One of 76,000 higher education success stories in the making

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One of 76,000 higher education
success stories in the making Sylvan Learning Systems, Inc. 2002 Annual Report Over 30 degree programs 76,000 degree-seeking students Online higher education worldwide 26 campus locations in six countries A transaction that provides focus, simplicity and rapid growth On March 10, 2003, Sylvan Learning Systems, Inc. (“Sylvan” or “the Company”) announced its intention to focus exclusively on post-secondary education by selling its K-12 business units to leading private equity firm Apollo Management LP, and disbanding Sylvan Ventures. Highlights of the transaction • Upon the expected completion of the transaction in June 2003, Sylvan will comprise two complementary operating units focused on higher education: a campus-based unit providing classroom-based degree programs to students around the world, and an online unit offering career-focused undergraduate and graduate degree programs to working adult students through distance learning. • Sylvan will receive an estimated $117 million in cash, a $55 million, six-year subordinated note paying 12% annual interest, as much as $13 million in deferred or contingent consideration, and the retirement of up to 75% of the Company’s outstand- ing convertible debentures. • Sylvan will receive Apollo Management’s preferred interest in Sylvan Ventures, valued at $45 million, which will result in Sylvan’s receipt of the 51% ownership interest in Walden University, and the 100% ownership interest in National Technological University (NTU), previously held by Sylvan Ventures. Sylvan Ventures will be disbanded, and the Company plans to sell all of the remaining assets of Sylvan Ventures during 2003. • Sylvan Learning Center, Sylvan Education Solutions, and Schülerhilfe—as well as eSylvan and Connections Academy from what was the Sylvan Ventures portfolio—will become part of Educate, Inc., a newly formed private entity associated with Apollo Management, LP. These businesses will own all rights to, and continue to operate under, the Sylvan name. Sylvan Learning Systems, Inc. plans to change its corporate name before the end of 2003. After the transaction:
A rapidly growing post-secondary company 90 60 30 0 Enrollment IN THOUSANDS 76.5 62.6 52.7 13.3 4.8 $500 $400 $300 $200 $100 $ 0 Revenue (1) IN MILLIONS $450-475 $119.9$147.4 $300.3 $385.4 98 99 00 01 02 99 00 01 02 03 (E) (1) Does not include revenues of discontinued operations. Following months of detailed study by our Board of Directors
and management to consider options that would enhance long-
term growth and shareholder value, we announced our decision
to sell our K-12 business units and disband Sylvan Ventures.
Upon the expected completion of the transaction in June 2003,
Sylvan will consist of two business segments: a campus-based
unit and an online unit, which together focus on addressing the
needs of full-time and working adult students around the world. Our decision will enable us to build a more profitable and faster-growing organization, one with industry-leading earnings
predictability that should create significant value for our share-
holders. Demand for university-level education is growing
around the world, as traditional and working adult students seek
the benefits and convenience of career-oriented degree programs
offered on campus and online. A look at the past performance of our post-secondary busi- nesses illustrates why this decision is so compelling. Over
the past three years, our campus-based and online revenues
increased at a compounded annual growth rate of 62%, and
today constitute almost two-thirds of the Company’s total reve-
nues. Looking forward, we believe that the strong global higher
education market, coupled with Sylvan’s highly profitable and
scalable post-secondary business model, will drive industry-
leading growth in future earnings. Our growth strategy is simple and straightforward. We will expand student enrollment at existing campus-based and online
universities by introducing new programs and curricula, adding
campus locations, and leveraging our education and marketing
expertise. We will also enter into new, promising geographic
markets, and attract emerging segments of students to our cam-
pus-based universities, such as working adults and post-graduate
students. Our goal: to build a post-secondary education com-
pany serving 200,000 students, and generating revenue of more
than $1 billion, over the next four years. I am delighted to report to you that we are entering our new future having just completed another year of strong growth.
In 2002, our post-secondary business performed well with strong
increases in both revenue and operating income. In addition, new
student enrollments at our campus-based and online universities
rose 24% year over year, giving us a solid foundation of revenue
and earnings growth for years to come. While we transform Sylvan into a pure global higher educa- tion business, the Sylvan Learning Center and other K-12 busi-
ness units will move forward under new ownership, and with the
Sylvan brand name, as a private organization fully focused on
educating children. Later this year, Sylvan plans to introduce a
new corporate name—a name that will represent both our future
and our legacy of education and service excellence. Since entering the post-secondary market in 1997, Sylvan has produced an extraordinary record of success in higher educa-
tion—a record attributable to our outstanding management
team, dedicated faculty and staff worldwide, and our effective
use of capital resources. This year, we are dedicating ourselves
exclusively to this market, with a focus that will allow us to real-
ize the full potential of this proven opportunity. I look forward
to sharing with you a closer look at our global higher education
organization, and our exciting international growth strategy, in
the months ahead. Sincerely, Douglas L. Becker
Chairman and Chief Executive Officer
Sylvan Learning Systems, Inc. As you read this letter, Sylvan Learning Systems is completing a transformation
that will focus our efforts and resources exclusively on serving the rapidly
expanding, global market for post-secondary education. Letter to shareholders Q: How is the market for higher
education performing around the world? Raph Appadoo: In the United States, the overall market for
higher education continues to be robust. Outside the United
States—with far fewer university seats available to applicants—
the higher education market is growing three times faster. Public
universities are either fully enrolled or straining to meet demand,
meaning private institutions like ours are seeing tremendous
enrollment increases. Bill Dennis: The increasing demand for higher education in
global markets is not a recent phenomenon, either. In each mar-
ket we explore, we find a long history of strong growth in private
higher education. For example, a look back at the past 12 years of
enrollment at private universities in Mexico shows that student
enrollment increased at an 11% compound annual growth rate.
And a look forward shows the trend strengthening: the Mexican
government projects a need for two million more seats at upper
secondary and post-secondary institutions by 2010. Q: What’s driving the growth? Bill Dennis: A combination of demographic, economic and
social factors is contributing to the exploding global demand for
higher education. In countries such as Mexico, Chile and India,
large proportions of the populations are high school-aged and
younger. At the same time, the economies of these countries are
producing generations of middle class families that expect to send
their children to college. Of course, the backdrop to all of this is
an information- and knowledge-driven global economy, in which
multinational employers are seeking well-educated, skilled and
bilingual employees. The bottom line: growing numbers of fami-
lies and students, and growing expectations on all sides, are driv-
ing the incredible growth we see in higher education worldwide. Higher Education on Campus: Expanding our global university network Yohanna Louis is a second- year business and marketing student at École Supérieure du Commerce Extérieur (ESCE), Sylvan’s school of international commerce in Paris, France, where she serves as president of the student association. Following her graduation, Ms. Louis hopes to launch a career in marketing with a multinational firm. She chose ESCE because of its reputation as one of the finest institutions with programs in international business, its foreign language programs, and the opportunities the school affords students for travel and internships. Ms. Louis says, “I’m confident that the knowledge and expertise I am acquiring at ESCE will serve me well as I find and grow into the job of my dreams.” With the pioneering acquisition of Universidad Europea de Madrid in 1999, Sylvan Learning Systems began its campus-based higher education business. Today, through a global network of six accredited universities, Sylvan offers a broad range of career-oriented undergraduate and graduate degree programs to more than 60,000 students. In 2002, total student enroll- ments across the 26-campus network increased 17% over 2001, driving revenues of more than $303 million, and operating income of $33 million, representing year-over-year increases of 28% and 31% respectively. Raph Appadoo, president of Sylvan International Universities, and Bill Dennis, the division’s chief operating officer, recently discussed the global market for higher education, Sylvan’s growing population of students worldwide, and how the Sylvan model is delivering results for students and investors alike. PAGE 2 Q: Who are your students, and what are
they seeking from their university experience? Raph Appadoo: Our campus-based universities around the world
address the aspirations of students from middle- to upper-middle
class families who appreciate the value produced by a quality
university education. They expect our universities to deliver an
education that imparts career-oriented knowledge, technology
skills, language abilities and a global perspective. They are
attracted by both the local reputations of our schools, and the
prospect of being part of an exciting, global learning community.
Increasingly, students and faculty alike are pursuing opportunities
to study or teach at another school in our network. Bill Dennis: A good example of how our universities are deliver-
ing on their promise can be seen in Sylvan’s hospitality manage-
ment schools, Les Roches and Glion, and our post-secondary
school of international commerce, École Supérieure du Commerce
Extérieur (ESCE). These schools offer focused, career-oriented
instruction and knowledge to students who come from more than
50 countries. They also meet and exceed our students’ career
expectations: virtually all of our students there are employed in
their chosen field within months of graduation. Q: How will Sylvan grow its network
of campus-based universities worldwide? Bill Dennis: First and foremost, we will continue to grow our
business by attracting more students, and expanding capacity, at
our existing campus locations. At the same time, we will broaden
our reach by developing new campus locations for universities in
our current network. Last year, Sylvan opened two new campuses
at Universidad del Valle de Mexico, and two others at Universidad
de las Americas in Chile. This strategy not only helps us grow our
enrollments, but also extends our visibility and reputation in each
of our markets. Finally, we will continue to look carefully at new
geographic markets, and plan to enter one or two of these each
year, either through acquisition or by building new institutions
from the ground up. Raph Appadoo: The excellence of our global management is key
to our growth strategy. I’m proud to say that across our network
of universities, Sylvan has brought together teams that include
highly regarded academic leaders and executives with broad,
multinational experience in product and service marketing, opera-
tions and financial management. They blend local market knowl-
edge and sensitivity with a global outlook and perspective that are
serving our students and our shareholders very well. Q: Why else should investors be excited by what you are doing? Bill Dennis: Sylvan’s global network of universities offers investors
a unique blend of revenue and earnings visibility, as well as global
diversification, against a backdrop of exploding worldwide
demand for our product and service. I believe the most compelling characteristics of our business are the increases in student enrollment, our student lengths of
stay, and our low student attrition rates. In most cases, our
students enroll for a period of four, and often five, years. With
growth in new student enrollments across our campus-based
network of 24% in 2002 over 2001, investors have tremendous
visibility into our future revenues and operating profit for a
period measured in years, rather than quarters. Sylvan’s campus-based network is clearly delivering excellence in education for our students. For our investors, it is delivering
rapid growth and profitability. PAGE 3 Bill Dennis (left), chief operating officer of Sylvan’s campus-based division, discussing strategy with Raph Appadoo, president of the division. Higher Education Online:
Building an online university
by remaining student-centered The Company’s online post-secondary institutions enroll more
than 16,000 working adult students, most of whom are seeking
advanced degrees to improve their professional knowledge, skills
and earnings potential. Sylvan’s online higher education units
include Canter, Walden University and National Technological
University (NTU), which collectively offer degree programs in
education, psychology, health and human services, manage-
ment, engineering, and information technology. Paula Singer, president of Sylvan Online Higher Education, recently discussed what drives the rapidly growing working adult
post-secondary market and how Sylvan’s online institutions are
responding by remaining student-centered. Roderick C. French, a Ph.D. student in Walden University’s Applied Management and Decision Sciences program, is a specialist in workforce competency man- agement and organizational learning in the Department of the Navy’s Office of the Chief Information Officer. He says the Walden approach provides much greater flexibility, and a comparable level of interaction with classmates and instructors, than a traditional, classroom- based program. Says Mr. French, “With my interest in adult learning and workforce management, a Walden Ph.D. will let me expand my knowledge and give me additional credibility.” Paula Singer, president of Sylvan Online Higher Education, discusses
developments with Roderick French, a Walden University Ph.D. student
studying applied management and decision sciences. Q: What is driving the market for higher
education delivered at a distance? Paula Singer: Working professionals, who comprise the fastest-
growing group of university students overall, are largely responsi-
ble for the growth in online and other distance learning programs
offered at the post-secondary level. A recent U.S. Department of
Education study indicated that nearly three-quarters of all post-
secondary students nationwide exhibit one or more characteristics
of a “non-traditional” student: they may have full-time jobs,
spouses and/or children, and many personal and professional
responsibilities that compete with their academic programs.
While they differ from profession to profession in terms of how
they prefer to learn, these students share at least two characteris-
tics. First, they are looking for a return on their education invest-
ment, and are seeking knowledge and skills they can apply to
their jobs now, which will help them advance professionally.
Second, they want learning methods and programs that will allow
them to balance their academic careers with jobs, families and
other personal commitments. Q: How is Sylvan Online Higher Education
responding to the demands of this market? Paula Singer: We support our customers with what we refer to
as the three pillars of student-centeredness: we provide career-
focused, quality academic programs; we offer a technology platform
that allows learning to take place effectively at a distance; and we
engage them in a business relationship that treats them as valued
customers from inquiry to enrollment to graduation. Our student-
centered philosophy ensures that all of us are directly supporting
the success of each one of our students—every day. Q: How do you plan to drive continued
growth for Sylvan Online Higher Education? Paula Singer: As I look to our future, I draw on lessons from our
past. We are modeling our online development and growth on the
success of Canter. When Sylvan acquired Canter in 1997, it was a respected developer of professional education programs for teach-
ers. Over the past six years, we have transformed Canter into the
nation’s largest provider of distance learning master’s degree pro-
grams for K-12 teachers, with a 95% degree completion rate.
Along the way, we endeavored to learn everything we could about
our student-customers: what was driving them to seek master’s
degree programs; how they preferred to interact with faculty and
other students; what specific subject matter and knowledge they
sought; and how we needed to design program content to make it
immediately applicable to their work. Our approach continues to
yield excellent results: in 2002, we grew Canter revenues 22%,
and operating profits 55%, over 2001. I believe our future success will follow our effective implementa- tion of a strategy that has worked for us in the past. We will con-
tinue to improve our marketing and student acquisition efforts. We
will grow enrollments by adding new and appealing programs and
vertical disciplines, such as the new bachelor’s degree completion
programs and master’s and Ph.D. programs in public health intro-
duced this year by Walden University. And we will maintain our
superb retention and degree completion rates by providing students
with the best in academic advising and instructional services. PAGE 4 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ? ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2002. OR ? TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ____________ to ____________ . COMMISSION FILE NUMBER 0-22844 SYLVAN LEARNING SYSTEMS, INC. (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 52-1492296 (I.R.S. Employer Identification No.) 1001 Fleet Street, Baltimore, Maryland (Address of principal executive offices) 21202 (Zip Code) (410) 843-8000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Securities registered pursuant to the Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d), of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ?. No ?. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. ? Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ?. No ?
The aggregate market value of voting Common Stock held by non-affiliates of the registrant was approximately $732 million as of June 28, 2002. The registrant had 40,958,230 shares of Common Stock outstanding as of March 25, 2003. DOCUMENTS INCORPORATED BY REFERENCE Certain information in Sylvan Learning Systems, Inc.’s definitive Proxy Statement for its 2003 Annual Meeting of Stockholders,
which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A no later than April 30, 2003, is incor-
porated by reference in Part III of this Form 10-K. Name of each exchange on which registered NASDAQ None Title of each class Common Stock, Par Value $.01 Preferred Stock Purchase Rights PART I. Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II. Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters Item 6. Selected Consolidated Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure PART III. Items 10., 11., 12. and 13. are incorporated by reference from Sylvan Learning Systems, Inc.’s definitive Proxy Statement which will be filed with the Securities and Exchange Commission, pursuant
to Regulation 14A, no later than April 30, 2002. Item 14. Controls and Procedures PART IV. Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K SIGNATURES CERTIFICATIONS PAGE 2 ITEM 1. BUSINESS
Sylvan Learning Systems, Inc. (“the Company” or “Sylvan”) is a leading international provider of educational services to families
and schools. The Company maintained its leadership position in the core K-12 educational services market while significantly
expanding its post secondary offerings by focusing on the following business concentrations: • Post-Secondary. Providing educational services to students through a network of fully accredited international universities, center- based adult English language instruction and accredited teacher training university courses and degree programs. Services are tai-
lored to address the fast growing international marketplace for advanced education as well as the shortage of teaching professionals
in the United States. Services are provided through International Universities, Wall Street Institute (“WSI”) and Canter. • K-12. Providing consumer and institutionally focused education services for students ranging from kindergarten through high school education levels. Services are provided through Sylvan Learning Centers and Sylvan Education Solutions. This business
focuses on proven grade level advancement of students through direct student-instructor interaction. • Education Technology. Investing in companies employing emerging technology solutions in the education marketplace. The Company currently provides lifelong educational services through five separate business segments. The K-12 Education Services segment includes: Sylvan Learning Centers, which designs and delivers personalized tutorial programs to school-aged chil-
dren through franchised and Company-owned learning centers; Schülerhilfe, a major provider of tutoring services in Germany, Italy
and Austria; 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 segment provides
professional development and graduate degree programs to teachers through Canter and Associates. The International Universities
segment owns or maintains controlling interests in six private universities located in Spain, Switzerland, Mexico, Chile and France
and also includes the non-Spain operations of WSI, a European-based franchiser and operator of post-secondary English language
learning centers. The English Language Instruction–Spain segment consisted of the operations of WSI located in Spain, a business
that was sold in the third quarter of 2002. The Sylvan Ventures segment invests in and develops companies that are creating emerging
technology solutions for the education marketplace, and consolidates the operations of eSylvan, Inc., Walden E-Learning, Inc.
(“Walden”), Connections Academy, Inc., National Technological University, Inc. (“NTU”) and EdVerify, Inc., all of which are
majority-owned subsidiaries. Sylvan’s services are delivered through an international network of Company-owned and franchised educational centers, in-school programs and agreements with university partners, as well as Sylvan controlled universities. In 2002, Company revenues were
approximately $604.0 million, comprised of $215.3 million from the K-12 Education Services segment, $52.4 million from the
Online Higher Education segment, $303.7 million from the International Universities segment, $7.0 million from the English
Language Instruction–Spain segment and $25.6 million from the Sylvan Ventures segment. System wide revenues, which include
franchised Learning Center and Schülerhilfe revenues of $389.6 million, and franchised WSI revenues of $114.8 million, totaled
$1.1 billion in 2002. Note 18 of the Company’s 2002 audited financial statements contains additional disclosures regarding the
Company’s segments and geographic information. Pending Sale of Business Units
On March 10, 2003, the Company announced that it would sell the operations comprising its K-12 education business units and
committed to a plan to sell certain investments in Sylvan Ventures that are not strategic to its post-secondary education business.
Upon completion of the contemplated transactions, the Company’s operations would consist solely of its post-secondary business
units comprising its International Universities and Online Higher education segments. On March 10, 2003, the Company and Educate Operating Company, LLC (“Educate LLC”), a company newly-formed by Apollo Management, L.P, (“Apollo”) executed an Asset Purchase Agreement that provided for the acquisition by Educate LLC of
substantially all of the Company’s K-12 education business units, including eSylvan, Inc. and Connections Academy, Inc., which PART I. PAGE 3 are investments held by Sylvan Ventures. The consideration for the sale of the assets comprising the K-12 business units will consist
of the following at closing: • Cash of $112.0 million to $117.0 million, plus an amount equal to the difference between $72.5 million and the conversion value of the convertible debentures issued by the Company and surrendered by Apollo at closing, less any accrued and unpaid
interest on the debentures; • A subordinated note in the amount of $55.0 million, bearing interest at 12% per annum and maturing in 2009;
• The surrender of convertible debentures issued by the Company with a conversion value of up to $72.5 million;
• The assumption of trade accounts payable of the K-12 business units, and other specified liabilities of the K-12 business units;
• Apollo’s 25% preferred interest in Sylvan Ventures. Additionally, the proceeds received by the Company are subject to post closing adjustments for specified changes in working capital from the date of the agreement to the closing date. The Company is also eligible for up to $10.0 million of additional con-
sideration if certain operations of Connections Academy exceed specified levels of earnings any time prior to December 31, 2007.
The transaction will result in the elimination of various consent and governance rights that had been held by Apollo. Apollo’s rep-
resentation on the Company’s Board of Directors will be reduced from two board seats to one. In a separate transaction, Sylvan acquired the remaining membership interest in Sylvan Ventures not owned by Sylvan or Apollo for consideration of 581,000 shares of Sylvan stock, which is restricted from sale for three years. Additionally, all member-
ship profit interests in Sylvan Ventures have also been eliminated. Upon completion of these acquisitions and the sale of the K-12
business units, the Company will own all of the membership interests of Sylvan Ventures LLC. The remaining investments of
Sylvan Ventures will include the consolidated investments in Walden and NTU, which will be managed and reported within the
Online Higher Education segment, and a $2.5 million debt instrument that will be amortized over the next two years. In addition,
investments with a carrying value of $16.7 million at December 31, 2002 are held for sale to be marketed to a single buyer and are
expected to be sold by June 30, 2003 for principally contingent consideration. The Company, after the sale of substantially all of its K-12 business units, will hold for sale the remaining K-12 assets of the Company, consisting of the Company’s Sylvan Learning Center operations in the United Kingdom and France. The Company
expects to sell these two operations for principally contingent amounts of future consideration by December 31, 2003. The transactions were negotiated and approved by a committee of Sylvan’s Board of Directors composed solely of independent directors. Credit Suisse First Boston LLC and U.S. Bancorp Piper Jaffray, Inc. were financial advisors to the committee of inde-
pendent directors. The Apollo transaction is subject to legal and regulatory approvals and is expected to close by June 30, 2003. As a result of these expected disposal transactions, the Company estimates that it will record (i) a yet to be determined gain from the disposition of its K-12 business units upon closing of the sale to Educate LLC (expected to be in the second quarter of
2003), representing the difference between the carrying value of the net assets sold (approximately $115.9 million at December 31,
2002) and net proceeds upon sale (ii) a loss in the first quarter of 2003 of approximately $17,300 to reduce the carrying value of
the held for sale assets of Sylvan Ventures to their estimated net realizable value, and (iii) a loss in the first quarter of 2003 of
approximately $11,000 to reduce the carrying value of the held for sale assets of the Company’s UK and France Learning Center
operations to their estimated net realizable value. The operations of the Company’s disposal groups comprising its K-12 business units will be classified as discontinued opera- tions beginning in the first quarter of 2003. Because the operations and cash flows of these components will be eliminated from the
ongoing operations of the Company as a result of the disposal transactions, and because the Company will not have any significant
continuing involvement in the held for sale operations after the disposal transactions, the results of operations of this component
will be reported for all periods as a separate component of income, net of income taxes. These transactions present a number of risks and uncertainties, including the possibility that the transactions will not be com- pleted due to legal, regulatory or other reasons. If these transactions are completed, the Company’s overall business will be signifi-
cantly smaller and will consist exclusively of the international and online university business. This remaining business has been
operated by the Company for less time than the K-12 business. Therefore, it is more difficult for management to predict the future
results of the university business than the K-12 business. Also, following completion of these transactions, most of the Company’s
business operations will be in foreign countries, which increases the possible negative effect on the Company of the many risks of
doing business in foreign countries. PAGE 4 Expected Stock Option Modification in the Second Quarter of 2003
As discussed more fully in Note 14, certain employees of the Company’s International University segment have been granted options
to acquire common stock of the holding company subsidiary comprising the International University segment. Due to the restruc-
turing of the Company’s operations resulting from the sale of the K-12 business units and non-strategic Sylvan Ventures assets, the
Company has negotiated an agreement with certain key employees holding stock options to acquire common stock of the subsidiary
that provides for the exchange of these stock options for stock options to acquire common stock of Sylvan, contingent upon the closing
of the sale of the K-12 business units to Educate LLC. The Company also expects to offer similar terms to other employees holding
options to acquire common stock of the subsidiary. The result of the exchange of options will not increase the aggregate intrinsic value
of the options or reduce the ratio of the exercise price per share of the options to the per share fair value of common stock on the date
of exchange, as determined by independent members of the Board of Directors advised by independent valuation experts. The exchange will be accounted for as a modification of granted stock options, resulting in a new measurement date for the exchanged stock options. The Company estimates that the modification will result in non-cash compensation expense of approxi-
mately $25 million. The change will be recorded primarily in the quarter the conversion is completed with the balance recorded
over any remaining vesting period. In connection with the sale of the K-12 Education business, each unexpired and unexercised outstanding option to purchase shares of the Company’s common stock held by employees who will be employed by Educate LLC will continue to vest for a period
of twelve months following the closing of the transaction and will be exercisable for twenty-four months following the closing. This
will be accounted for as a modification of granted stock options, resulting in a new measurement date. The modification will result
in non-cash compensation expense in an amount equal to the intrinsic value of such options at the date of closing. This expense will
be included in the Company’s results from discontinued operations. K-12 Education Services
Sylvan Learning Centers
Sylvan provides high quality supplemental educational services with consistent, quantifiable results. It has delivered its core educa-
tional service to more than 1.8 million students in grades K-12 over the past 24 years. The Sylvan Learning Center (“SLC”) division
provides supplemental, remedial and enrichment instruction primarily in reading, writing, mathematics, study skills and test prepa-
ration, featuring an extensive series of standardized diagnostic assessments, individualized instruction, a student motivational system
and continued involvement from both parents and the child’s regular school teacher. Parents learn about Sylvan from the Company’s advertising, from a referral from another parent or from school personnel. The learning center’s Sylvan-trained educators use assessment results to diagnose students’ skill gaps and to design an individual learning
program for each student. Sylvan Learning Center’s curriculum is consistent throughout North America. Instruction is typically
given three to four times per week for one or two hours per visit at U-shaped tables designed to ensure that teachers work with three
to four students at a time. Instructional programs are research-based and built upon the philosophy of mastery learning. There are
special incentives, such as tokens redeemable for novelties and toys, to motivate the student to achieve the program’s objectives, to
build self-confidence and to strengthen the student’s enthusiasm for learning. Student progress is monitored and parent conferences are scheduled after every 12 hours of a student’s program. Throughout each student’s course of study, the learning center assesses the student’s progress using standardized diagnostic assessments. The
results are shared with the parents in personal conferences, during which the student’s progress is discussed. Franchise Operations. As of December 31, 2002, there were a total of 825 learning centers in 48 states, 8 Canadian provinces, Puerto Rico, Hong Kong and Guam operated by its franchisees. As of that date, there were 475 U.S. franchisees operating Sylvan
Learning Centers. During 2002, 53 franchised learning centers were opened, net of closures. Additionally, during 2002, the
Company acquired 36 franchisee-owned learning centers. The Company’s typical franchise agreement (the “License Agreement”) grants a license to operate a Sylvan Learning Center and to use Sylvan’s trademarks within a specified territory. The Company currently offers a License Agreement with an initial term of
ten years, subject to unlimited additional ten-year extensions at the franchisee’s option under the same terms and conditions. The
initial license fee and royalty rates vary depending upon the demographics of the territory. Franchisees must obtain the Company’s
approval for the location and design of the learning center and of all advertising, and must operate the learning center in accordance
with the Company’s methods, standards and specifications. The franchisee is required to purchase from Sylvan certain diagnostic PAGE 5 and instructional materials, student record forms, parental information booklets and explanatory and promotional brochures devel-
oped by the Company. Sylvan specifies requirements for other items necessary for operation of a learning center, such as computers,
instructional materials and furniture. Franchisees must also submit monthly financial data to the Company. The Company actively manages its franchise system. The Company requires franchisees and their employees to attend initial training in learning center operations and Sylvan’s educational programs. The Company also offers franchisees continuing training
each year. The Company employs field operations managers who act as “consultants” to provide assistance to franchisees in tech-
nology implementation, business development, marketing, education and operations. These employees also facilitate regular com-
munications between franchisees and the Company. The Company believes there is significant potential for additional franchised learning centers. A number of territories with only one learning center could support one or more additional learning centers based upon the number of school-age children in
the market area. The Company is actively encouraging existing franchisees in these territories to open additional learning cen-
ters. Additionally, management has identified at least 231 territories in North America, primarily in smaller markets, in which there
are no learning centers. The Company is actively seeking franchisees for a number of these territories. Forty-four new territories
were sold in 2002. The Company has sold franchise rights for the operation of learning centers in Hong Kong and Spain. In pricing international franchise rights, the Company takes into account estimates of the number of centers that could be opened in an area. A master fran-
chisee operates Sylvan Learning Centers in Spain and at December 31, 2002, had 123 centers in operation. Company-owned Learning Centers. As of December 31, 2002, Sylvan owned and operated 127 learning centers: 8 in the greater Baltimore, MD area, 10 in the greater Philadelphia, PA area, 6 in Pittsburgh, PA, 10 in Boston, 9 in the greater Washington, D.C.
area, 14 in Atlanta, GA, 8 in South Florida, 7 in Orlando, FL, 5 in Alabama, 6 in the greater Minneapolis, MN area, 8 in Dallas,
TX, 8 in Houston, TX, 3 in Austin, TX, 5 in the greater Salt Lake City, UT area and 20 in the greater Los Angeles, CA area. The
Company’s operation of learning centers enables it to test new educational programs, marketing plans and learning center manage-
ment procedures. The Company may consider selected acquisitions of additional learning centers now operated by franchisees. Schülerhilfe. As of December 31, 2002, Schülerhilfe, a major provider of tutoring services in Germany, had approximately 236 company-owned centers and approximately 695 franchise locations in Germany, Italy and Austria. Schülerhilfe is engaged in
providing tutoring service to primary and secondary students with an operational business model that is similar to Sylvan Learning
Centers. Students typically attend twice per week and are instructed in small groups of four to six students per session. Schülerhilfe
advertises using print, radio and television advertisements on local and national levels. Ivy West. On May 18, 2000, the Company acquired Ivy West, an SAT/ACT preparation company based in California. Ivy West offers individual home-based instruction for students preparing to take the SAT I, SAT II, PSAT, or ACT. Ivy West also offers
school partnerships to provide SAT preparation materials and instruction in a group or classroom environment. Sylvan Learning
Centers also offers the Ivy Prep program in their centers using the traditional 3-to-1 student–teacher ratio, small group instruction
and school partnership programs. Sylvan Education Solutions
Since 1993, Sylvan Education Solutions (“SES”) has partnered with schools, school districts, education institutions and community
organizations in providing learning programs that are outcomes-based and tailored to the individual needs of the student. Under
contract to school systems and workforce development agencies, Sylvan Education Solutions provides direct instruction and after-
school tutoring for K-12 students and work skills training for “hard-to-employ” individuals—at-risk and drop-out youth, welfare
recipients, and underemployed workers. SES provides low-income families and students access to supplemental education and
tutoring services similar to those offered by Sylvan Learning Centers. Funding sources for SES programs include federal Department
of Education programs, such as Title I, state programs, such as PA Act 89, special education funds, local school funds and federal
Department of Labor initiatives. In 2002, SES served over 69,000 students. SES also provides specialized services to non-public
schools, including speech and language instruction, special education instruction and early childhood programs. PAGE 6 Online Higher Education
Canter
For more than 25 years, Canter has recognized that the key to student achievement is a well-trained teacher. To that end, Canter’s
mission is to enhance the quality of teaching and learning by empowering educators with new teaching strategies. Canter achieves
this goal by offering products and services that present not only the most current educational theory, but also the practical applica-
tions educators need and want. Canter’s Distance Learning Masters division works domestically with six traditional universities to provide working adults the opportunity to earn a Master in the Art of Teaching degree via distance education. Additionally, Canter’s Distance Learning Masters
division works domestically with Walden University, a subsidiary of Sylvan, to provide working adults the opportunity to earn an
MS in Education, with a specialty in either reading, technology or standards via distance education. The majority of Walden’s stu-
dents in these three programs elect online learning as their mode of distance education. For the Winter 2003 semester, Canter had
approximately 12,800 students enrolled in a Distance Learning Masters program with its partner universities. Tuition for a typical
student enrolled in one of Canter’s partner universities is approximately $8,000, paid over the five semesters, or 20 months, that the
student is enrolled in the program. Canter and its university partners split the tuition based on the agreed upon percentages that are
based on the allocation of services provided to the student by both Canter and the partner university. Canter typically provides the
program development services (subject to final approval by the university partner) and markets the program directly to consumers
on behalf of the university partner. The university partners provide the faculty to teach the course and grade the student perform-
ance. Since Canter is not an accredited university, it is the partner university that issues the degree. For those teachers that need “for credit” continuing education, but do not want to commit to enrolling in a degree program, Canter’s Teacher Education Courses division works with 15 university partners to provide “for credit” courses to over 40,000 students
during 2002. Canter’s course topics include reading at the elementary and secondary level, elementary math, learning styles, instruc-
tional strategies, assessment, classroom management, reading and language development, character development and parental involve-
ment. These courses are designed to satisfy certification requirements of teachers, as well as provide America’s school districts with
research-based, long-term technology embedded training that delivers measurable results. Approximately 15% of the students
enrolled in individual courses during 2002 were enrolled in online courses, with the remaining enrolled in more traditional distance
learning using video and study guides. International Universities
The International Universities segment is the leading network of private, post-secondary educational institutions outside the United
States. Its offerings address the fast-growing international demand for career-oriented education. International Universities currently
owns and operates six fully licensed universities. In June 2002, the Company realigned its International Universities segment to
include the non-Spain operations of WSI. Through WSI, Sylvan provides English language instruction using proprietary multi-
media technologies. University Descriptions
The International Universities segment has three full-service universities in Spain, Mexico and Chile, a specialized international busi-
ness school in France, and hospitality schools (“Hospitality”) with operations in Switzerland and Spain. International Universities
currently enrolls approximately 60,000 full-time students and offers more than 100 degree programs through 25 campuses. The
universities primarily serve 18- to 24-year-old students and offer an education that emphasizes career-oriented fields of study with
undergraduate and graduate degrees in a wide range of disciplines, including international business, hotel management, health sciences,
information technology and engineering. The Company believes that the universities benefit from strong academic reputations and
brand awareness and established operating histories. Each university also has flexible, non-tenured, teaching-focused faculty and is
led by an experienced local management team. PAGE 7 The following table presents information about the universities in the SIU network: Average Principal Date Date Current No. of Enrolled Annual Regulatory University Location Founded Acquired Ownership Campuses Students (1) Tuition (2) Oversight Universidad Europea de Madrid Madrid, Spain 1995 1999 78% 1 7,400 $ 7,500 Madrid Regional
Education
Authority Universidad del Valle de Mexico Mexico City, 1960 2000 80% 14 36,900 $ 3,900 Mexican Mexico Secretary
of Education Universidad de las Americas Santiago, Chile 1988 2000 80% 5 12,200 $ 2,800 Chilean Ministry
of Education École Supérieure du Commerce Extérieur Paris, France 1968 2001 89% 2 1,100 $ 5,400 French Ministry
of Education Hospitality—Les Roches and Glion Bluche, 1979 2000 100% 3 2,800 $14,900 Swiss Government Switzerland (Les (Les (license, Swiss Marbella, Roches) Roches) Hotel Association/ Spain and and and NEASC Glion, 1962 2002 (accreditation) Switzerland (Glion) (Glion) (1) Represents full-time enrollment on the last day of the enrollment period rounded to the nearest hundred.
(2) Based on 2002 calendar year data in U.S. dollars rounded to the nearest hundred. The universities provide a broad range of degrees and programs and are well regarded by students, employers and government authorities in their respective markets: • Universidad Europea de Madrid (“UEM”) offers 39 diploma or bachelor’s degree programs or double degree programs and 25 master’s and doctorate degree programs. The university includes a well-known school of health sciences and schools of
architecture, economics, engineering, journalism, law and sports sciences. In 2002, UEM began student exchange programs
with the Company’s universities in Mexico and Chile bringing more than 100 students to UEM for study abroad. • Universidad del Valle de Mexico (“UVM”) offers 24 undergraduate and six graduate degree programs in a broad range of fields including accounting, architecture, business administration, education, engineering and law. The university is the third largest
private university in Mexico in number of students and is the largest in number of campuses. During the 2002 primary enroll-
ment period, UVM increased its new enrollment by 27% compared to the same period last year. • Universidad de las Americas (“UDLA”) offers 26 undergraduate degree programs focused on business administration, education, engineering, law and psychology. In 2002, this university had the highest number of new enrollments of any private university
in Chile increasing its new enrollments by 51% compared to the same period the prior year. • École Supérieure du Commerce Extérieur (“ESCE”) offers a four-year degree program in international commerce and manage- ment that features a combination of coursework and internships. This university was the first university in France to specialize
in international trade. In May 2002, ESCE was ranked 21st out of 200 business schools in France based on initial salary
received by their graduates in a supplement to the magazine Le Expansion. • Hospitality (Swiss Hotel Association Hotel Management School Les Roches (“Les Roches”) and Glion Hotel School (“Glion”)) offers globally recognized hospitality and hotel management programs. Hospitality specialized programs require students
to complete at least two internships prior to graduation. Les Roches was the first English-speaking hotel management
school established in Switzerland. Glion and Les Roches are both accredited by the New England Association of Schools
and Colleges (“NEASC”). PAGE 8 Degree Programs and Areas of Study
The universities in the International Universities segment offer more than 100 career-oriented undergraduate and graduate degree
programs in a wide range of fields. The time typically required to complete a program varies by degree, with undergraduate degrees
requiring on average four to five years and graduate degrees requiring on average two to three years following completion of an
undergraduate degree. The Company’s International Rector oversees the curriculum development and the deployment of programs
in our network in cooperation with the deans of the universities. The Company also encourages its faculty to develop new educa-
tional programs and curricula. The programs are designed to satisfy three constituencies: • Students. The Company believes that students choose from career-oriented schools based on the type and quality of the educa- tional offering and career placement opportunities. The Company focuses on providing students with a solid academic founda-
tion and the technical and practical skills necessary to pursue and excel in their careers. • Employers. The relationship of each of the universities with the business community plays a significant role in the placement of the students and the development of curriculum. Each of the universities works with prominent members of relevant industries
to evaluate and improve existing programs in order to maintain their relevance in the workplace. These employers provide crit-
ical input on the latest advancements within each field and the implications of these changes on the curriculum. • Regulating or licensing agencies. The degree programs of each of the universities have been approved in accordance with appli- cable law. For example, the Secretary of Education in Mexico has reviewed all of UVM’s programs and given the university
degree-granting authority for those programs. The Company must generally work with the regulators of these universities to
ensure that any new programs will be approved. In Chile, UDLA has been granted full autonomy by the Ministry of Education.
As a result, the Company is free to create new degree programs in Chile without additional regulatory approval. Les Roches and
Glion (Hospitality) are licensed in Switzerland and are accredited by the NEASC, one of six accrediting associations in the U.S,
and must ensure that their curriculum continues to meet the standards of that association.
The SIU network allows the Company to share high-quality curricula among the universities, broadening students’ educa- tional opportunities. For example, during 2001 UEM and Les Roches developed a new joint degree program in hospitality business
management that is now being offered to students at UEM. Similarly, during the 2002–2003 academic term, UVM is offering a
sports management degree program developed at UEM. The Company intends to use highly specialized course materials developed
at ESCE and Les Roches throughout the SIU network, potentially creating new degree programs at minimal cost. English Language Instruction—Non-Spain
As of December 31, 2002, the WSI organization included 303 English language centers in 23 countries, primarily in Europe, Asia
and the Americas. Located primarily in the business districts of urban areas, WSI centers are easily accessible to working adults.
Enrollment at each center averages 350 to 400 students per year. English is the language of international business and the Company believes that a working knowledge of English has become increasingly important to many professionals throughout the world. Because English is becoming more prevalent around the world,
the Company believes there is growing demand for instruction in English as a second language among both full-time university
students and working adults. As more working adults and students seek English language instruction for employment or educational
purposes, the Company believes that the English language instruction market will experience significant growth. WSI’s goal is to enable its students to successfully learn English. WSI’s method of English language instruction is based on six stages, with a total of 17 levels ranging from beginning to advanced skills, and includes courses for specific purposes, such as busi-
ness English. WSI’s courses use a combination of live, personalized instruction, small group classes and interactive computer-based
instruction. Currently, the main product offering is English Online, a proprietary interactive computer-based instruction method-
ology that is personalized for each student’s needs, timetable and goals. All of WSI’s courses can be tailored by students to meet
their scheduling needs as well as location preferences. Students can elect to take a course at a center, at home or at work. WSI’s
courses are taught by instructors that speak English as their first language and who have been trained and certified in our compre-
hensive program. Each student is given assistance and personalized attention and follow-up from a personal tutor. Each student also
has the opportunity to socialize with other students and teachers at the social club at each center. WSI continually aims to update
and innovate its English language courses. WSI is developing additional courses dedicated to teaching English for other specific
purposes, such as tourism, law and medicine. PAGE 9 Franchise Operations
A substantial portion of WSI’s expansion has been accomplished through franchising centers. Of WSI’s 303 English language centers,
264 are franchised centers (168 in Europe and Asia and 96 in the Americas). WSI also has 39 company-owned centers, most of
which are located in Europe. After WSI identifies an attractive area for growth, it typically seeks to open centers in that area by
selling master franchising rights or developing the territory internally. The typical master franchising agreement grants a license to
develop centers and obtain sub-franchisees in a specified exclusive country or region. WSI currently offers a master franchising
agreement with an initial term ranging from ten to twenty-five years, subject to unlimited additional five to ten year extensions at
the master franchisee’s option on the same terms and conditions. The initial license fee ranges from $0.3 million to $1.5 million,
depending on the size and population of the territory. Under this agreement, the master franchisee pays royalties of 4% of the reve-
nue of its first center and any center in which the master franchisee has an equity interest. The master franchisee also pays 20% to
25% of all royalties and fees paid to it by all sub-franchisee centers within its territory. The royalties cover the use of WSI’s brand
name, multimedia teaching system, marketing and back-up support. WSI requires franchisees to use and pay for didactic materials. The typical sub-franchise agreement grants a license to operate a center and to use WSI’s trademarks within a master fran- chisee’s specified territory. The standard sub-franchise agreement extends for an initial term of ten years, subject to unlimited
additional ten-year extensions at the sub-franchisee’s option on the same terms and conditions. The initial license fee ranges from
$50,000 to $100,000, depending on the territory. Under each agreement, the sub-franchisee pays the master franchisee royalties
of 7% of revenue of each center. The Company actively manages its franchise system. The Company requires master franchisees, sub-franchisees and their employees to attend initial training in center operations and WSI’s English language programs. Each master franchisee must obtain
the Company’s approval prior to opening its first center and any centers in which it has an equity interest and may not alter the
standard form of sub-franchise agreement without the Company’s approval. Master franchisees are also required to submit monthly
financial data to the Company so that it can monitor their progress and address any potential issues. Master franchisees are respon-
sible for monitoring sub-franchisees’ compliance with the Company’s methods and standards, including training requirements, cor-
rect administration of the multimedia teaching system, staffing and center appearance. If the Company determines that the training
of a sub-franchisee’s employees is inadequate, it may require the sub-franchisee employees to complete training at their own expense. Tuition and Fees
Tuition varies at each of the universities depending on the curriculum and type of program. For the full-service universities, average
annual tuition ranges from $2,800 to $7,600 for the 2002–2003 academic year. For the specialized universities, average tuition ranges
from $5,400 to $15,500 for the 2002–2003 academic year. Tuition payment options vary by university and range from a lump sum
payment at the beginning of the academic year to monthly installment payment plans. Historically, the Company has been able
to increase tuition as educational costs and inflation have risen. In 2002, the Company implemented average tuition increases of
approximately 9%. The Company intends to continue increasing tuition at each of the universities as market conditions warrant. Students are generally responsible for room and board fees, transportation expenses and costs related to textbook and supply purchases required for their educational programs. At some of the universities, the Company offers these services to the student
body, which helps to generate incremental revenue. Students typically self-finance their education or seek non-university sponsored financing programs. Although none of the coun- tries in which the universities currently operate provides student loan programs similar to those in the U.S., the universities are
actively working to develop financing alternatives for students. Sylvan Ventures
Sylvan Ventures operates with the goal of investing in and developing companies to bring technology solutions to the education and
training marketplace. On June 30, 2000, affiliates of Apollo and certain members of management joined the Company in the for-
mation of Sylvan Ventures, LLC. The total committed funds of $400.0 million are comprised of commitments from the Company
for $285.0 million, from Apollo for $100.0 million, and from management investors for $15.0 million. PAGE 10 In accordance with the formation agreement, Sylvan Ventures is owned in the following percentages: Company 72%, Apollo 25% and management investors 3%. The Company has significant control of the operations of Sylvan Ventures as a result of being
the majority shareholder and through representation on the Investment Committee, which reviews and approves individual Sylvan
Ventures projects. The Sylvan Ventures’ Board of Directors is comprised of the same slate of directors as the Company’s Board of
Directors. Apollo has a preferred position with respect to distributions which entitles them to first priority on distributions to the
extent of their vested capital. Following the 2000 fiscal year, losses are allocated first to the Company and management investors to
the extent of their capital accounts and then to Apollo. No losses can be allocated to the membership profit interests. Profits are
only allocated on a pro rata basis after all losses have been recaptured by the respective parties. In the event of a subsequent profit
triggering event, profits will be shared in the following percentages: Company 57%, Apollo 20%, management investors 3% and
membership profits interests 20% (when fully allocated). As of December 31, 2002, only 15.3% of the membership profit interest
have been granted. The Company maintains a majority-ownership position in Sylvan Ventures and accounts for Sylvan Ventures as
a consolidated subsidiary with a minority interest balance representing the minority owners’ net investment. As of December 31, 2002, Sylvan Ventures has investments in Walden, E-Learning, Inc., National Technological University (“NTU”), eSylvan, Inc., Connections Academy, Inc., EdVerify, Inc., Chancery Software Limited, iLearning, Inc., Parthenon Group,
Inc., SciQuest, Inc., and Club Mom, Inc. In 2002, Sylvan Ventures reported significant losses resulting from recording its propor-
tionate share of losses generated by its investees. On March 10, 2003, the Company committed to a plan to sell certain investments in Sylvan Ventures that are not strategic to its post-secondary education business. In connection with this, Sylvan acquired the remaining membership interests in Sylvan Ventures not owned by Sylvan or Apollo for consideration of 581,000 shares of Sylvan stock restricted from sale for three years.
Additionally, all membership profit interests in Sylvan Ventures have also been eliminated. Upon completion of these acquisitions
and the sale of the K-12 business units, the Company will own all of the membership interests of Sylvan Ventures LLC. Upon
closing, the remaining investments of Sylvan Ventures will include the consolidated investments of 51% ownership interest in
Walden and the 100% ownership interest in NTU, which will be managed and reported within the Online Higher Education
segment. All remaining investments with a carrying value of $16.7 million at December 31, 2002 are held for sale to be mar-
keted to a single buyer and are expected to be sold by June 30, 2003 for principally contingent consideration. The following
describes the continuing operations owned by Sylvan Ventures as of December 31, 2002. Post Secondary Descriptions
Sylvan Ventures has two fully accredited distance learning universities operating domestically—Walden University (“Walden”) and
National Technological University (“NTU”). Walden offers graduate-level degrees in the social and behavioral sciences and related
professional fields. All programs are delivered at a distance with Bachelor’s and Master’s degree level course work fully available
online. Ph.D. programs combine online instruction with required residency experiences. NTU offers distance education Masters
degree programs in engineering, information technology, and management. NTU delivers its courses through three methods
including on-line, videotape, and CD-ROM. Both universities are accredited by the North Central Association of Colleges and
Schools (“NCA”). The following table presents information about the universities owned by Sylvan Ventures: Average Principal Date Date Current Enrolled Annual Accrediting University Location Founded Acquired Ownership Students (1)(2) Tuition Body Walden University Distance Learning 1970 2002 51% 4,627 $6,780 North Central
Association of
Colleges and
Schools (“NCA”) NTU Distance Learning 1984 2002 100% 598 $9,047 North Central
Association of
Colleges and
Schools (“NCA”) (1) Represents full-time enrollment as of December 31, 2002
(2) Included 2,451 students enrolled through the Canter program. PAGE 11 Degree Programs and Areas of Study
The universities provide a broad range of degrees and programs and are well regarded by students, employers and government authori-
ties in their respective markets: • Walden offers 15 graduate degree programs and two undergraduate degree programs in the disciplines of Education, Heath and Human Services, Management, and Psychology. In addition, Walden plans to introduce four new degrees in 2003 as it plans to
substantially expand its degree and course offerings over the next few years. • NTU offers 15 masters degree programs in the disciplines of engineering, information technology, and management. NTU has developed a prestigious network of content providers with more than 50 leading universities, including 20 of the top 50 graduate
engineering programs. NTU aggregates the “best in breed” courses from these partners into proprietary NTU degrees, pro-
viding unique benefits to the students. In addition, NTU distributes four programs in which the degree is conferred by the
partner university itself rather than by NTU. Tuition and Fees
Tuition varies at each of the universities depending on the curriculum and type of program. • For Walden, tuition ranges from $220 per credit hour for bachelors degree programs; to between $265 and $380 per credit hour for the masters degree programs; to $3,460 per quarter for certain doctorate degree programs. Walden students are cur-
rently eligible for the Department of Education’s Title IV federal financial aid under the Higher Education Act of 1965. Degree
programs typically take 20 months to five years to complete with a total cost ranging from $8,000 to $65,000, depending on
the degree. • For NTU, tuition ranges from $700 to $1,276 per credit hour. Degree programs typically take a student 10 semesters to com- plete at a total cost of $25,000 to $35,000 depending on the university and program. Marketing
K-12 Education Services. The Company and its franchisees market SLC’s services to parents of school-aged children at all grade
levels and academic abilities. SLC’s supplemental education utilizes a diagnostic and prescriptive approach to address the specific
needs of each and every student. A portion of Sylvan’s advertising includes commercials, various cable delivered programs and
Internet marketing. Sylvan’s advertising is intended to position it as the leader in supplemental education and emphasizes Sylvan’s
personalized lesson plan, individual attention and positive results—the skills to do better in school, the confidence to do better in
everything else. Franchisees form local cooperatives to collectively purchase local television and radio advertising and usually sup-
plement their efforts with local print advertising and direct mail. The Company also has additional marketing support for specific
programs, including Reading, Math, Algebra, Study Skills, SAT/ACT College Prep, and Writing. The Company markets its school-based educational services to local school districts and state education departments. This marketing effort has been expanded to seek contracts for both public and non-public schools, where both are administered by the
local public school district. The Company markets its adult programs to state and local welfare agencies in need of remedial edu-
cation and job training services. Online Higher Education. The Company markets its Canter division primarily through cooperative programs with partici- pating institutions and advertising aimed towards teachers. International Universities. The Company markets its universities through professional broadcast and targeted marketing cam- paigns. These campaigns reach prospective students indirectly through media advertising campaigns as well as directly by mail or one-
on-one meetings. During annual enrollment periods, the Company supplements its advertising with local, regional and sometimes
national campaigns on television, radio, print and the Internet. Each university is responsible for implementing its own marketing
campaign, although the Company provides a forum for the marketing departments of each of the universities to share best practices. WSI employs a marketing staff that is primarily located in Barcelona, Spain. This staff is responsible for creating programs to build brand awareness and generating direct customer response to the centers by developing advertising campaigns for various
media as well as telemarketing, direct mail and referral programs. The staff works with the marketing staff of the master franchisee
in each of the countries in which WSI operates. WSI and the franchisees typically market their services through the use of radio
advertising programs and through locally placed advertising. Additionally, WSI centers are typically located in highly visible areas
near central business areas and public transportation routes. WSI gauges the effectiveness of its promotions and marketing campaigns
by monitoring in-bound leads, walk-ins and appointment presentations at each of its centers. PAGE 12 Sylvan Ventures. Walden University incorporates a diverse marketing mix of activities including online and mail. Programs are directed towards professionals in the areas of management, psychology, education and health and human services. National
Technological University promotes to engineering and IT professionals through partner cooperation’s and direct selling. Competition
The Company faces competition in each of its business segments. That competition focuses on price, educational quality and loca-
tion in the franchise businesses. In the Education Solutions and International University businesses, the competition is primarily
based on price, educational quality and reputation. K-12 Education Services. The Company is aware of only five national competitors in its U.S. based SLC business: Huntington Learning Centers, Kumon Educational Institutes, The Princeton Review, Kaplan Educational Centers and SCORE! Educational
Centers. The Company believes these competitors operate fewer fixed site based centers than Sylvan and they concentrate their
services within a smaller geographic area. In most areas served by SLC, competition also exists from individual private tutors and
local learning centers. State and local education agencies also fund tutoring by individuals, which compete with the Company’s SLC
business. Schülerhilfe’s primary competition consists of Studienkreis, a national provider of tutoring services in Germany as well as
individual private tutors. Given the unique position of public education in the United States, the Company believes that educational reforms imple- mented directly by school officials will not face the same degree of public resistance that the Company may face. The Company also
competes with school reform efforts sponsored by private or not-for-profit organizations and universities and with consultants hired
by school districts to provide assistance in the identification of problems and implementation of solutions. The Company is aware
of several other entities that currently provide Title I and state-based programs on a contract basis for students attending parochial
and private schools. Online Higher Education. Canter competes with both public and private universities in the U.S. that provide graduate courses and master degree programs for teachers. The Company understands the needs of its customers based on Canter’s 25 years of expe-
rience in the marketplace. Additionally, the Company compares favorably to its competitors for customers due to the convenience
of its online and video delivery systems. International Universities. The market for post-secondary education outside the U.S. is highly fragmented and marked by large numbers of local competitors. The target demographics are primarily 18- to 24-year-olds in each country in which the Company
competes, except for its Hospitality schools, which markets to students worldwide. The Company generally competes with both
public and private universities on the basis of price, educational quality, reputation and location. Public universities tend to be less
expensive, if not free, but more selective and less focused on career-oriented degree programs. The Company believes that it com-
pares favorably with competitors because of its focus on quality, career-oriented curriculum and the efficiencies of its network. At
present, the Company believes that no other company has a similar network of international universities. There are a number of
other private and public universities in each of the countries where the Company owns a university. Because the concept of private,
for-profit universities is fairly new in many countries, it is difficult to predict how the market will evolve and how many competi-
tors there will be in the future. The Company expects competition to increase as the market matures. The English language instruction industry is highly fragmented, varying significantly among different geographic locations and types of consumers. The Company’s ability to compete depends on its ability to improve existing or create new English language
learning products to distinguish WSI from its competitors. Other providers of English language instruction include individual tutors,
small language schools operated by individuals and public institutions, and franchisees or branches of large language instruction
companies, some of which operate internationally. The smaller operations typically offer large group instruction and self-teaching
materials for home study, while some larger competitors concentrate on the higher-priced, business-oriented segment of the English
language instruction market by offering programs of intensive and individualized instruction. As the demand for English language
skills rises due to the evolution of the information-based global economy, competing English language instruction providers are likely
to try to strengthen their positions in the market by expanding their operations, pursuing strategic alliances and acquiring small
competitors. This increasing competition may adversely affect the Company’s ability to grow its English language instruction busi-
ness and may also adversely affect its profitability. PAGE 13 Sylvan Ventures. The postsecondary education market in the U.S. is highly fragmented and competitive, with no single institu- tion having a significant market share. The target demographics are adult working professionals who are over 25 years old. Walden
University and NTU compete with traditional public and private non-profit institutions and for-profit schools. Typically, public
institutions charge lower tuition than Walden and NTU because they receive state subsidies, government and foundation grants,
tax-deductible contributions and other financial sources not available to Walden and NTU. However, tuition at private non-profit
institutions is typically higher than the average tuition rates charged by Walden and NTU. Walden and NTU compete with other
educational institutions principally based upon the quality of its educational programs and student services. Government Regulation
Franchise. Various state authorities as well as the Federal Trade Commission (“FTC”) regulate the sales of franchises in the United
States. The FTC requires that franchisors make extensive disclosures to prospective franchisees but does not require registration.
A number of states require registration and prior approval of the franchise-offering document. In addition, many states have “fran-
chise relationship laws” or “business opportunity laws” that limit the ability of a franchisor to terminate franchise agreements or to
withhold consent to the renewal or transfer of these agreements. While the Company’s franchising operations have not been materi-
ally adversely affected by such existing regulation, the Company cannot predict the effect of any future legislation or regulation. Title I. Title I eligible school districts are responsible for implementing Title I and carrying out their educational programs. Title I regulations, as well as provisions of Title I itself, direct Title I eligible districts to satisfy obligations including involving par-
ents in their children’s education, evaluating and reporting on student progress, providing equitable services and other benefits to
eligible non-public school students in the district and other programmatic and fiscal requirements. In contracting with school dis-
tricts to provide Title I services, the Company has become, and will continue to be, subject to various Title I requirements and may
become responsible to the school district for carrying out specific functions required by law. For example, Sylvan has responsibility
for introducing program content adequate to achieve certain educational gains and maintaining the confidentiality of student
records. The Company’s failure to adhere to Title I requirements or to carry out regulatory responsibilities undertaken by contract
may result in contract termination, financial liability or other sanctions. International University Regulation and Licensing. In response to the growing demand for post-secondary education, govern- ments in many countries have revised their regulations to permit the establishment of private post-secondary universities. Each
country in which International Universities currently operates has made this shift in regulatory policy. Typically, each applicable
regulatory agency oversees universities, establishes requirements for creation of universities and sets the official qualifications and
standards governing university departments and degree programs. Additionally, these regulatory agencies establish prerequisites that
students must satisfy in order to apply. These policies are designed to ensure that the universities have the resources and capability
to provide the student body with a quality education. Wall Street Institute. Since WSI does not offer any degree programs, it is not generally required to comply with any special edu- cational regulation in most of the countries in which it operates. However, WSI typically registers as an educational institution in
order to qualify for certain tax exemptions. Registration may subject WSI to additional regulation and possible restrictions on own-
ership or movement of funds in some countries. WSI is also subject to regulation by the applicable labor regulators in each country
in which it operates. Trademarks
The Company has a federal trademark registration for the words “Sylvan,” “Sylvan Learning Center” and “eSylvan” and distinctive
logos, along with various other trademarks and service marks and has applications pending for a number of other distinctive phrases.
The Company also has obtained foreign registrations of a number of the same trademarks. The Company’s License Agreement
grants the franchisee the right to use the Company’s trademarks in connection with operation of the franchisee’s learning center.
Additionally, the Company has a federal trademark registration for the words “Wall Street Institute” and distinctive logo (Statue
of Liberty), as well as foreign trademark registrations and pending applications for the WSI trademark and logo. PAGE 14 Employees
As of December 31, 2002, the Company had approximately 16,200 employees, 6,800 of whom were classified as full-time and
9,400 of whom were classified as part-time. Most of the Company’s part-time employees are university employees and teachers in
school-based programs, Company-owned learning centers and Schülerhilfe centers. The Company’s employees at UEM and UVM
are covered by labor agreements. The UEM agreement has been negotiated by a national union with a committee representing all
of the private, for-profit universities in the country. Substantially all of the faculty at UVM is represented by a union. The economic
provisions of the labor agreement at UVM are scheduled to be revised in 2003. The agreements govern salaries, benefits and working
conditions for all union members at the universities. The Company considers its relationship with these unions and with all of its
employees to be good. Effect of Environmental Laws
The Company believes it is in compliance with all environmental laws, in all material respects. Future compliance with environ-
mental laws is not expected to have a material effect on the business. Available Information
The Registrant’s Internet Address is: www.educate.com. The Registrant makes available free of charge through its website its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pur-
suant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed
with the SEC. In addition, the Registrant's earnings conference calls and presentations to securities analysts are web cast live via
the Registrant’s website. ITEM 2. PROPERTIES
The Company leases many of its facilities, consisting principally of administrative office space and center site locations. The
Company’s administrative offices consist of four leased facilities in Baltimore, Maryland. The Company’s segments lease various sites, primarily in North America and Europe. The K-12 Education Services segment leases space for 139 sites in the United States, 236 Schülerhilfe sites in Germany, 1 site in the United Kingdom, 2 sites in France
and 12 regional offices; the Online Higher Education segment leases 1 site in Los Angeles, CA; the International Universities seg-
ment leases 12 UVM sites, 4 UDLA sites, 2 ESCE sites, 1 site at Les Roches-Marbella, 3 sites used for the UEM dentistry and
podiatry clinics and the new polyclinic under construction, as well as 55 WSI sites around the world. The Company also owns academic buildings and dormitories on the UEM, Les Roches, Glion, UDLA, and certain UVM campuses. Certain of the academic buildings and dormitories at UEM, Les Roches, Glion and UDLA are subject to mortgages.
In addition, the Company acquired a mortgaged building occupied by NTU. ITEM 3. LEGAL PROCEEDINGS
At this time the Company is not a party, either as plaintiff or defendant, to any litigation that management believes to be material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to be voted on by security holders during the fourth quarter ended December 31, 2002. PAGE 15 ITEM 5. MARKET FOR REGISTRANTS’ COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company’s Common Stock is traded on the NASDAQ National Market. The Company’s trading symbol is SLVN. The high
and low trade prices for 2002 and 2001 for the Company’s Common Stock are set out in the following table. These prices are as
reported by NASDAQ, and reflect inter-day price quotations, without retail mark-up, mark down or commission, and may not
necessarily represent actual transactions. 2002 High Low 1st Quarter $28.36 $21.41 2nd Quarter $29.15 $19.64 3rd Quarter $19.93 $11.75 4th Quarter $18.78 $ 9.46 2001 High Low 1st Quarter $22.56 $13.38 2nd Quarter $25.58 $15.85 3rd Quarter $28.99 $20.50 4th Quarter $27.52 $17.92 No dividends were declared on the Company’s common stock during the years ended December 31, 2002 and 2001, and the Company does not anticipate paying dividends in the foreseeable future. The number of registered shareholders of record as of March 25, 2003 was 586.
During the year ended December 31, 2002, the Company issued 143,609 shares of its common stock as part of acquisition transactions. These shares were not registered under the Securities Act of 1933, in reliance upon the exemption contained in
Section 4(2) of the Act. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the years ended December 31, 2002, 2001, 2000, 1999, and 1998 have been derived
from Sylvan’s consolidated financial statements. The financial data should be read in conjunction with the consolidated financial
statements and notes thereto. The Company consummated several significant purchase business combinations in the five-year period ended December 31, 2002. These business combinations affect the comparability of the amounts presented. Additionally, the accompanying financial
data has been restated to reflect the net assets of the disposed operations of Aspect, Prometric and PACE as net assets and net
liabilities of discontinued operations. The following data should be read in conjunction with Notes 3 and 5 to the consolidated
financial statements. PART II. PAGE 16 2002 (1)(2)(3) 2001 (4) 2000 (5)(6)(7) 1999 (8)(9)(10) 1998 (11) (in thousands, except per share amounts) Statements of Operations Data:
Revenues Core operating segments $578,380 $484,804 $ 314,739 $276,333 $178,802 Sylvan Ventures 25,618 479 16 — — Total Revenues 603,998 485,283 314,755 276,333 178,802 Cost and expense
Direct costs: Core operating segments 491,436 413,809 269,061 220,007 134,132 Sylvan Ventures 49,820 15,573 12,948 — — General and administrative expense: Core operating segments 21,318 22,003 20,306 26,855 15,530 Sylvan Ventures 4,804 9,211 5,473 — — Transaction costs related to pooling of interests — — — — 3,245 Restructuring and asset impairment charges 20,244 — — 3,569 — Total costs and expense 587,622 460,596 307,788 250,431 152,907 Operating income 16,376 24,687 6,967 25,902 25,895 Other income (expense)
Investment and other income 6,074 9,968 20,386 1,122 3,988 Interest expense (8,391) (9,063) (7,093) (3,924) (319) Sylvan Ventures investment income (losses) (2,308) 22,131 (11,441) — — Loss on investments (19,827) (14,231) — (13,370) — Equity in net loss of affiliates: Sylvan Ventures (5,595) (52,374) (21,222) — — Other 131 (501) (981) (2,356) (3,500) Minority interest in consolidated subsidiaries: Sylvan Ventures 3,001 3,856 9,133 — — Other (7,826) (7,599) (1,674) (319) — Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle (18,365) (23,126) (5,925) 7,055 26,024 Income tax benefit (expense) 3,490 5,680 4,308 1,284 (6,624) Income (loss) from continuing operations before cumulative effect of change in accounting principle $ (14,875) $ (17,446) $ (1,617) $ 8,339 $ 19,440 Income (loss) from continuing operations per share, basic $ (0.37) $ (0.46) $ (0.04) $ 0.16 $ 0.40 Income (loss) from continuing operations per share, diluted $ (0.37) $ (0.46) $ (0.04) $ 0.16 $ 0.38 Balance Sheet Data:
Cash and cash equivalents $104,685 $102,194 $ 116,490 $ 18,995 $ 29,267 Available-for-sale securities 22,546 60,091 202,077 10,890 6,108 Net working capital 45,331 117,254 165,431 284,311 24,584 Intangible assets and deferred contract costs, net 318,421 300,620 283,441 194,645 116,667 Net assets of discontinued operations — — — 280,287 278,150 Total assets 965,275 909,191 1,016,963 764,625 602,410 Long-term debt, including current portion and other long term liabilities 200,858 148,787 193,306 185,934 62,248 Stockholders’ equity 485,928 545,855 553,263 474,093 488,833 PAGE 17 (1) The following material acquisitions were completed during the year ended December 31, 2002. The Company’s 2002 results of operations include the results of the acquired companies from the effective date of the acquisition through December 31, 2002.
• Effective January 1, 2002, the Company acquired substantially all of the net operating assets of three Sylvan Learning Center franchise businesses, com-
prising 30 centers, for an initial cash payment of $11.1 million and 144,000 shares of Sylvan common stock with a quoted market value of $3.0 million.
The purchase price was allocated to acquired assets of $15.1 and assumed liabilities of $1.0 million. The purchase agreement required the Company to
pay additional consideration to the sellers in the event that specified levels of operating results were achieved in 2002, 2003, 2004 and 2005. In October
2002, the Company paid $8.1 million in final settlement of all remaining contingent payments. In connection with the settlement of the contingent pur-
chase price of these Learning Center franchises, the Company entered into an agreement with the sellers, effective August 31, 2002, to repurchase the
franchise rights in the United Kingdom and France for net cash of $9.2 million. • On February 1, 2002, Sylvan Ventures exercised its option to acquire an additional 10% ownership of common stock in Walden E-Learning, Inc.
(“Walden”) for $8.0 million, increasing its ownership percentage in Walden to 51%. Prior to the exercise of its option, Sylvan Ventures had acquired a
41% stake in Walden for $32.8 million in February 2001. The transactions have been accounted for as a step acquisition with a total purchase price of
$40.0 million after subtracting previously recorded equity in net losses. The purchase price was allocated to acquired assets of $57.5 million and assumed
liabilities of $17.5 million. • On March 1, 2002, the Company acquired for cash all of the outstanding common stock of Hedleton, B.V., which owns all of the capital stock of
Escuela Superior De Alta Gestion De Hotel, S.A. (“Marbella”), a private for-profit university located in Marbella, Spain. The purchase price for the out-
standing common stock totaled approximately $6.7 million, including acquisition costs of $0.5 million. The purchase price was allocated to acquired
assets of $9.3 and assumed liabilities of $2.6 million. • Effective August 1, 2002, the Company acquired all of the outstanding common stock of the Glion Group, S.A., the parent company of Glion Hotel
School, S.A. (“Glion”), a leading hotel management school in Switzerland. The initial cash purchase price totaled approximately $16.9 million, including
acquisition costs of $1.4 million. Additionally, the Company is required to make payments of $2.0 million and $3.4 million on August 30, 2003 and
August 30, 2004, respectively. The purchase agreement includes a provision for a possible reduction in the purchase price of up to $1.5 million based on
the working capital of Glion at the acquisition date. The purchase price was allocated to acquired assets of $58.3 and assumed liabilities of $41.4 million. • In November 2002, Sylvan Ventures completed its acquisition of substantially all the assets and certain liabilities of the National Technological University
(“NTU”) and Stratys Learning Solutions, Inc. (the holding company of NTU) for cash payments of $7.5 million and a promissory note payable of
$7.5 million due in 2007. The purchase price was allocated to acquired assets of $21.4 and assumed liabilities of $6.4 million. (2) The Company recognized a net realized investment loss of $22.1 million in 2002. The most significant transactions giving rise to these gains and losses are described below.
• The Company recorded a loss of $11.5 million related to its investment in the franchisor of Sylvan Learning Centers in Spain. This investment write-off
was a result of the decline of English Language instruction business in Spain. During 2002, the saturation of the marketplace caused a collapse of the
English language instruction industry in Spain, resulting in the bankruptcy of many of the leading adult English language instruction providers and the
Company’s sale of its Wall Street Institute business in Spain. This collapse also had a negative effect on the Sylvan Learning Centers business in Spain,
since a main part of the business is teaching English language to children. • The Company recorded a loss of $7.4 million related to the write-off of its investment in and advances to the Frontline Group. This investment write-off
was a result of challenges facing the corporate training industry in general, and Frontline Group specifically. The Company originally accepted shares of
common stock in Frontline Group, in 1999, as consideration for the sale of the PACE business unit. (3) During 2002, the Company recorded a $3.5 million charge related to the write-off of previously deferred costs of a terminated initial public offering of the International Universities segment and one terminated International Universities acquisition. During 2002, the Company sold the portion of its English
Language Instruction segment that is located in Spain (“WSI Spain”). As a result of the sale, the Company recognized an impairment charge of $20,244. (4) The Company recognized a net realized investment gain of $7.9 million in 2001. The most significant transactions giving rise to this net gain are described below.
• On September 11, 2001 Sylvan Ventures recognized an investment gain of $24.7 million upon the sale of its 42% stake in Classwell Learning Group,
Inc. for total cash proceeds of $31.8 million. • On June 15, 2001, Caliber Learning Network, Inc. (“Caliber”) filed for Chapter 11 bankruptcy protection. The Sylvan Ventures investment in Caliber
of $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. This loss consists of bad debt expense for notes
receivable from 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. (5) The following material acquisitions were completed during the year ended December 31, 2000. The Company’s 2000 results of operations include the results of the acquired companies from the effective date of the acquisition through December 31, 2000.
• On May 18, 2000, the Company purchased certain assets and assumed certain liabilities of Ivy West. The purchase price included cash payments of
$7.9 million, common stock and stock of a subsidiary totaling $0.5 million and a promissory note of $1.4 million. The purchase price was allocated to
acquired assets of $10.2 million and assumed liabilities of $0.4 million. • Effective June 30, 2000, the Company acquired for cash the controlling interests in Gesthotel, S.A. which owns and operates Les Roches. The purchase
price totaled $12.3 million and was allocated to acquired assets totaling $32.4 million and assumed liabilities totaling $20.1 million. • Effective November 24, 2000, the Company acquired for cash the controlling interests in Planeacion de Sistemas, S.A. which controls and operates
UVM. The purchase price totaled $49.9 million and was allocated to acquired assets totaling $67.7 million and assumed liabilities totaling $17.8 mil-
lion. Contingent consideration is also payable to the sellers if specified levels of earnings before interest and taxes are achieved in 2002. Consideration of
$0.5 million based on the attainment of these earnings levels was paid to the sellers and recorded as additional goodwill in 2002. • Effective December 12, 2000, the Company acquired for cash the controlling interests in Desarollo del Conocimiento S.A., a holding company that con-
trols and operates UDLA. The purchase price totaled $26.0 million, including acquisition costs of $1.7 million, $13.0 million of which was paid in 2001
after finalization of UDLA’s 2000 operating results. The purchase price was allocated to acquired assets totaling $34.8 million and assumed liabilities
totaling $8.8 million. PAGE 18 (6) On March 3, 2000, the Company sold Prometric for approximately $775.0 million in cash and recorded an estimated gain on the sale of approximately $288.5 million, net of income taxes of approximately $136.8 million. On October 6, 2000, the Company sold Aspect for approximately $19.8 million in cash
and recorded a gain on the sale of approximately $22.4 million including an income tax benefit of approximately $3.0 million. In 2000, the Company’s con-
solidated statements of operations were restated to reflect the results of operations for Prometric and Aspect as discontinued operations. Therefore, the opera-
tions of these entities, along with the gain on the sale of these entities, are not presented on this table. (7) The Company recognized realized investment losses of $11.4 million in 2000. The most significant transactions giving rise to these losses are described below. • In 2000, Sylvan Ventures incurred a $3.0 million realized loss upon the disposal of its $4.9 million investment in the common stock of ZapMe! Corporation
for cash proceeds of $1.9 million. • Sylvan Ventures also recorded realized investment losses of $8.4 million in 2000 based on an assessment that two investments were permanently impaired
due to a significant deterioration in operating results and concerns regarding the ability of these companies to successfully implement their business plan. (8) The following material acquisitions were completed during the year ended December 31, 1999. The Company’s 1999 results of operations include the results of the acquired companies from the effective date of the acquisition through December 31, 1999.
• On April 1, 1999, the Company acquired a controlling interest in UEM for cash of $29.2 million. • The Company acquired 23 WSI franchise businesses for a total purchase price of $65.8 million. (9) During 1999, the Company recognized restructuring costs of $3.6 million related to continuing operations. Additionally, the Company recognized significant non-recurring operating charges related to continuing operations during the fourth quarter of 1999, which totaled $10.0 million, of which $7.0 million is
included in direct costs and $3.0 million is included in general and administrative expenses above. These charges were principally related to asset impairment
charges, which resulted from management’s focus on simplification of the business model and a return to the core business strengths. Losses recorded on dis-
posal of investments in the fourth quarter of 1999 also resulted in $13.4 million of non-recurring charges during the period. The cumulative effect of these sig-
nificant, unusual charges was to reduce income from continuing operations before income taxes and cumulative effect of change in accounting principle by
$26.9 million during the fourth quarter of 1999. (10) In 1999, $3.2 million of expenses were recognized related to a pooling-of-interest acquisition such as legal, accounting and advisory fees. (11) The following material acquisitions were completed during the year ended December 31, 1998. The acquisitions were accounted for as a purchase and the Company’s 1998 results of operations include the results of the acquired companies from the effective date of the acquisition through December 31, 1998.
• On January 1, 1998, the Company acquired Canter for an initial purchase price of $25.0 million. Additional consideration of $48.8 million has been
paid upon Canter’s achievement of certain targets. The acquisition was accounted for as a purchase. • Effective October 28, 1998, the Company acquired Schülerhilfe for an initial purchase price of $19.1 million in cash. Additional consideration of
$10.4 million was recorded subsequent to the initial purchase upon the achievement of revenue and collection targets in 1999. ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained herein include forward-looking statements. Forward-looking statements include information about
possible or assumed results of operations, business strategies, financing plans, competitive position and potential growth oppor-
tunities. Forward-looking statements include all statements that are not historical facts and are generally accompanied by words
such as “may,” “will,” “intend,” “anticipate,” “believe,” “estimate,” “expect,” “should” or similar expressions. These statements
also relate to the Company’s contingent payment obligations relating to acquisitions, future capital requirements, potential
acquisitions and the Company’s future development plans and are based on current expectations. Forward-looking statements
involve various risks, uncertainties and assumptions. The Company’s actual results may differ materially from those expressed
in these forward-looking statements. Future events and actual results could differ materially from those set forth in the forward-looking statements as a result of many factors. These factors may include, without limitation: the Company’s ability to continue to make acquisitions and to suc-
cessfully integrate and operate acquired businesses; changes in student enrollment; the development and expansion of the franchise
system and the effect of new technology applications in the educational services industry; failure to maintain or renew required
regulatory approvals, accreditations or authorizations; the Company’s ability to effectively manage business growth; possible
increased competition from other educational service providers; the effect on the business and results of operations of fluctuations
in the value of foreign currencies; and the many risks associated with the operation of an increasingly global business, including
complex legal structures, foreign currency, legal, tax and economic risks and the risk of changes in the business climates in the
markets where the Company operates. These forward-looking statements are based on estimates, projections, beliefs and assump-
tions of management and speak only as of the date made and are not guarantees of future performance. PAGE 19 Overview
The Company continued to grow during 2002 through focusing on expanding opportunities in the educational services industry.
The Company increased its activity in the post secondary market with the integration and expansion of universities acquired in
2000, 2001 and 2002. The International Universities segment continues to operate the largest global network of international uni-
versities with full local accreditation through its network of six universities. Growth in Online Higher Education occurred through
increased Canter enrollments and the continued integration with Walden E-Learning, Inc. The Company’s K-12 Education Services
segment also displayed continued strong growth with the expansion of the Learning Centers network and the addition of contracts
and services within Education Solutions. The Company also continued to focus on opportunities created by technology applica-
tions in the education and instruction marketplaces through the investments and operations of Sylvan Ventures. Critical Accounting Policies and Estimates
The Company’s accounting policies are more fully described in Note 2 of Notes to Consolidated Financial Statements. As disclosed
in Note 1 of Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and assumptions about future events that
affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be deter-
mined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably
will differ from those estimates, and such differences may be material to the financial statements. The Company believes the fol-
lowing key accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated finan-
cial statements and are critical to its business operations and the understanding of its results of operations. Revenue Recognition. Revenue from the sale of educational products is generally recognized when shipped. Revenue from edu- cational services are recognized in the period services are provided. As the Company continues to integrate educational product and
service businesses, the resulting business structure may impact the revenue recognition of product sales to affiliated educational ser-
vice providers. Educational services provided by the Company include results-oriented English language instruction modules that are based on desired proficiency levels. The related revenue is recognized ratably over the estimated period required to complete the modules,
which ranges from 8 months to 11 months, depending on the location that the services are provided. The Company estimates the
period of instruction based on an analysis of actual historical activity by location. If the historical data the Company uses to calcu-
late these estimates does not properly reflect future usage, revenue recognized by the Company may be negatively impacted.
Additionally, if usage trends change over time, the Company may have significant fluctuations in recognized revenues in the future. A portion of the Company’s revenue is derived from fixed-price contracts with school districts, which are accounted for under the proportional performance method. Contract revenue is recognized ratably over the term of the contract and expenses are recog-
nized in an amount equal to the ratio of estimated total expenses to the total contract value. If the Company does not accurately
estimate the resources required, does not manage its contracts properly within the planned periods of time, or does not satisfy its obli-
gations under the contracts, future margins may be negatively impacted or losses on existing contracts may need to be recognized. Goodwill and Other Intangible Assets. During each of the years presented, the Company acquired certain businesses accounted for using the purchase method of accounting. A portion of the purchase prices for these businesses was allocated to identifiable tan-
gible and intangible assets and assumed liabilities based on estimated fair values at the dates of acquisitions. Any excess purchase
price was allocated to goodwill. This goodwill and other indefinite-lived intangibles are evaluated at least annually for impairment
by comparison of the carrying amounts of the respective reporting units to their implied fair value determined by discounting esti-
mated future cash flows expected from the reporting units. Other intangible assets include acquired student rosters, accreditation, non-competition agreements and curriculum. The assumptions used to calculate the fair value of these identified intangible assets included estimates of future operating results and
cash flows, as well as discount rates based on specifically identified risks for each acquisition and assumptions about the weighted
average cost of capital for each acquisition. The assigned useful lives, which range from 4 to 30 years, are based upon estimated
matriculation rates and other factors. If the Company used different assumptions and estimates in the calculation of the fair value of identified intangible assets and the estimation of the related useful lives, the amounts allocated to these assets, as well as the related amortization expense, could
have been significantly different than the amounts recorded. PAGE 20 In assessing the recoverability of the Company’s goodwill and other intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their
related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously
recorded. In 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets, which required the Company to analyze its goodwill for impairment upon adoption. As a result, the Company recorded a
non-cash charge of $78.6 million, net of income tax benefit of $7.7 million, which is included as a cumulative effect of a change in
accounting principle in the consolidated statements of operations. Investment in Affiliated Companies and Other Investments. The Company holds minority interests in companies having opera- tions or technology in areas within its strategic focus, some of which are non-publicly traded companies whose value is difficult to
determine. At December 31, 2002 these investments had a carrying value of approximately $21.1 million. The Company records
an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary.
Adverse changes in market conditions or poor operating results of underlying investments may require management to make subjec-
tive judgments about the recoverability of its investments. Due to the inherent subjectivity of the valuation of minority investments
in companies without readily ascertainable fair values, it is reasonably possible that events or circumstances could change in the near
term and thereby change management’s estimates of the recoverability of its investments. Income Taxes. The Company earns a significant portion of its income from subsidiaries located in countries outside of the United States. At December 31, 2002, undistributed earnings of foreign subsidiaries totaled approximately $337.3 million. Deferred
tax liabilities have not been recognized for these undistributed earnings because it is management’s intention to reinvest such undis-
tributed earnings outside of the United States. APB Opinion No. 23, Accounting for Income Taxes—Special Areas, requires that a
company evaluate its circumstances to determine whether or not there is sufficient evidence to support the assertion that it has or
will reinvest undistributed foreign earnings indefinitely. The Company’s assertion that earnings from its foreign operations will be permanently reinvested is supported by projected working capital and long-term capital needs in each subsidiary location in which the earnings are generated, as well as similar
considerations for domestic operations. Additionally, the Company believes that it has the ability to permanently reinvest foreign
earnings based on a review of projected cash flows from domestic operations, projected working capital and liquidity for both
short-term and long-term domestic needs, and the expected availability of debt or equity markets to provide funds for those
domestic needs. If circumstances change and it becomes apparent that some or all of the undistributed earnings of the Company’s foreign subsidiaries will be remitted in the foreseeable future, the Company will be required to recognize deferred tax liabilities on those
amounts. As of December 31, 2002, if all undistributed earnings had been remitted to the United States, the amount of incremental
U.S. federal income tax liabilities, net of foreign tax credits, would have been approximately $104.6 million of which $83.4 million
relates to discontinued operations. The Company has generated significant deferred tax assets, primarily as a result of its equity in the net losses of affiliated com- panies. The Company records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely
than not to be realized. The primary factor used by the Company to determine the amount of valuation allowance needed to offset
deferred tax assets related to these losses is that when realized, these capital losses may be carried back to offset the Company’s sub-
stantial prior year capital gains, subject to certain limitations. The Company also has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the amount of valuation allowance needed. If the Company were to deter-
mine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax
assets would be charged to income in the period such determination was made. Likewise, should the Company determine that it
would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax
assets would increase income in the period such determination was made. Accounts and Notes Receivable. The Company’s accounts receivable consist primarily of installment payments due from parents and students for tuition at learning centers and universities; related fees that are payable over the course of payment plans of up to
nine months; and amounts due from franchisees for franchise fees, franchise royalties and didactic material purchases. Notes receiv-
able consist primarily of loans to franchisees, which are generally collateralized. The Company routinely makes estimates of the
collectibility of its accounts and notes receivable. The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers and franchisees to make required payments. The Company estimates the amount of the PAGE 21 required allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. Actual collection experi-
ence has not varied significantly from estimates, due primarily to credit policies, collection experience, and a lack of concentration
of amount receivable. If the financial condition of the Company’s customers and franchisees were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required. Results of Operations
Revenues generated by Sylvan’s five business segments are described as follows: K-12 Education Services primarily earns franchise
royalties, franchise sales fees, Company-owned learning center revenues and contract-based revenues from providing supplemental
remedial education services to public and non-public schools; Online Higher Education primarily earns revenues from providing
teacher training products and distance-learning instructional services; International Universities earns tuition and related fees paid
by the students at its universities, in addition to franchise royalties, Company-owned center revenues and franchise sales fees related
to WSI operations outside of Spain; English Language Instruction–Spain earned franchise royalties, Company-owned center revenues
and franchise sales fees related to the WSI business in Spain prior to the sale of the segment; and Sylvan Ventures primarily earns
tuition and related fees from the students of Walden, NTU and eSylvan. The following table sets forth the percentage relationships of operating revenues and direct costs for each segment, as well as certain income statement line items expressed as a percentage of total revenues for the years ended December 31: 2002 2001 2000 Revenues: K-12 Education Services 36% 38% 53% Online Higher Education 9% 9% 12% International Universities 50% 49% 27% English Language Instruction–Spain