,000, including investments in portfolio companies valued at $65,000; Apollo has committed $100,000; and the management investors have committed $15,000. 9 NOTE 4 - INVESTMENTS (CONTINUED) Upon formation, Sylvan Ventures issued common membership interests to Sylvan and the management investors and preferred membership interests to Apollo. Additionally, Sylvan Ventures authorized the granting of plan membership profit interests to members of management that entitle the recipients to receive an aggregate allocation of up to 20% of any cumulative net profits. As of JuneSeptember 30, 2001, plan membership profit interests have been granted to management for an aggregate allocation of approximately 15% of the cumulative net profits upon the occurrence of any profits interest event.

    In 2000, the membership agreement provided for the allocation of net losses to the common and preferred members on a pro rata basis, subject to certain limitations. Beginning January 1, 2001, net losses are being allocated on a pro rata basis only to the common membership interest holders until their capital account balances have been reduced to zero, at which time any losses will be allocated to Apollo until its capital account balance has been reduced to zero. Thereafter, any losses will be allocated on a pro rata basis to all membership interest holders. Any annual profits earned after January 1, 2001 will first be allocated to Apollo until it has recovered its 2000 allocated losses and then to the common membership interest holders to recover previously allocated losses. After all previously allocated losses have been recovered through profit allocations, any additional net profits will be allocated on a pro rata basis to all interest holders, including the plan membership profit interest holders. The preferred members also maintain a preferred position relating to cash distribution provisions of the membership agreement. CONSOLIDATED INVESTMENTS

Consolidated Investments

    eSylvan, Inc. ("eSylvan") is a start-up organization formed to distribute the Company's learning center tutoring product to students at home via computer. Sylvan Ventures owns 85% of the common stock of eSylvan. eSylvan had not generated significant revenue through JuneSeptember 30, 2001, and its operating expenses have been included in the 2001 and 2000 consolidated statementstatements of operations as a component of Sylvan Ventures' operating costs. Sylvan Ventures has committed additional funding of $6,666$8,733 as of JuneSeptember 30, 2001 for eSylvan development and operating costs in 2001. During 2001, eSylvan issued common stock representing a 15% ownership interest to franchisees of Sylvan Learning Centers to more fully leverage the relationship between center-based and online tutoring. INVESTMENT IN AFFILIATES (EQUITY METHOD INVESTMENTS)

10


Investment in Affiliates (Equity Method Investments):

    The Company's investment in and advances to affiliates consist of investments in and loans to companies in the initial or early stages of development. These companies are frequently illiquid or experiencing cash flow deficits from operations. Further, investments are generally unsecured and subordinated to the claims of other creditors. Accordingly, the Company's investments in and advances to affiliates are subject to a high degree of investment and credit risk. The Company has made estimates of the recoverability of loans and advances to its affiliates, and due to the inherent uncertainty of the operations of these affiliates, it is reasonably possible that these estimates may change in the near term. 10 NOTE 4 - INVESTMENTS (CONTINUED)

    Investments in and advances to affiliates consist principally of investments in common stock and preferred stock, as follows as of JuneSeptember 30, 2001 and December 31, 2000, respectively:
JUNE 30, OWNERSHIP DECEMBER 31, 2000 OWNERSHIP 2001 INTEREST INTEREST ------------------ ------------------ --------------------- ----------------- Walden E-Learning, Inc. $32,415 41% $ - - Chancery Software Limited 11,350 42% 14,224 42% Classwell Learning Group, Inc. 8,819 42% 13,045 42% Caliber Learning Network, Inc. - 35% 15,123 34% HigherMarkets, Inc. 3,029 31% 6,694 31% iLearning, Inc. 3,358 27% 5,568 29% Mindsurf, Inc. 455 47% 1,109 47% EdVerify, Inc. 2,382 33% - - Other 2,856 - 2,236 - ------------------ --------------------- Total $64,664 $57,999 ================== =====================
The Company's

 
 September 30,
2001

 Ownership
Interest

 December 31,
2000

 Ownership
Interest

Walden E-Learning, Inc. $32,055 41% $ 
Chancery Software Limited  8,076 42%  14,224 42%
iLearning, Inc.  2,202 27%  5,568 29%
EdVerify, Inc.  2,034 33%   
Mindsurf, Inc.   47%  1,109 47%
HigherMarkets, Inc.   31%  6,694 31%
Classwell Learning Group, Inc.     13,045 42%
Caliber Learning Network, Inc.     15,123 34%
Other  261   2,236 
  
   
  
Total $44,628   $57,999  
  
   
  

    Sylvan Ventures' equity in net losses related to the investments in affiliates for the three month and sixnine month periods ended JuneSeptember 30, 2001 was $15,725$10,830 and $35,637,$46,204, respectively. At JuneSeptember 30, 2001, the difference between the carrying amount of equity method investments and the amount of underlying equity in net assets of these investments was $35,284.$29,645. This amount is being amortized for each investment primarily over a three-year period as a component of the Company's allocable share of income or loss. For the three month and sixnine month periods ended JuneSeptember 30, 2001, equity in net loss of affiliates includes amortization of $2,174$2,128 and $4,979,$7,106, respectively. Under the provisions of Statement No. 142 (see Note 2), this goodwill related to equity method investments will no longer be amortized, effective January 1, 2002.

    On September 11, 2001 Sylvan Ventures has committed additional fundingrecognized a gain of $13,300 to Mindsurf,$24,724 upon the sale of its 42% stake in Classwell Learning Group, Inc. ("Mindsurf") if specified performance targets are achieved.Total proceeds of $31,807 were recorded as a receivable on September 30, 2001, and were subsequently received by Sylvan Ventures on October 5, 2001.

11


    The tables below include summarized financial data and results of operations of those affiliates in which Sylvan Ventures hadhas an equity method investment.
JUNE 30, DECEMBER 31, 2001 2000 -------------------- -------------------- Current assets $45,538 $44,420 Other assets 74,772 67,191 Current liabilities 45,166 37,902 Long-term and other liabilities 24,700 7,149 Redeemable convertible preferred stock 88,232 77,643
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------------- ------------------------------------------- 2001 2000 2001 2000 ----------------- ----------------- ------------------ ------------------- Net sales $ 16,022 $ 6,079 $ 26,645 $ 11,150 Gross profit 11,725 4,458 18,478 7,439 Net loss (31,423) (6,845) (60,502) (14,143)
11 NOTE 4 - INVESTMENTS (CONTINUED) LOSS ON INVESTMENT

 
 September 30,
2001

 December 31,
2000

Current assets $27,748 $44,420
Other assets  51,310  67,191
Current liabilities  26,538  37,902
Long-term and other liabilities  14,360  7,149
Redeemable convertible preferred stock  62,492  77,643
 
 
Three months ended
September 30,

 
Nine months ended
September 30,

 
 
 2001
 2000
 2001
 2000
 
Net sales $12,607 $5,982 $39,252 $17,133 
Gross profit  6,962  4,422  25,440  11,861 
Net loss  (14,060) (8,440) (74,562) (22,582)

Loss on Investment

    The loss on investment was prompted by the Caliber Learning Network, Inc.'s ("Caliber") filing for Chapter 11 bankruptcy protection on June 15, 2001. The Sylvan Ventures investment in Caliber of $2,931 was reduced to $0 upon recording its allocable share of losses related to Caliber prior to the bankruptcy proceedings, which is included in "Equity in net loss of affiliates". Additionally, the Company recorded a loss on investment of $14,231 in the three month period ended June 30, 2001. This charge consists of the reserve for notes receivable and advances to Caliber of $7,497, as well as the accrual of a $6,734 estimated liability relating to the Company's guarantee of certain non-cancelable Caliber lease obligations and other Caliber related liabilities incurred by the Company. Due to the uncertainties surrounding the bankruptcy proceedings and the ultimate settlement of Caliber's lease and other liabilities, it is reasonably possible that the Company's loss estimate may change prior to finalization. NOTE 5 - DUE TO SHAREHOLDERS OF ACQUIRED COMPANIES

12


Note 5—Due to Shareholders of Acquired Companies and Other Contingencies

    Due to shareholders of acquired companies consists of the following amounts payable in cash:
JUNE 30, DECEMBER 31, 2001 2000 --------------------- -------------------- Amounts payable to former shareholders of Canter $ - $13,145 Amounts payable to former shareholders of Les Roches 561 - Amounts payable to former shareholders of Prometric 3,050 3,050 Amounts payable to former shareholders of WSI franchises 900 12,000 Amounts payable to former shareholders of UDLA 12,000 12,000 --------------------- -------------------- $16,511 $40,195 ===================== ====================
NOTE 6 - INCOME TAXES

 
 September 30,
2001

 December 31,
2000

Amounts payable to former shareholders of Canter $ $13,145
Amounts payable to former shareholders of Les Roches  621  
Amounts payable to former shareholders of Prometric  3,050  3,050
Amounts payable to former shareholders of WSI franchises  4,700  12,000
Amounts payable to former shareholders of UDLA    12,000
  
 
  $8,371 $40,195
  
 

    In connection with the Company's acquisition of Les Roches, variable amounts of contingent consideration are payable to the seller if specified levels of earnings are achieved in 2001 and 2002. The Company will record the contingent consideration when the contingencies are resolved and the additional consideration is payable.

    In connection with the Company's acquisition of UDLA, variable amounts of contingent consideration are payable to the seller in 2006 and 2007 if specified levels of earnings are achieved in 2004, 2005 and 2006. The Company will record the contingent consideration when the contingencies are resolved and the additional consideration is payable.

    The Company has entered into agreements with certain franchisees of Sylvan Learning Centers and Wall Street Institute that allow the franchisees to require the Company to repurchase the centers at a predetermined multiple of operating results if specified operating results thresholds are achieved. When the Company can assess the likelihood of this repurchase right being exercised and the amount of the related commitment to purchase the center, such obligation will be disclosed.

Note 6—Income Taxes

    The tax provisions for the sixnine month periods ended JuneSeptember 30, 2001 and 2000 were based on the estimated effective tax rates applicable for the full years, after giving effect to significant unusual items related specifically to the interim periods. The Company's income tax provisions for all periods consist of federal, state, and foreign income taxes. The Company's overall effective tax rate from continuing operations was 36%37% for the sixnine months ended JuneSeptember 30, 2001. This rate represents the blended rate computed after taking into account the impact of Sylvan Ventures on the Company's results. Due to the volatility of Sylvan Ventures' income and losses, the Company's overallconsolidated rate may fluctuate from quarter to quarter. However, on a full year basis the Company estimates that the effective income tax rate, for the continuing operations results of the Company, prior toexcluding Sylvan Ventures, and Sylvan Ventures'Ventures for the year ended December 31, 2001 will be 34% and 35%, respectively. Fluctuations in the magnitude and timing of the tax impact of Sylvan Ventures' financial results may cause the Company's consolidated effective income tax rate to vary substantially from the statutory rate.

13


    The Company's effective income tax rate from continuing operations in 2000 was significantly affected by its inability to utilize tax benefits from certain investment losses of Sylvan Ventures, the impact of minority interests and the timing of recognition of corporate level tax benefits from subsidiary losses. Because of these factors, the 2000 effective tax rate varied substantially from the statutory rate.

    At JuneSeptember 30, 2001, undistributed earnings from continuing operations of non-U.S. subsidiaries totaled $77,100.$75,930. Deferred tax liabilities have not been recognized for these undistributed earnings because it is management's intention to reinvest such undistributed earnings outside of the U.S. If all undistributed earnings were remitted to the U.S., the amount of incremental U.S. federal income taxes, net of foreign tax credits, would be approximately $21,900. 12 NOTE 7 - STOCKHOLDERS' EQUITY$20,000.

Note 7—Stockholders' Equity

    The components of stockholders' equity are as follows:
ADDITIONAL RETAINED ACCUMULATED OTHER TOTAL COMMON PAID-IN EARNINGS COMPREHENSIVE LOSS STOCKHOLDERS' STOCK CAPITAL EQUITY ------------- -------------- -------------- ------------------- ------------------- Balance at December 31, 2000 $373 $205,343 $360,232 $(12,685) $553,263 Options exercised for purchase of 762 shares of common stock, including income tax benefit of $3,485 8 10,435 10,443 Other equity activity 571 571 Comprehensive income (loss): Net loss for the six months ended June 30, 2001 (25,018) (25,018) Unrealized loss on available- for-sale securities (204) (204) Foreign currency translation adjustment (14,721) (14,721) -------------------- Total comprehensive loss (39,943) ------------- -------------- -------------- -------------------- ------------------- Balance at June 30, 2001 $381 $216,349 $335,214 $(27,610) $524,334 ============= ============== ============== ==================== ===================
NOTE 8 - COMPREHENSIVE INCOME (LOSS)

 
 Common
Stock

 Additional
Paid-In
Capital

 Retained
Earnings

 Accumulated Other
Comprehensive
Loss

 Total
Stockholders'
Equity

 
Balance at December 31, 2000 $373 $205,343 $360,232 $(12,685)$553,263 

Options exercised for purchase of 1,325 shares of common stock, including income tax benefit of $5,874

 

 

13

 

 

20,871

 

 

 

 

 

 

 

 

20,884

 
Issuance of 29 shares of common stock in connection with the employee stock purchase plan     404        404 
Other equity activity     383        383 
Comprehensive income (loss):                
 Net loss for the nine months ended September 30, 2001        (16,650)    (16,650)
 Unrealized loss on available-for-sale securities           (47) (47)
 Foreign currency translation adjustment           (5,275) (5,275)
              
 
Total comprehensive loss              (21,972)
  
 
 
 
 
 
Balance at September 30, 2001 $386 $227,001 $343,582 $(18,007)$552,962 
  
 
 
 
 
 

Note 8—Comprehensive Income (Loss)

    The components of comprehensive income (loss), net of related tax,income taxes, are as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2001 2000 2001 2000 ----------------- ---------------- --------------- ------------- Net income (loss) $(13,434) $4,669 $(25,018) $292,664 Unrealized loss on available-for-sale securities (227) (4,304) (204) (5,728) Foreign currency translation adjustment (4,423) (2,578) (14,721) (6,066) ----------------- ---------------- --------------- ------------- Comprehensive income (loss) $(18,084) $(2,213) $(39,943) $280,870 ================= ================ =============== =============
13 NOTE 9 - EARNINGS (LOSS) PER SHARE

 
 Three months ended
September 30,

 Nine months ended
September 30,

 
 
 2001
 2000
 2001
 2000
 
Net income (loss) $8,369 $(1,434)$(16,650)$291,231 
Unrealized gain (loss) on available-for-sale securities  157  2,695  (47) (3,033)
Foreign currency translation adjustment  9,446  (10,784) (5,275) (16,850)
  
 
 
 
 
Comprehensive income (loss) $17,972 $(9,523)$(21,972)$271,348 
  
 
 
 
 

14


Note 9—Earnings (Loss) Per Share

    The following table summarizes the computations of basic and diluted earnings (loss) per common share:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2001 2000 2001 2000 ------------- ------------- --------------- ------------- Numerator used in basic and diluted earnings (loss) per common share: Income (loss) from continuing operations $ (13,434) $ 6,625 $(25,018) $ 10,034 Loss from discontinued operations, net of tax - (1,956) - (5,824) Gain on disposal of discontinued operations, net of tax - - - 288,454 ------------- ------------- --------------- ------------- Net income (loss) $ (13,434) $ 4,669 $(25,018) $292,664 ============= ============= =============== ============= Denominator: Weighted average common shares outstanding 37,877 45,110 37,665 47,955 Net effect of dilutive stock options based on treasury stock method using average market price - 645 - 707 Effect of convertible debentures - 70 - 35 ------------- ------------- --------------- ------------- Weighted average common shares outstanding and additional dilution from common stock equivalents 37,877 45,825 37,665 48,697 ============= ============= =============== ============= Earnings (loss) per common share, basic: Income (loss) from continuing operations $(0.35) $0.15 $(0.66) $0.21 Loss from discontinued operations, net of tax - (0.05) - (0.12) Gain on disposal of discontinued operations, net of tax - - - 6.01 ------------- ------------- --------------- ------------- Net income (loss) $(0.35) $0.10 $(0.66) $6.10 ============= ============= =============== ============= Earnings (loss) per common share, diluted: Income (loss) from continuing operations $(0.35) $0.14 $(0.66) $0.21 Loss from discontinued operations, net of tax - (0.04) - (0.12) Gain on disposal of discontinued operations, net of tax - - - 5.92 ------------- ------------- --------------- ------------- Net income (loss) $(0.35) $0.10 $(0.66) $6.01 ============= ============= =============== =============

 
 Three months ended
September 30,

 Nine months ended
September 30,

 
 
 2001
 2000
 2001
 2000
 
Numerator used in basic earnings (loss) per common share:             
 Income (loss) from continuing operations $8,369 $(3,337)$(16,650)$6,699 
 Income (loss) from discontinued operations, net of tax    1,903    (3,922)
 Gain on disposal of discontinued operations, net of tax        288,454 
  
 
 
 
 
 Net income (loss) $8,369 $(1,434)$(16,650)$291,231 
  
 
 
 
 
Numerator used in diluted earnings (loss) per common share:             
 Income (loss) from continuing operations $8,369 $(3,337)$(16,650)$6,699 
 Add: Interest expense from assumed conversion of convertible debentures, net of tax  825      825 
  
 
 
 
 
 Income (loss) from continuing operations, after assumed conversion of convertible debentures  9,194  (3,337) (16,650) 7,524 
 Income (loss) from discontinued operations, net of tax    1,903    (3,922)
 Gain on disposal of discontinued operations, net of tax        288,454 
  
 
 
 
 
  $9,194 $(1,434)$(16,650)$292,056 
  
 
 
 
 
Denominator:             
 Weighted average common shares outstanding  38,472  41,084  37,937  45,667 
 Net effect of dilutive stock options based on treasury stock method using average market price  1,726      689 
 Effect of convertible debentures  6,355      2,142 
  
 
 
 
 
 Weighted average common shares outstanding and additional dilution from common stock equivalents  46,553  41,084  37,937  48,498 
  
 
 
 
 
Earnings (loss) per common share, basic:             
 Income (loss) from continuing operations $0.22 $(0.08)$(0.44)$0.15 
 Income (loss) from discontinued operations, net of tax    0.05    (0.09)
 Gain on disposal of discontinued operations, net of tax        6.32 
  
 
 
 
 
 Net income (loss) $0.22 $(0.03)$(0.44)$6.38 
  
 
 
 
 
Earnings (loss) per common share, diluted:             
 Income (loss) from continuing operations $0.20 $(0.08)$(0.44)$0.15 
 Income (loss) from discontinued operations, net of tax    0.05    (0.08)
 Gain on disposal of discontinued operations, net of tax        5.95 
  
 
 
 
 
 Net income (loss) $0.20 $(0.03)$(0.44)$6.02 
  
 
 
 
 

15


    Stock options and the convertible debentures were not dilutive for the three month period ended September 30, 2000 and sixthe nine month periodsperiod ended JuneSeptember 30, 2001 as the Company reported a net loss from continuing operations. NOTE 10 - CONTINGENCIES

Note 10—Contingencies

    On November 18, 1996, ACT, Inc. filed suit against the Company alleging that the Company violated federal antitrust laws and committed various state law torts in connection with the operations of its computer-based testing operations and in obtaining a testing services contract from the National Association of Securities Dealers ("NASD"). The trial court has granted the Company's motion for summary judgementjudgment and ACT, Inc. has filed its appeal of the decision to the U.S. Court of Appeals for the Eighth Circuit. Management is unable to predict the ultimate outcome of the appeal, but believes that the ultimate resolution of the matter will not have a material effect on the Company's consolidated financial position.

    On November 18, 1998, James Jinsoo and Christine Choi filed suit against the Company seeking damages and recission under the Development Agreement they had entered into for Korea in 1995 and which had been terminated by the Company due to their default under the Development Agreement. The dispute was submitted to arbitration pursuant to the terms of the Agreement. On July 10, 2001 the arbitration panel found in favor of the Company on all substantive issues raised by the Chois. The only amount the arbitrators awardedassessed to the ChoisCompany was $108, which had been paid by the Chois in fees and expenses for the arbitration. 14 NOTE 10 - CONTINGENCIES (CONTINUED)

    The Company is subject to other legal actions arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions and does not believe any settlement would materially affect the Company's financial position. NOTE 11 - BUSINESS SEGMENT INFORMATION
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------------------- --------------------------------- 2001 2000 2001 2000 ----------------- ------------------ --------------- -------------- Operating revenues: Sylvan Learning Centers $ 30,918 $26,084 $ 58,760 $ 48,743 Sylvan Education Solutions 34,229 30,108 60,999 56,053 Sylvan English Language Instruction 12,492 12,129 25,508 24,564 Sylvan International Universities 52,756 13,905 105,574 28,406 Sylvan Ventures - - - - ----------------- ------------------ --------------- -------------- $130,395 $82,226 $250,841 $157,766 ================= ================== =============== ============== Segment profit (loss): Sylvan Learning Centers $ 8,967 $ 6,429 $ 14,657 $11,431 Sylvan Education Solutions 7,748 5,913 9,422 7,780 Sylvan English Language Instruction 373 385 1,061 1,942 Sylvan International Universities 6,973 104 11,292 2,789 Sylvan Ventures (22,716) (4,036) (48,479) (5,698) ----------------- ------------------ --------------- -------------- $ 1,345 $ 8,795 $(12,047) $ 18,244 ================= ================== ================ ==============
JUNE 30, DECEMBER 31, Segment assets: 2001 2000 ------------------ ----------------- Sylvan Learning Centers $ 91,746 $ 84,895 Sylvan Education Solutions 111,937 120,756 Sylvan English Language Instruction 127,460 135,857 Sylvan International Universities 246,506 239,166 Sylvan Ventures 84,259 82,006 ------------------ ----------------- $661,908 $662,680 ================== =================

Note 11—Business Segment Information

    As of July 1, 2001, the Company realigned several of its business segments to emphasize the Company's focus on increasing its presence in the post-secondary education and online education markets. The new segments are K-12 Education Services (comprised of Sylvan Learning Centers and the Sylvan at School and Career Starters operations of the business formerly referred to as Sylvan Education Solutions), Online Higher Education (comprised of Canter and Associates and Sylvan Teacher Institute, both previously reported as part of Sylvan Education Solutions), International

16


Universities, English Language Instruction, and Sylvan Ventures. All segment information has been reclassified to conform to the new presentation.

 
 Three months ended
September 30,

 Nine months ended
September 30,

 
 
 2001
 2000
 2001
 2000
 
Operating revenues:             
 K-12 Education Services $38,143 $34,262 $139,464 $122,428 
 Online Higher Education  12,756  9,958  31,194  26,588 
 International Universities  42,327  4,200  147,900  32,608 
 English Language Instruction  14,523  11,549  40,032  36,113 
 Sylvan Ventures         
  
 
 
 
 
  $107,749 $59,969 $358,590 $217,737 
  
 
 
 
 

Segment profit (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 
 K-12 Education Services $7,083 $7,145 $28,161 $23,725 
 Online Higher Education  3,286  2,826  6,288  5,457 
 International Universities  1,565  (3,575) 12,857  (782)
 English Language Instruction  80  346  1,141  2,289 
 Sylvan Ventures  7,233  (10,192) (41,246) (15,890)
  
 
 
 
 
  $19,247 $(3,450)$7,201 $14,799 
  
 
 
 
 
 
 September 30,
2001

 December 31,
2000

Segment assets:      
 K-12 Education Services $110,575 $112,008
 Online Higher Education  102,335  93,643
 International Universities  257,918  239,166
 English Language Instruction  150,137  135,857
 Sylvan Ventures  98,411  82,006
  
 
  $719,376 $662,680
  
 

    Segment profit (loss) is calculated as net operating profit (loss) for operating segments. Segment profit for Sylvan Ventures is calculated as the sum of the operating costs, net investment gain (loss) and equity in net loss of affiliates. There are no significant inter-company sales or transfers. The

17


following table reconciles the reported information on segment profit (loss) to income (loss) from continuing operations before income taxes reported in the consolidated statements of operations:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ -------------------------------- 2001 2000 2001 2000 -------------- -------------- -------------- --------------- Total profit (loss) for reportable segments $ 1,345 $ 8,795 $(12,047) $18,244 Corporate general and administrative expense (5,901) (4,566) (11,887) (9,367) Other income (expense) and minority interest, net (15,860) 5,476 (15,016) 5,030 --------------- -------------- -------------- --------------- Income (loss) from continuing operations before income taxes $(20,416) $ 9,705 $(38,950) $13,907 =============== ============== ============== ===============
15 NOTE 11 - BUSINESS SEGMENT INFORMATION (CONTINUED) In July 2001, the Company's management announced the creation of an Online Higher Education business unit focused on broadening the Company's presence and reach in the sector of post-secondary and adult continuing education delivered through distance learning. Concurrent with the creation of this new business unit, the Company intends to reorganize its business segments. The new Online Higher Education business unit will encompass Canter and Associates, Sylvan Teacher Institute and the Company's related business interests in the post-secondary distance learning marketplace. The Company anticipates that the reorganization of its segments will be substantially complete in the third quarter of 2001, at which time all segment information will be restated to conform to the new presentation. 16

 
 Three months ended
September 30,

 Nine months ended
September 30,

 
 
 2001
 2000
 2001
 2000
 
Total profit (loss) for reportable segments $19,247 $(3,450)$7,201 $14,799 
Corporate general and administrative expense  (5,643) (4,620) (17,530) (13,987)
Other income (expense) and minority interest, net  (999) 6,340  (16,017) 11,367 
  
 
 
 
 
Income (loss) from continuing operations before income taxes $12,605 $(1,730)$(26,346)$12,179 
  
 
 
 
 

18



ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW

Overview

    Sylvan Learning Systems, Inc. ("the Company" or "Sylvan") is a leading international provider of educational services to families and schools. The Company provides lifelong educational services through five separate business segments. As of July 1, 2001, the Company realigned several of its business segments to emphasize the Company's focus on increasing its presence in the post-secondary education and online education markets. The new segments are K-12 Education Services (comprised of Sylvan Learning Centers and the Sylvan at School and Career Starters operations of the business formerly referred to as Sylvan Education Solutions), Online Higher Education (comprised of Canter and Associates and Sylvan Teacher Institute, both previously reported as a part of Sylvan Education Solutions), International Universities, English Language Instruction, and Sylvan Ventures. All segment information has been reclassified to conform to the new presentation.

    The K-12 Education Services ("K-12") segment includes the operations of Sylvan Learning Centers, which designs and delivers individualized tutorial programs to school-aged children through franchised and Company-owned learning centers; Schülerhilfe, a major provider of tutoring services in Germany; and Sylvan Education Solutions, which principally provides educational programs to students of public and non-public school districts through contracts funded by Title I and state-based programs. The Online Higher Education ("OHE") segment provides professional development and graduate degree programs to teachers through Canter and Associates and Sylvan Teacher Institute. The International Universities ("IU") segment owns or maintains controlling interests in four private, for-profit universities located in Spain, Switzerland, Mexico and Chile. The English Language Instruction segment consists of the operations of Wall Street Institute ("WSI"), a European-based franchiser and operator of learning centers that teach the English language in a post-secondary market. The Sylvan Ventures segment invests in and develops companies that are creating emerging technology solutions for the education marketplace.

    Consistent with the stated goal of focusing resources and management efforts on the core business of educational services, and in order to fund expansion of technology applications in educational services, in 2000 the Company consummated the sale of Prometric, a computer-based testing business, and Aspect Language Schools ("Aspect"), an English Language immersion business. Unless specifically noted, all discussion of financial results excludes the results of Prometric and Aspect except as disclosed as discontinued operations.

Results of Operations

    Sylvan generates revenues from four of its business segments: Sylvan Learning Centers,K-12 Education Services, which primarily earns primarily franchise royalties, franchise sales fees, Company-owned learning center revenues and Company-owned Learning Center revenues; Sylvan Education Solutions, which earnscontract-based revenues from providing supplemental remedial education services to public and non-public schools as well asschools; Online Higher Education, which primarily earns revenues from providing teacher training services; Sylvan English Language Instruction, which earns primarily franchise royalties, company-owned center revenue and franchise sales fees; and Sylvan International Universities, which earns tuition and dormitory fees paid by the students of Universidad Europea de Madrid CEES ("UEM"), Swiss Hotel Association Hotel Management School Les Roches ("Les Roches"), Universidad del Valle de Mexico ("UVM") and Universidad de Las Americas ("UDLA"). A fifth segment, Sylvan Ventures, invests in; and develops companies to bring technology solutions to the educationEnglish Language Instruction, which primarily earns franchise royalties, Company-owned center revenue and training marketplace.franchise sales fees. Sylvan Ventures has not generated material revenues since its inception in 2000, but costs have been incurred to oversee and develop theits investments.

19


    The following table sets forth the percentage relationships of operating revenues and direct costs for each business segment, as well as certain income statement line items expressed as a percentage of total revenues for the periods indicated:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 2001 2000 2001 2000 --------------- --------------- ----------------- --------------- Revenues: Sylvan Learning Centers 24% 32% 23% 31% Sylvan Education Solutions 26% 36% 24% 35% Sylvan English Language Instruction 10% 15% 10% 16% Sylvan International Universities 40% 17% 43% 18% --------------- --------------- ----------------- --------------- Total revenues 100% 100% 100% 100% Direct costs: Sylvan Learning Centers 17% 24% 18% 24% Sylvan Education Solutions 20% 29% 20% 31% Sylvan English Language Instruction 9% 14% 10% 14% Sylvan International Universities 35% 17% 37% 16% --------------- --------------- ----------------- --------------- Total direct costs 81% 84% 85% 85% General and administrative expenses 5% 6% 5% 6% Sylvan Ventures operating costs 5% 4% 5% 3% --------------- --------------- ----------------- --------------- Operating income 9% 6% 5% 6% Non-operating (expense) income (including equity in net loss of Ventures affiliates) (24%) 6% (21%) 2% --------------- --------------- ----------------- --------------- Income (loss) from continuing operations (15%) 12% (16%) 8% Income tax benefit (expense) 5% (4%) 6% (2%) --------------- --------------- ----------------- --------------- Income (loss) from continuing operations (10%) 8% (10%) 6% ================ =============== ================== ===============
RESULTS OF OPERATIONS Sylvan is a leading international provider

 
 Three months ended
September 30,

 Nine months ended
September 30,

 
 
 2001
 2000
 2001
 2000
 
Revenues:         
 K-12 Education Services 35%57%39%56%
 Online Higher Education 12%17%9%12%
 International Universities 39%7%41%15%
 English Language Instruction 14%19%11%17%
  
 
 
 
 
  Total revenues 100%100%100%100%

Direct costs:

 

 

 

 

 

 

 

 

 
 K-12 Education Services 29%45%31%45%
 Online Higher Education 9%12%7%10%
 International Universities 38%13%37%15%
 English Language Instruction 13%19%11%16%
  
 
 
 
 
  Total direct costs 89%89%86%86%

General and administrative expenses

 

5

%

8

%

5

%

6

%
Sylvan Ventures operating costs 4%9%5%5%
  
 
 
 
 
Operating income (loss) 2%(6%)4%3%
Non-operating (expense) income (including         
equity in net loss of Ventures affiliates) 10%3%(11%)3%
  
 
 
 
 
Income (loss) from continuing operations 12%(3%)(7%)6%
Income tax benefit (expense) (4%)(3%)3%(3%)
  
 
 
 
 
Income (loss) from continuing operations 8%(6%)(4%)3%
  
 
 
 
 

Comparison of educational services to families and schools. The Company provides lifelong educational services through five separate business segments. The Sylvan Learning Centers segment designs and delivers individualized tutorial programs to school age children through franchised and Company-owned Learning Centers. This segment also includes the operations of Schulerhilfe, a major provider of tutoring services in Germany. The Sylvan Education Solutions segment principally provides educational programs to students of public and non-public school districts through 17 contracts funded by Title 1 and state-based programs. This segment also provides professional development and graduate degree programs to teachers through the Canter and Associates. The Sylvan English Language Instruction segment consists of the operations of Wall Street Institute, Kft., ("WSI"), a European-based franchiser and operator of learning centers that teach the English language in a post-secondary market. Sylvan International Universities segment owns or maintains controlling interests in four private, for-profit universities located in Spain, Switzerland, Mexico and Chile. The Company's newest segment, Sylvan Ventures, invests in and develops companies that are creating emerging technology solutionsresults for the education marketplace. Consistent with the stated goal of focusing resources and management's efforts on the core business of educational services, and in order to fund expansion of technology applications in educational and training services, the Company consummated the sale of Prometric, a computer-based testing business, and Aspect Language Schools, B.V. ("Aspect"), an English Language immersion business in 2000. Unless specifically noted, all discussion of financial results excludes the results of Prometric and Aspect except as disclosed as discontinued operations. In July 2001, the Company's management announced the creation of an Online Higher Education business unit focused on broadening the Company's presence and reach in the sector of post-secondary and adult continuing education delivered through distance learning. Concurrent with the creation of this new business unit, the Company intends to reorganize its business segments. The new Online Higher Education business unit will encompass Canter and Associates, Sylvan Teacher Institute and the Company's related business interests in the post-secondary distance learning marketplace. The Company anticipates that the reorganization of its segments will be substantially complete in the third quarter of 2001, at which time all segment information will be restated to conform to the new presentation. COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNEthree months ended September 30, 2001 TO RESULTS FOR THE THREE MONTHS ENDED JUNEto results for the three months ended September 30, 2000. REVENUES.

    Revenues.  Total revenues from continuing operations increased by $48.2$47.7 million, or 59%80%, to $130$107.7 million for the three months ended JuneSeptember 30, 2001 (the "2001 fiscal quarter") from $82.2$60.0 million for the three months ended JuneSeptember 30, 2000 (the "2000 fiscal quarter"). Included in the total revenues from continuing operations for the 2001 fiscal quarter were $37.6$37.5 million of revenues from Les Roches, UVM and UDLA, which were acquired in the third and fourth quartersquarter of 2000. Total revenues from continuing operations increased 13%17%, excluding the increase due to the Les Roches, UVM and UDLA acquisitions. SYLVAN LEARNING CENTERSThis revenue increase was driven primarily by growth in the Online Higher Education segment and acquisitions of learning centers in the K-12 Education Services and English Language Instruction segments.

    K-12 Education Services revenue increased by $4.8$3.9 million, or 19%11%, to $30.9$38.1 million for the 2001 fiscal quarter compared to the 2000 fiscal quarter. Franchise royalties increased by $0.9$0.3 million, or 16%5%, in 2001 as a result of a net increase of 3638 new learning centers opened after JuneSeptember 30, 2000 and a 10% increaseincreases in same center revenue. Revenues from Company-owned learning centers increased $2.2$2.5 million, or 17%, to $15.0$17.4 million during the 2001 fiscal quarter. Same center revenues increased 9%8%, or $1.2 million, with the remaining revenue increase of $1.0$1.3 million generated from five Company-owned centers acquired from franchise owners and a net of fourthree new centers opened during the past year. In May of 2000, the Company acquired Ivy West, an SAT preparation company based in California. The acquisition of Ivy West resulted in increased revenue of $1.5 million for the 2001 fiscal quarter.

20


International revenues, primarily Schulerhilfe,Schülerhilfe, increased by $0.2$0.3 million, or 4%12%, in the 2001 fiscal quarter compared to the 2000 fiscal quarter. OperatingThe remaining revenue for Learning Centers represents 24%increase of total revenues from continuing operations of the Company for the 2001 fiscal quarter. SYLVAN EDUCATION SOLUTIONS revenue increased by $4.1 million, or 14% to $34.2$0.6 million for the 2001 fiscal quarter compared to the 2000 fiscal quarter. Sylvan at Schoolquarter relates to other franchise services. Contract-based revenue increased by $2.0$0.2 million, or 11%2%, to $20.9$8.5 million in the 2001 fiscal quarter compared to the 2000 fiscal quarter due to a higher number of school contracts. Operating revenue for K-12 Education Services represents 35% of total revenues of the Company for the 2001 fiscal quarter.

    Online Higher Education revenue increased school contracts and growth inby $2.8 million, or 28%, to $12.8 million for the Career Starters business.2001 fiscal quarter compared to the 2000 fiscal quarter. Canter teacher-training revenue increased by $2.1 18 $2.7 million, or 19%29%, to $13.3$12.2 million in the 2001 fiscal quarter compared to the 2000 fiscal quarter. The Canter revenue increase is due to greater product demand, particularly the distance learning masters program. Sylvan Teacher Institute revenue increased by $0.1 million, or 17%, to $0.6 million in the 2001 fiscal quarter compared to the 2000 fiscal quarter. The increase is due to Sylvan Teacher Institute contracts signed after September 30, 2000. Operating revenue for SylvanOnline Higher Education Solutions represents 26%12% of total revenues from continuing operations of the Company for the 2001 fiscal quarter. SYLVAN ENGLISH LANGUAGE INSTRUCTION revenue increased $0.4 million to $12.5 million in the 2001 fiscal quarter from $12.1 million in the 2000 fiscal quarter. The revenue increase comes almost entirely from tuition revenues in existing Company-owned centers and from the acquisition of three centers in Argentina. Operating revenue for Sylvan English Language Instruction represents 10% of total revenues from continuing operations of the Company for the 2001 fiscal quarter. SYLVAN INTERNATIONAL UNIVERSITIES

    International Universities revenue for the 2001 fiscal quarter increased $38.9$38.1 million or 279%, to $52.8$42.3 million, compared to the 2000 fiscal quarter. International Universities revenueRevenue increased $37.6$37.5 million due to the acquisitions of controlling interests of Les Roches,in UVM in Mexico and UDLA in Chile, which occurred in the third and fourth quarters ofDecember 2000 and are, therefore, not included in revenue for the 2000 fiscal quarter. Revenue growth at UEM in Spain and Les Roches in Switzerland was $1.2$0.6 million, or 9%15%, to $15.1$4.8 million in the 2001 fiscal quarter as a result ofdue primarily to enrollment increases, in enrollment, increased tuition and the expansion of programs offered. Revenues in the 2001 fiscal quarter are lower than previous quarters in 2001 as a result of semester breaks at UEM and UVM, which are the largest universities in the network. Operating revenue for Sylvan International Universities represents 40%39% of total revenues from continuing operations of the Company for the 2001 fiscal quarter. DIRECT COSTS.

    English Language Instruction revenue increased by $3.0 million, or 26%, to $14.5 million for the 2001 fiscal quarter compared to the 2000 fiscal quarter. The revenue increase resulted primarily from the acquisition of centers in Italy, Argentina, Brazil and Portugal. Tuition revenue increases were also achieved in existing Company-owned centers in Italy. Operating revenue for English Language Instruction represents 14% of total revenues of the Company for the 2001 fiscal quarter.

    Direct Costs.  Total direct costs of revenues, excluding Sylvan Ventures, increased $36.9$42.5 million, or 53%80%, to $106.3$95.7 million for the 2001 fiscal quarter from $69.4$53.2 million for the 2000 fiscal quarter. Included in direct costs in the 2001 fiscal quarter were $31.7$32.4 million of costs of Les Roches, UVM and UDLA, which were acquired in the third and fourth quartersquarter of 2000. Total direct costs increased $5.2$10.1 million, or 8%19%, excluding the costs related to Les Roches, UVM and UDLA. Direct costs as a percentage of total revenues decreased to 81%were 89% in the 2001 fiscal quarter, from 84% inconsistent with the 2000 fiscal quarter. This decrease in direct costs as a percentage of revenues is primarily due to margin improvements in the Learning Centers,

    K-12 Education Solutions and UEM businesses. Direct costs in these divisions were effectively controlled to produce margin improvement in this period of strong revenue increases. SYLVAN LEARNING CENTERSServices expenses increased $2.3$3.9 million to $22.0$31.0 million, or 71%81% of Learning CentersK-12 Education Services revenue for the 2001 fiscal quarter, compared to $19.7$27.1 million, or 75%79% of Learning CentersK-12 Education Services revenue for the 2000 fiscal quarter. Approximately $1.9$2.7 million of the 2001 fiscal quarter increase relates to expenses incurred in Company-owned learning centers due to the acquisition of franchised learning centers and costs associated with higher revenues at existing company-ownedCompany-owned centers. The acquisitionInternational expenses increased $0.9 million, consisting of Ivy West resultedincreased Schülerhilfe costs of $0.5 million and an increase of $0.4 million related to international development in $1.1the United Kingdom and France. $0.5 million of increasedthe cost during the 2001 fiscal quarter. The remaining $0.7 million cost decreaseincrease for the 2001 fiscal quarter relates to lowerhigher franchise support costs compared to the 2000 fiscal quarter. Contract-based expenses decreased by $0.1 million to $7.6 million, compared to $7.7 million for the 2000 fiscal quarter.

    Online Higher Education expenses increased by $2.4 million to $9.5 million, or 74% of OHE revenue for the 2001 fiscal quarter, compared to $7.1 million, or 72% of OHE revenue for the 2000

21


fiscal quarter. The decreaseincrease in expenses as a percentage of revenuesrevenue for the 2001 fiscal quarter is primarily due to the increase to franchise royalties due to system-wide expansion combined withacquisition of OnlineLearning.net, effective management of franchise related expenses. SYLVAN EDUCATION SOLUTIONSJuly 1, 2001, which generates lower margin revenue in the 2001 fiscal quarter.

    International Universities expenses increased by $2.3 million to $26.5 million, or 77% of Sylvan Education Solutions revenue for the 2001 fiscal quarter compared to $24.2 million or 80% of Sylvan Education Solutions revenue for the 2000 fiscal quarter. The decrease in expenses as a percentage of revenue for 2001 fiscal quarter is primarily due to the increase in higher margin products sold during the 2001 fiscal quarter, as compared to the 2000 fiscal quarter. These higher margin products include Canter's distance learning masters programs and Career Starters' business expansion. 19 SYLVAN ENGLISH LANGUAGE INSTRUCTION expenses increased $0.3$33.0 million to $12.1$40.8 million, or 97% of WSI revenues for the 2001 fiscal quarter compared to $11.8 million or 97% of Sylvan English Language Instruction revenues for the 2000 fiscal quarter. Expenses in the 2001 fiscal quarter have been maintained at 2000 fiscal quarter levels despite increasing overhead costs related to the internal expansion of the international network of centers through controlling expenses in the operating centers. SYLVAN INTERNATIONAL UNIVERSITIES expenses increased by $32.0 million to $45.8 million, or 87% of Sylvan International Universities revenue for the 2001 fiscal quarter, compared to $13.8 million or 99% of Sylvan International Universities revenue for the 2000 fiscal quarter. This increase in expenses is primarily due to the acquisition of controlling interests of Les Roches,in UVM in Mexico and UDLA in Chile in December 2000. Comparison of operating expenses as a percentage of revenues between fiscal years is not meaningful due to the thirdtiming of these acquisitions. The timing of summer semester breaks results in significant seasonal fluctuations in operating results based primarily on the geographical location of the individual university. Revenues and fourth quartersdirect instructional expenses are recorded during the period that classes are in session; however, certain basic operating and marketing expenses continue during the semester break, which distorts comparisons of 2000.expenses as a percentage of revenues.

    English Language Instruction expenses increased $3.2 million to $14.4 million, or 99% of English Language Instruction revenues for the 2001 fiscal quarter compared to $11.2 million, or 97% of English Language Instruction revenues for the 2000 fiscal quarter. The decreaseincrease in expenses as a percentage of revenue is the result of higher costs related to the acquisition of additional franchise centers and costs related to continued international expansion. Decreases in Company-owned center revenues in one mature market are also responsible for the 2001 fiscal quarter is primarily due to improved operating margin performance at UEM, high margins at Les Roches and UDLA, strong operating performance at UVM and management's efforts to control divisional overheadincrease in costs while expanding the university network. OTHER EXPENSES.as a percentage of revenues.

    Other Expenses.  General and administrative expenses increased by $1.3$1.0 million in the 2001 fiscal quarter compared to the 2000 fiscal quarter. The increase wasis primarily due to a decrease in the allocation to third parties of certain administrative costs in 2001 and the additional costs of overseeing the international expansion of the Company. General and administrative expenses decreased to 5% of total revenues in the 2001 fiscal quarter, compared to 6%8% of revenues in the 2000 fiscal quarter due to cost controls and the strong revenue expansion in the 2001 fiscal quarter.

    Sylvan Ventures operating costs increaseddecreased by $3.7$1.1 million to $6.9$4.8 million for the 2001 fiscal quarter, compared to $3.2$5.9 million for the 2000 fiscal quarter. Operating costs of eSylvan, a subsidiary of Sylvan Ventures, increased $1.2decreased $0.9 million to $3.6$2.9 million for the 2001 fiscal quarter compared to the 2000 fiscal quarter. This increasedecrease is primarily duethe result of the continuous effort by eSylvan to increased expenses neededenhance the efficiencies of its operations, in addition to advancereducing costs associated with content development and research and development in the development of eSylvan's Internet-based tutoring service.2001 fiscal quarter compared to 2000 fiscal quarter. Sylvan Ventures increaseddecreased management expenses by $2.5$0.2 million to $3.3$1.9 million for the 2001 fiscal quarter primarily due to increaseddecreased costs associated with the research, evaluation and management of an increased number ofnew and current portfolio companies in the Sylvan Ventures portfolio in the 2001 fiscal quarter compared to the 2000 fiscal quarter. The decrease in management costs of Sylvan Ventures was offset partially by costs incurred in the early stages of a number of new start-up projects, which are reported in operating costs.

    Sylvan Ventures' equity in net losses of affiliates increased by $14.8$9.6 million to $15.6$10.8 million for the 2001 fiscal quarter, compared to $0.8$1.2 million for the 2000 fiscal quarter primarily duequarter. This increase is the result of losses associated with a greater number of portfolio investments owned in 2001 by Sylvan Ventures in comparison to the increased amount of investments in the Sylvan Ventures' portfolio in the 20012000 fiscal quarter. These losses relate to Sylvan Ventures' share of operating losses generated by the early stage enterprises in the investment portfolio and the amortization of the difference between the initial carrying amount of equity method investments and the underlying equity in net assets of these investments at the time of purchase. Minority interests' share of Sylvan Ventures losses totaled $1.8 million for the 2001 fiscal quarter. The loss on investment was prompted by the Caliber Learning Network, Inc. ("Caliber") filing for Chapter 11 bankruptcy protection on June 15, 2001. The Sylvan Ventures investment in Caliberincome of $2.9$22.8 million was reduced to $0 upon recordingconsists primarily of the $24.7 million gain on the sale of its allocable share of lossesClasswell investment, partially offset by certain impairment charges related to Caliber prior to the bankruptcy proceedings, which is included in "Equity in net loss of affiliates". Additionally, the Company recorded a loss on investment of $14.2 million in the 2001 fiscal quarter. This charge consists of the reserve for notes receivable and advances to Caliber of $7.5 million as well as the accrual of a $6.7 million estimated liability relating to the Company's guarantee of certain non-cancelable Caliber lease obligations and other Caliber related liabilities incurred by the Company. Due to the uncertainties surrounding the bankruptcy proceedings and the ultimate settlement of Caliber's lease and other liabilities, it is reasonably possible that the Company's loss estimate may change prior to finalization.portfolio investments.

    Other non-operating items decreased by $8.9$4.4 million for the 2001 fiscal quarter compared to the 2000 fiscal quarter. The decrease is primarily attributable to a decrease in interest income of $5.1 million, an increase in interest expense of $1.7$4.6 million and an increase in minority interest expense of $2.3 million.$2.0 million, partially offset by a

22


$2.2 million decrease in foreign currency exchange loss. The increased minority interest expense results from the strong operating performance of the Universitiesuniversities in which Sylvanthe International Universities segment maintains a controlling interest. 20 The decrease in the exchange loss is due to a loss of $3.1 million that was incurred in the 2000 fiscal quarter on the settlement of a forward exchange contract entered into to protect against fluctuations in local currency related to the UVM acquisition that was pending in the 2000 fiscal quarter.

    The Company's effective tax rate from continuing operations was 34% for the 2001 fiscal quarter. This reported effective income tax rate from continuing operations differs from the U.S. federal statutory tax rate due to the impact of state income taxes, minority interests, foreign income taxed at lower rates and the inability to utilize tax benefits from certain investment losses of Sylvan Ventures. On a full year basis, the Company estimates that its effective income tax rate for the CompanyCompany's (excluding Sylvan Ventures) and Sylvan Ventures continuingVentures' operations for the year endedending December 31, 2001 will be 34% and 35%, respectively. INCOME (LOSS) FROM CONTINUING OPERATIONS.

    Income (loss) from Continuing Operations.  Income from continuing operations decreasedincreased by $20.1$11.7 million, to a lossincome of $13.4$8.4 million for the 2001 fiscal quarter. The decreaseincrease is primarily the result of the lossgain on the sale of Sylvan Ventures' investment in and advances to CaliberClasswell of $14.2$24.7 million and additionalimproved operating performance of $5.4 million. This increase was partially offset by a decrease in interest and other income of $2.4 million, an increase in Sylvan Ventures related costs of $8.5 million, a $4.9 million increase in minority interest share of operating results and investment losses, which increased $18.5 million inadditional income tax expense of $2.6 million.

Comparison of results for the 2001 fiscal quarter compared to the 2000 fiscal quarter, which offset favorable operating income increases of $9.9 million. COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNEnine months ended September 30, 2001 TO RESULTS FOR THE SIX MONTHS ENDED JUNEto results for the nine months ended September 30, 2000 REVENUES.

    Revenues.  Total revenues from continuing operations increased by $93.1$140.9 million, or 59%65%, to $250.8$358.6 million for the sixnine months ended JuneSeptember 30, 2001 (the "2001 fiscal sixnine month period") from $157.8$217.7 million for the sixnine months ended JuneSeptember 30, 2000 (the "2000 fiscal sixnine month period"). Included in the total revenues from continuing operations for the 2001 fiscal sixnine month period were $74.4$105.3 million of revenues from Les Roches, UVM and UDLA, which were acquired in the third and fourth quartersquarter of 2000. Total revenues from continuing operations increased 12%16%, excluding the increase due to the Les Roches, UVM and UDLA acquisitions. SYLVAN LEARNING CENTERS

    K-12 Education Services revenue increased by $10.0$17.0 million, or 21%14%, to $58.8$139.5 million for the 2001 fiscal sixnine month period compared to the 2000 fiscal sixnine month period. Franchise royalties increased by $1.8$2.1 million, or 17%13%, during thein 2001 fiscal six month period as a result of a net increase of 3638 new learning centers opened after JuneSeptember 30, 2000, and a 10%9% increase in same center revenue. Revenues from Company-owned learning centers increased $3.9$9.8 million, or 16%25%, to $27.8$48.8 million during the 2001 fiscal sixnine month period. Same center revenues increased 8%, or $2.0$3.0 million, with the remainingand additional revenue increase of $1.9$3.1 million was generated from five Company-owned centers acquired from franchise owners and a net of fourthree new centers opened during the past year. The remaining revenue increase is due to the acquisition of Ivy West, an SAT preparation company based in California, which occurred in May 2000. The Ivy West acquisition resulted in increased revenue of $3.5$3.7 million for the 2001 fiscal sixnine month period. International revenues, primarily Schulerhilfe,Schülerhilfe, increased by $0.3$0.6 million, or 4% over6%, in the 2001 fiscal nine month period compared to the 2000 fiscal sixnine month period. Other franchise service revenues generated the remaining revenue increase of $1.2 million for 2001. Contract-based revenue increased by $3.3 million, or 7%, to $51.0 million in the 2001 fiscal nine month period compared to the 2000 fiscal nine month period due to new contracts signed since September 30, 2000. Operating revenue for Learning CentersK-12 Education Services represents 23%39% of total revenues from continuing operations of the Company for the 2001 fiscal sixnine month period. SYLVAN EDUCATION SOLUTIONS

    Online Higher Education revenue increased by $4.9$4.6 million, or 9%17%, to $61.0$31.2 million for the 2001 fiscal sixnine month period compared to the 2000 fiscal sixnine month period. Sylvan at School revenue increased $3.0 or 8% over the 2000 fiscal six month period due to new contracts and a continued high renewal rate of existing contracts. Canter teacher-training revenue increased $1.9$4.4 million to $18.4$29.5 million during the 2001 fiscal sixnine month period compared to the 2000 fiscal sixnine month period. Canter's revenue increase is due to greater demand for its products,

23


particularly the distance learning masters program. Sylvan Teacher Institute revenue increased by $0.2 million, or 11%, to $1.7 million in the 2001 fiscal nine month period compared to the 2000 fiscal nine month period. The increase is due to additional Sylvan Teacher Institute contracts signed since September 30, 2000. Operating revenue for SylvanOnline Higher Education Solutions represents 24%9% of total revenues from continuing operations of the Company for the 2001 fiscal sixnine month period. SYLVAN ENGLISH LANGUAGE INSTRUCTION revenue increased $0.9 million to $25.5 million for the 2001 fiscal six month period from $24.6 million in the 2000 fiscal six month period. The revenue increase comes almost entirely from increased tuition revenues in existing Company-owned centers and from the acquisition of three centers in Argentina. Operating revenue for Sylvan English Language Instruction represents 10% of total revenues from continuing operations of the Company for the 2001 fiscal six month period. 21 SYLVAN INTERNATIONAL UNIVERSITIES

    International Universities revenue for the 2001 fiscal sixnine month period increased $77.2$115.3 million, or 272 %, to $105.6$147.9 million, compared to the 2000 fiscal sixnine month period. International Universities revenueRevenue increased $74.4$112.8 million due to the acquisitions of controlling interests ofin Les Roches in Switzerland (acquired in July 2000), UVM in Mexico (acquired in December 2000) and UDLA which occurred in the third and fourth quarters of 2000 and are, therefore, not includedChile (acquired in revenue for the 2000 fiscal six month period.December 2000). Revenue growth at UEM in Spain of $2.8$2.5 million, or 10%9%, to $31.2$32.2 million for the 2001 sixfiscal nine month period resulted from increased enrollment, new program offerings and tuition increases. Operating revenuerevenues for Sylvan International Universities represents 43%41% of total revenues from continuing operations of the Company for the 2001 fiscal sixnine month period. DIRECT COSTS.

    English Language Instruction revenue increased by $3.9 million, or 11%, to $40.0 million for the 2001 fiscal nine month period compared to the 2000 fiscal nine month period. The revenue increase comes from the acquisition of centers in Italy, Argentina, Brazil and Portugal. Tuition revenue increases in existing Company-owned centers in Italy and revenue from sales to corporations also contributed to the improvement in revenues. Operating revenue for English Language Instruction represents 11% of total revenues of the Company for the 2001 fiscal nine month period.

    Direct Costs.  Total direct costs of revenues, excluding Sylvan Ventures, increased $80.6$123.1 million, or 60%66%, to $214.4$310.1 million for the 2001 fiscal sixnine month period from $133.8$187.0 million for the 2000 fiscal sixnine month period. Included in direct costs in the 2001 fiscal sixnine month period were $65.7$92.7 million of costs of Les Roches, UVM and UDLA, which were acquired in the third and fourth quartersquarter of 2000. Total direct costs increased $14.9$30.4 million, or 11%16%, excluding the costs related to Les Roches, UVM and UDLA. Direct costs as a percentage of total revenues were 85%86% in the 2001 fiscal sixnine month period consistent with the 2000 fiscal sixnine month period. SYLVAN LEARNING CENTERS

    K-12 Education Services expenses increased $6.8$12.6 million to $44.1$111.3 million, or 75%80% of Learning CentersK-12 Education Services revenue for the 2001 fiscal sixnine month period, compared to $37.3$98.7 million, or 77%81% of Learning CentersK-12 Education Services revenue for the 2000 fiscal sixnine month period. Approximately $3.6$6.0 million of the increase for the 2001 fiscal sixnine month period relates to expenses incurred in Company-owned learning centers due to the acquisition of franchised learning centers since September 2000 and costs associated with higher revenues at existing Company-owned centers. The acquisitiontiming of the Ivy West acquisition resulted in $2.8$3.1 million of increased cost during 2001 fiscal sixnine month period. The remaining $0.4International expenses increased $1.1 million, costconsisting of increased Schülerhilfe costs of $0.6 million and $0.5 million related to international development in the United Kingdom and France. $0.6 million of the increase relates to increased franchise support costs compared to the 2000 fiscal sixnine month period. TheContract-based expenses increased by $1.7 million to $43.7 million, or 86% of revenue for the 2001 fiscal nine month period, compared to $42.0 million or 87% of revenue for the 2000 fiscal nine month period. This decrease in contract-based expenses as a percentage of revenue for the 2001 fiscal six month period is primarily due to increased franchise royalties due to system-wide expansion combined with effective management of franchise related expenses. SYLVAN EDUCATION SOLUTIONS expenses increased by $3.3 million to $51.6 million, or 85% of Sylvan Education Solutions revenue for the 2001 fiscal six month period, compared to $48.3 million or 86% of Sylvan Education Solutions revenue for the 2000 fiscal six month period. The decrease in expenses as a percentage of revenue for the 2001 fiscal sixnine month period is primarily due to the increase in higher margin products sold during the 2001 fiscal sixnine month period asand better cost controls.

    Online Higher Education expenses increased by $3.8 million to $24.9 million, or 80% of OHE revenue for the 2001 fiscal nine month period, compared to $21.1 million or 79% of OHE revenue for the 2000 fiscal sixnine month period. These higherThe increase in expenses as a percentage of revenue for the 2001 fiscal nine month period is primarily due to the acquisition of OnlineLearning.net, effective July 1, 2001, which has three months of lower margin products include Canter's distance learning masters programrevenue in the 2001 fiscal nine month period.

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    International Universities expenses for the 2001 fiscal nine month period increased $101.6 million to $135.0 million, or 91% of International Universities revenues for the 2001 fiscal nine month period compared to $33.4 million, or 102% of International Universities revenues for the 2000 fiscal nine month period. This increase in expenses is primarily due to the timing of acquisitions of Les Roches in Switzerland (acquired in July 2000), UVM in Mexico (acquired in December 2000) and Career Starters' business expansion. SYLVAN ENGLISH LANGUAGE INSTRUCTIONUDLA in Chile (acquired in December 2000). The decrease in expenses as a percentage of revenues for the 2001 fiscal nine month period is primarily due to improved operating margin performance at UEM in Spain, high margins at Les Roches and UDLA, strong operating performance at UVM and management's efforts to control divisional overhead costs while expanding the university network.

    English Language Instruction expenses increased $1.9$5.1 million to $24.4$38.9 million, or 96%97% of WSI revenues for the 2001 fiscal sixnine month period compared to $22.6$33.8 million, or 92%94% of WSIEnglish Language Instruction revenues for the 2000 fiscal sixnine month period. The increase in expenses as a percentage of revenue is primarily the result of increasing overheadhigher costs related to the internal expansionacquisition of the international network ofadditional franchise centers and the start up costs associated with the opening of new centers during the 2001 fiscal six month period. SYLVAN INTERNATIONAL UNIVERSITIES expenses increased by $68.7 millionrelated to $94.3 million, or 89% of Sylvan International Universities revenuecontinued international expansion. Decreases in Company-owned center revenues in one mature market are also responsible for the 2001 fiscal six month period, compared to $25.6 million or 90% of Sylvan International Universities revenue for the 2000 fiscal six month period. This increase is primarily due to the acquisition of controlling interests of Les Roches, UVM and UDLA in the third and fourth quarters of 2000. The decrease in expensescosts as a percentage of revenue for the 2001 six month period is primarily due to improved UEM margins and high margins at Les Roches. OTHER EXPENSES.revenues.

    Other Expenses.  General and administrative expenses increased by $2.5$3.5 million in the 2001 fiscal sixnine month period compared to the 2000 fiscal sixnine month period. The increase was primarily due to a decrease in the allocation to third parties of certain administrative costs in 2001 and the additional costs of directing the international expansion of the Company. General and administrative expenses decreased to 5% of total 22 revenues in the 2001 fiscal sixnine month period compared to 6% of revenues in the 2000 fiscal sixnine month period due to cost controls and the strong revenue expansion in the 2001 fiscal sixnine month period.

    Sylvan Ventures operating costs increased by $7.9$6.7 million to $12.5$17.2 million for the 2001 fiscal sixnine month period compared to $4.6$10.5 million for the 2000 fiscal sixnine month period. Operating costs of eSylvan, a subsidiary of Sylvan Ventures, increased $3.8$2.9 million to $7.2$10.1 million for the 2001 fiscal sixnine month period. This increase is primarily due to increased expenses needed to advance the development of eSylvan's Internet-based tutoring service.service for a full nine month period in 2001 compared to the 2000 fiscal nine month period, in which development costs were systematically increased throughout the nine month period. Sylvan Ventures increased management expenses of $4.1by $3.9 million to $5.3$7.1 million for the 2001 fiscal sixnine month period compared to the 2000 fiscal sixnine month period primarily dueperiod. Management expenses relate to increasedthe costs associated with the research, evaluationdevelopment and management of an increased number of companies in the Sylvan Ventures portfolioportfolio. The increase in 2001 is the result of a full nine months of operations in the 2001 fiscal nine month period versus the 2000 fiscal nine month period, in which costs were systematically increased over only a six month period compared to the 2000 fiscal six month period.as additional portfolio investments were purchased.

    Sylvan VenturesVentures' equity in net losses of affiliates increased by $34.3$43.9 million to $35.4$46.2 million for the 2001 fiscal sixnine month period compared to $1.1$2.3 million for the 2000 fiscal sixnine month period primarilyperiod. This increase is due to the increased amountlosses associated with a full nine months of activity in 2001 related to investments made after June 2000. Additionally, Sylvan Ventures owned a greater number of investments inat the Sylvan Ventures' portfolio inend of the third quarter of 2001 fiscal six month period.than at the end of the third quarter of 2000. These losses relate to Sylvan Ventures' share of operating losses generated by the early stage enterprises in the investment portfolio and the amortization of the difference between the initial carrying amount of equity method investments and the underlying equity in net assets of these investments at the time of purchase.

    Sylvan Ventures investment lossesincome of $0.6$22.2 million consistedconsists primarily of the $24.7 million gain on the sale of its Classwell investment, partially offset by certain impairment charges related to portfolio investments. Minority interests' share of Sylvan Ventures losses totaled $3.1 million for the 2001 fiscal sixnine month period.

    The loss on investment was prompted by the Caliber Learning Network, Inc.'s ("Caliber") filing for Chapter 11 bankruptcy protection on June 15, 2001. The Sylvan Ventures investment in Caliber of $2.9

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$2.9 million was reduced to $0 upon recording its allocable share of losses related to Caliber prior to the bankruptcy proceedings, which is included in "Equity in net loss of affiliates". Additionally, the Company recorded a loss on investment of $14.2 million in the 2001 fiscal sixnine month period. This charge consists of the reserve for notes receivable and advances to Caliber of $7.5 million, as well as the accrual of a $6.7 million estimated liability relating to the Company's guarantee of certain non-cancelable Caliber lease obligations and other Caliber related liabilities incurred by the Company. Due to the uncertainties surrounding the bankruptcy proceedings and the ultimate settlement of Caliber's lease and other liabilities, it is reasonably possible that the Company's loss estimate may change prior to finalization.

    Other non-operating items decreased by $8.9$13.3 million for the 2001 fiscal sixnine month period compared to the 2000 fiscal sixnine month period. The decrease is largely attributable to a decrease in interest income of $4.6$9.3 million, an increase in interest expense of $2.0$2.1 million and an increase in minority interest expense of $3.0 million.$4.9 million, partially offset by a $2.3 million decrease in foreign currency exchange loss. The increased minority interest expense is generated from strong operating performance of the universities in which the International Universities which SIUsegment maintains a controlling interest. The decrease in the exchange loss is due to a loss of $3.1 million that was incurred in the 2000 fiscal nine month period on the settlement of a forward exchange contract acquired to protect against fluctuations in local currency related to the UVM acquisition that was pending in the 2000 fiscal nine month period.

    The Company's effective tax rate from continuing operations was 36%37% for the 2001 fiscal sixnine month period. This reported effective income tax rate from continuing operations differs from the U.S. federal statutory tax rate due to the impact of state income taxes, minority interests, foreign income taxed at lower rates and the inability to utilize tax benefits from certain investment losses of Sylvan Ventures. On a full year basis, the Company estimates that its effective income tax rate for the CompanyCompany's (excluding Sylvan Ventures) and Sylvan Ventures continuingVentures' operations for the year endedending December 31, 2001 will be 34% and 35%, respectively. INCOME (LOSS) FROM CONTINUING OPERATIONS.

    Income (loss) from Continuing Operations.  Income from continuing operations decreased by $35.1$23.3 million, to a loss of $25.0$16.7 million for the 2001 fiscal sixnine month period. The decrease is primarily the result of the loss on the investment in and advances to Caliber of $14.2 million, a decrease in net interest income and other income of $9.0 million and additional Sylvan Ventures' related costsVentures equity basis losses of $43.1 million, as well as increased minority interest ownership allocation of $4.8 million, partially offset by the Sylvan Ventures investment income increase of $25.3 million, additional tax benefits of $15.2 million and investment losses, which increased $42.0 million in the 2001 fiscal six month period compared to the 2000 fiscal six month period, which offsetimproved operating income increases of $10.0$7.5 million. 23 LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources

    Cash used byin operations was $68.0$79.1 million for the 2001 fiscal sixnine month period a decreasecompared to cash used in operations of $59.5$10.3 million as compared tofor the 2000 fiscal sixnine month period. The reported net loss of $25.0$16.7 million wasand gains on investment ($8.0 million) were offset by significant non-cash items, such as depreciation and amortization charges ($18.528.3 million) and, equity in net loss of affiliates, primarily of Sylvan Ventures ($35.646.5 million). and other activities of $2.9 million. Working capital related decreases in liquidity of $113.6$132.2 million consisted primarily of income tax payments resulting from the sale of Prometric in the first quarter of 2000, which were not payable until 2001.

    Cash provided by investing activities was $15.9$11.4 million for the 2001 fiscal sixnine month period compared to cash provided by investing activities of $573.7$409.8 million for the 2000 fiscal sixnine month. The 2001 investment activity was primarily the result of net proceeds from the sale of available-for-sale securities ($111.7143.1 million), partially offset by increases in investments in and advances to affiliates primarily related to Sylvan Ventures ($36.635.7 million), purchases of property and equipment ($28.340.4 million), the payment of contingent consideration for prior acquisitions ($25.139.5 million) and net cash paid for acquired businesses ($3.011.3 million). The significant investing proceeds received in the

26


2000 fiscal sixnine month period related primarily to the sale of the Prometric division ($710.3 million), partially offset by net purchases of available-for-sale securities ($181.3 million), increases in investments primarily related to Sylvan Ventures ($43.3 million) and cash paid related to acquisitions ($50.4 million). At JuneSeptember 30, 2001, the Company has accrued obligations payable in cash of $16.5$8.4 million related to contingent consideration for certain prior acquisitions. The amounts are expected to be paid later in 2001.

    Cash provided by financing activities was $29.7$43.1 million in the 2001 fiscal sixnine month period compared to cash used in financing activities of $160.5$221.7 million in the 2000 fiscal sixnine month period. The 2001 financing activity related primarily to cash received from the minority interest members of Sylvan Ventures ($21.923.3 million) and, proceeds from the exercise of options ($7.015.0 million) and net proceeds from the issuance of debt ($4.1 million). Cash used by financing activities of $160.5$221.7 million in the 2000 fiscal sixnine month period related primarily to the net repayment of the Company's borrowings ($30.8 million) and the repurchase of shares of its common stock ($140.0211.0 million) and the net repayment of the Company's borrowings ($27.7 million), partially offset by cash received from the minority interest partners in Sylvan Ventures ($9.315.7 million).

    The Company anticipates that cash flow from operations, available cash and existing credit facilities will be sufficient to meet its operating requirements, including the expansion of its existing business, funding International University acquisitions, payment of contingent consideration and funding of Sylvan Ventures investments and operating costs. Sylvan Ventures has outstanding commitments to provide certain additional funding totaling $43.0of approximately $28.0 million to certain portfolio companies. The Company continues to examine opportunities in the educational services industry for potential synergistic acquisitions. EURO CONVERSION

Euro Conversion

    On January 1, 1999, certain countries of the European Union established fixed conversion rates between their existing currencies and one common currency, the Euro. The Euro is now traded on currency exchanges and may be used in business transactions. The Company encountered no difficulties related to the initial adoption of the Euro in 1999. Beginning in January 2002, new Euro-denominated currencies will be issued and the existing currencies will be withdrawn from circulation. The Company is currently evaluating the systems and business issues raised by the euroEuro conversion. These issues include the need to adapt computer and other business systems and equipment and the competitive impact of cross-border transparency. At present, management does not believe the Euro conversion will have a material impact on the Company's financial condition or results of operations. 24 CONTINGENT MATTERS

Contingent Matters

    In connection with the Company's acquisition of Les Roches, variable amounts of contingent consideration are payable to the seller if specified levels of earnings are achieved in 2001 and 2002. The Company will record the contingent consideration when the contingencies are resolved and the additional consideration is payable.

    In connection with the Company's acquisition of UDLA, variable amounts of contingent consideration are payable to the seller in 2006 and 2007 if specified levels of earnings are achieved in 2004, 2005 and 2006. The Company will record the contingent consideration when the contingencies are resolved and the additional consideration is payable.

    The Company has entered into agreements with certain franchisees of Sylvan Learning Centers and Wall Street Institute that allow the franchisees to require that the Company to repurchase the centers at a predetermined multiple of operating results if specified operating results thresholds are achieved. When the Company can assess the likelihood of this repurchase right being exercised and the amount of the related commitment to purchase the center, such obligation will be disclosed. EFFECTS OF INFLATION

27


Effects of Inflation

    Inflation has not had a material effect on Sylvan's revenues and income from continuing operations in the past three years. Inflation is not expected to have a material effect in the foreseeable future. SEASONALITY IN RESULTS OF OPERATIONS

Seasonality in Results of Operations

    The Company experiences seasonality in results of operations primarily as a result of changes in the level of student enrollments and the timing of semester cycles, particularly in the International Universities segment. Timing of semester breaks at the International Universities results in the most favorable operating performance being achieved in the second and fourth quarters of the year. Other factors that impact the seasonality of operating results include: timing of contracts funded under Title I, timing of summer vacations, timing of franchise license fees and the timing of Sylvan Ventures' development costs. Revenues and profits in any period will not necessarily be indicative of results in subsequent periods. ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS, INCLUDING BUT NOT LIMITED TO, STATEMENTS REGARDING THE COMPANY'S CONTINGENT PAYMENT OBLIGATIONS RELATING TO ACQUISITIONS, FUTURE CAPITAL REQUIREMENTS, POTENTIAL ACQUISITIONS, AND THE COMPANY'S FUTURE DEVELOPMENT PLANS ARE BASED ON CURRENT EXPECTATIONS. THESE STATEMENTS ARE FORWARD LOOKING IN NATURE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. POLITICAL, ECONOMIC, CURRENCY, TAX, REGULATORY, TECHNOLOGICAL, COMPETITIVE AND OTHER FACTORS DESCRIBED IN THE COMPANY'S REPORTS FILED FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS. THE COMPANY CAUTIONS READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD LOOKING STATEMENTS, WHICH STATEMENTS ARE MADE PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF

All statements contained herein that are not historical facts, including but not limited to, statements regarding the Company's contingent payment obligations relating to acquisitions, future capital requirements, potential acquisitions and the Company's future development plans are based on current expectations. These statements are forward-looking in nature and involve a number of risks and uncertainties. Political, economic, currency, tax, regulatory, technological, competitive and other factors described in the Company's reports filed from time to time with the Securities and Exchange Commission could cause actual results to differ materially from those anticipated in the forward-looking statements. The Company cautions readers not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 AND, AS SUCH, SPEAK ONLY AS OF THE DATE MADE. 25 and, as such, speak only as of the date made.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK

    Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from the changes in the price of financial instruments. The Company is exposed to financial market risks, including changes in foreign currency exchange rates, interest rates and investment values. The Company occasionally uses derivative financial instruments to protect against adverse currency movements related to significant foreign acquisitions. Exposure to market risks related to operating activities is managed through the Company's regular operating and financing activities. FOREIGN CURRENCY RISK

Foreign Currency Risk

    The Company derives approximately 55%56% of its revenues from continuing operations from customers outside the United States. This business is transacted through a network of international subsidiaries, generally in the local currency that is considered the functional currency of that foreign subsidiary. Expenses are also incurred in the foreign currencies to match revenues earned and minimize the Company's exchange rate exposure to operating margins. A hypothetical 10% adverse change in average annual foreign currency exchange rates would increase net loss and decrease cash flows for the fiscal sixnine month period 2001 by $0.9$2.3 million. The Company generally views its investment in the majority of its foreign subsidiaries as long-term. The effects of a change in foreign currency exchange rates on the Company's net investment in foreign subsidiaries are reflected in other comprehensive income (loss). A 10% depreciation in functional currencies relative to the U.S. dollar would result in a decrease in consolidated stockholders' equity at JuneSeptember 30, 2001 of approximately $26.1$29.8 million. INTEREST RATE RISK

Interest Rate Risk

    The Company holds its cash and cash equivalents in high quality, short-term, fixed income securities. Consequently, the fair value of the Company's cash and cash equivalents would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due to the short-term nature of the Company's portfolio. The Company's long-term revolving credit facility bears interest at variable rates, and the fair value of this instrument is not significantly affected by changes in market interest rates. The Company's convertible debentures bear interest at 5%, which presentlycurrently approximates the market rate, and therefore the fair value approximates the recorded value of this liability. A 100 basis point decrease in interest rates would reduce net interest income for the 2001 fiscal sixnine month period by $0.7$0.8 million. INVESTMENT RISK

Investment Risk

    The Company's investment portfolio contains debt securities that mature within one year. A hypothetical 10% adverse change in the fair value of the debt securities would not materially adversely effect earnings or cash flows because of the Company's ability to hold the debt securities until maturity.

    In addition to the debt securities, the Company also has an investment portfolio that consists of direct investment positions in education technology companies through Sylvan Ventures, as well as short-term investments in available-for-sale debt and equity securities. The Company's investment portfolio is exposed to risks arising from changes in these investment values.

    The Company's investment portfolio includes a number of holdings of non-publicly traded companies in the educational services industry. The Company accounts for these investments using either the cost method (cost less impairment, if any) or the equity method of accounting. Equity method investments are specifically excluded from the scope of this disclosure. Non-public investments where the Company owns less than a 20% interest are subject to fluctuations in market value, but their current illiquidity reduces the exposure to pure market risk while resulting in risk that the Company may not be able to liquidate these investments in a timely manner. 26

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    The Company is exposed to equity price risks on equity securities included in the portfolio of investments entered into for the promotion of business and strategic objectives. These investments are generally small capitalization stocks in the Internet segment of the educational services industry. The Company typically does not attempt to reduce or eliminate its market exposure on these securities. A 10% adverse change in equity prices would not materially impact the fair value of the Company's marketable securities or other comprehensive income (loss).

    All the potential impacts noted above are based on sensitivity analysis performed on the Company's financial position at JuneSeptember 30, 2001. Actual results may differ materially. 27

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PART II - II—OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Company held its 2000 annual meeting of stockholders on May 30, 2001. (b) The following sets forth information regarding each matter voted upon at the 2000 annual meeting. There were 37,788,077 shares of common stock outstanding as of the record date for, and entitled to vote at, the 2000 annual meeting. Proposal No. 1. The stockholders approved election of both of the nominees to the board of directors. The tabulation of votes on this proposal is as follows:
NOMINEE FOR WITHHELD - ---------------------------- ------------------- ------------------- Douglas L. Becker 26,251,379 3,544,296 James H. McGuire 29,465,710 329,965 Richard R. Riley 29,447,125 348,550 Judith D. Moore 29,454,118 341,557
Proposal No. 2. The stockholders ratified the selection of Ernst & Young, LLP as the Company's independent auditors. The tabulation of votes on this proposal is as follows: For Approval 29,536,238 Against Approval 249,494 Abstain 9,943 Total Shares Voted 29,795,675
28 PART II - OTHER INFORMATION

ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K

(a)
Exhibits

    None

(b)
Reports on Form 8-K

    The Company filed one report on Form 8-K during the sixnine month period ended JuneSeptember 30, 2001. The 8-K dated April 4, 2001 related to Amendment to the Rights Agreement.


SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on behalf by the undersigned thereunto duly authorized.

Sylvan Learning Systems, Inc.

Date: November 9, 2001


/s/ 
SEAN CREAMER   
Sean Creamer, Senior Vice President and
Chief Financial Officer


QuickLinks

INDEX
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (Dollar and share amounts in thousands, except per share data)
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets (continued) (Dollar and share amounts in thousands, except per share data)
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Dollar and share amounts in thousands, except per share data)
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Operations (Dollar and share amounts in thousands, except per share data)
SYLVAN LEARNING SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (Amounts in thousands)
Sylvan Learning Systems, Inc. Date: August 10,and Subsidiaries Notes to Consolidated Financial Statements Unaudited (Dollar and share amounts in thousands, except per share amounts) September 30, 2001 /s/ SEAN CREAMER ------------------------------------- Sean Creamer, Vice President Corporate Finance 29