SYLVAN LEARNING SYSTEMS INC - 10-K Annual Report

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

FORM 10-K

[X] Annual Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended December 31, 1999.
------------------

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

Maryland 52-1492296
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1000 Lancaster Street, Baltimore, Maryland 21202
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(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange on
Title of each class which registered
---------------------------- ------------------------
Common Stock, Par Value $.01 NASDAQ
Preferred Stock Purchase Rights NONE

Securities registered pursuant to the Section 12(g) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of voting Common Stock held by non-affiliates of
the registrant was approximately $800 million as of March 7, 2000.

The registrant had 50,970,196 shares of Common Stock outstanding as of March
7, 2000.

DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------

Certain information in Sylvan Learning Systems, Inc.'s definitive Proxy
Statement for its 2000 Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A no later than
April 30, 2000 is incorporated by reference in Part III of this Form 10-K.

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INDEX
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Page No.
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PART I.

Item 1. Business.............................................. 3
Item 2. Properties............................................ 11
Item 3. Legal Proceedings..................................... 11
Item 4. Submission of Matters to a Vote of Security Holders... 12

PART II

Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters............... 12
Item 6. Selected Consolidated Financial Data.................. 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 14
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.......................................... 24
Item 8. Financial Statements and Supplementary Data........... 25
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure............... 25

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,
not later than April 30, 2000......................... 26

PART IV

Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................................. 26

SIGNATURES............................................................. 30

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PART I.
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Item 1. Business
Sylvan Learning Systems, Inc. ("the Company" or "Sylvan") is the leading
international provider of educational services to families and schools. The
Company provides lifelong educational services through four separate business
segments. The Sylvan Learning Centers segment designs and delivers
individualized tutorial programs to school age children through franchised and
Company-owned Learning Centers. This segment also includes the operations of
Schulerhilfe, a major provider of tutoring services in Germany. The Sylvan
Contract Educational Services segment principally provides educational programs
to students of public and non-public school districts through contracts funded
by Title 1 and state-based programs. This segment also provides professional
development and graduate degree programs to teachers through the Canter Group.
The Sylvan English Language Instruction segment includes the operations of Wall
Street Institute, B.V., ("WSI"), a European-based franchiser and operator of
learning centers that teach the English language to professionals, and Aspect
International Language Schools, B.V. ("Aspect"), which focuses primarily on
intensive English language instruction to students. The Company's newest
segment, Sylvan International Universities, commenced operation in the second
quarter of 1999 with the acquisition of a controlling interest in Universidad
Europea de Madrid ("UEM"), a private, for-profit university. This segment
principally earns tuition and dormitory fees paid by university students.
Through its affiliate Caliber Learning Network, Inc., formed as a joint venture
initiative between Sylvan and MCI Communications Corp., Sylvan has the ability
to distribute world-class adult professional education and training programs.

On September 30, 1999, the Company adopted a formal plan to dispose of The
PACE Group ("PACE"), the Company's corporate training business. The sale
transaction closed December 31, 1999, whereby the Company contributed PACE in
exchange for an equity investment in Frontline Group, Inc., the owner of a
corporate training enterprise. On March 3, 2000, the Company sold its computer-
based testing segment, Prometric, for approximately $775 million in cash.
Unless specifically noted, all discussion of financial results excludes the
results of PACE and Prometric except as disclosed as discontinued operations.
Management's decision to discontinue business in the corporate training and
computer-based testing segments of the industry is consistent with the stated
goal of refocusing management's efforts and the Company's resources on the core
business of educational services. The proceeds from the disposal of Prometric
will also provide the necessary seed capital to develop an Internet incubator
for educational service companies that are bringing emerging Internet solutions
to the education and instruction marketplace.

On February 24, 2000, Management announced a new business strategy.
Building on brand recognition and an industry-leading position in education
services, the Company will seek to create shareholder value by capitalizing on
the opportunity to establish a leadership position in the education and training
Internet marketplace. The Company will also seek to maintain a leadership
position in the core educational services businesses. Our business will focus on
these two areas:

. Internet Incubator Company. Launching an incubator company to invest
in and incubate companies focusing on emerging Internet technology
solutions for the education and training marketplace. The goal of the
incubator is to create asset value by investing in and starting
companies that have strong potential for market leadership.

. Core Educational Services. Providing consumer-oriented education
services, through an operating company that will include Sylvan
Learning Centers, Contract Educational Services, English Language
Instruction and the International Universities initiative.

An important part of the new business strategy is to launch the Internet
incubator company by the end of the first quarter of 2000. The Company will
have a controlling interest in the Internet incubator company. The Company will
commit $285 million in cash and other assets to the Internet incubator,
including current investments in Caliber Learning Network, Inc.,
OnlineLearning.net, ZapMe! Corp., and eSylvan, the Company's online tutoring
venture. Affiliates of Apollo Management, L.P., including Rare Medium Group,
Inc., a leading Internet professional

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services firm, have committed $100 million in funding for the Internet incubator
company. Also, certain members of Sylvan's management, including Mr. Becker and
Mr. Hoehn-Saric, and other investors at management's discretion will invest
approximately $15 million in the new venture. The Internet incubator company
intends to seek to raise another $100 million from strategic Internet investors
in the near future, bringing total funding to an expected $500 million.

Sylvan's services are delivered through an international network of
educational centers. In 1999, Company revenues were approximately $338.5
million, composed of $90.7 million from the Sylvan Learning Centers segment,
$101.2 million from the Sylvan Contract Educational Services segment, $114.3
million from the Sylvan English Language Instruction segment, and $32.3 million
from the Sylvan International Universities segment. System wide revenues, which
include franchised Learning Center revenues of $228.5 million and franchised WSI
revenues of $71.8 million, totaled $638.8 million in 1999. Note 17 of the 1999
audited financial statements contains additional disclosures regarding the
Company's segments and geographic information.

Sylvan Learning Centers

Sylvan is widely recognized as providing high quality educational services
with consistent, quantifiable results, and has delivered its core educational
service to more than 1.3 million students primarily in grades three through
eight over the past 20 years. The Company's Sylvan Learning Centers segment
provides supplemental instruction in reading and mathematics, featuring an
extensive series of standardized diagnostic tests, individualized instruction, a
student motivational system and continued involvement from both parents and the
child's regular school teacher.

Typically, a parent contacts a Sylvan Learning Center because the parent
believes that his or her child may have insufficient reading or mathematics
skills. Parents learn about Sylvan from the Company's media advertising, from a
referral from another parent or from school personnel. Learning Center
personnel ask the parent to bring the student to the Learning Center to complete
a series of standardized diagnostic tests and to receive educational
consultation. Approximately 42% of phone inquiries result in a visit to a
Learning Center. The Learning Center's Sylvan-trained educators use test results
to diagnose students' weaknesses and to design an individual learning program
for each student. After the initial testing and consultation, the Company
estimates that more than 85% of parents enroll the student in a full course of
study. The program typically requires four to six months to complete and
comprises approximately 36 to 60 hours of instruction. Instruction is generally
given twice a week for one hour per visit. Sylvan requires that all instructors
be certified teachers. The cost of the tests and initial consultation ranges
from $50 to $250, and fees average $40 per hour. The Company estimates that the
typical program costs approximately $2,000.

An individual Learning Center ranges in size from 1,000 to 3,500 square
feet. Instruction is given at U-shaped tables designed to ensure that teachers
work with no more than three students at a time. The student's individualized
one hour lesson includes a five segment mastery approach. There are special
incentives, such as tokens redeemable for novelties and toys, to motivate the
student to achieve the program's objectives and to strengthen the student's
enthusiasm for learning. Personal computers at each Learning Center are used by
the student as a supplemental learning tool. The Learning Center's Director of
Education monitors the progress of each student after each hour of instruction.

Instructors schedule parent conferences after every 12 hours of a student's
program. Throughout a student's course of study, the Learning Center tests the
student using the same standardized diagnostic tests, and the results are shared
with the parents in personal conferences, during which the student's
continuation in a Sylvan program is discussed.

Franchise Operations. As of December 31, 1999, there were a total of 710
Learning Centers in 49 states, 7 Canadian provinces, Spain, Hong Kong and Guam
operated by the Company or its franchisees. As of that date, there were 439
franchisees operating Sylvan Learning Centers. During 1999, 67 franchised
Learning Centers were opened and eight were closed. Additionally, during 1999,
16 franchisee-owned Learning Centers were acquired by the Company. Less than 1%
of franchisees are currently more than three months in arrears in the payment of
franchise

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royalties, and the Company does not believe that the closing of any or all of
the Learning Centers of these franchisees would have a material adverse effect
on the Company because the royalties earned from these franchisees represented
less than one-tenth of one percent of total franchise royalties earned by the
Company in 1999.

The Company licenses franchisees to operate Sylvan Learning Centers in a
specified territory, the size of which depends on the number of school-age
children and average household incomes in the area. Franchisees must obtain the
Company's approval for the location and design of the Learning Center and of all
advertising, and must operate the Learning Center in accordance with the
Company's methods, standards and specifications. Most Learning Centers are
located in suburban areas and have approximately 10 employees, two of which are
typically full-time employees and eight of which are part-time instructors. The
cost to open a typical franchised Learning Center ranges from approximately
$150,000 to $200,000, including the franchise license fee, furniture, equipment
and an initial supply of certain items required under the Company's franchise
agreement.

The Company actively manages its franchise system. The Company requires
franchisees and their employees to attend two weeks of initial training in
Learning Center operations and Sylvan's educational programs. The Company also
offers franchisees continuing training each year. The Company employs field
operations managers that act as "consultants" to provide assistance to
franchisees in technology implementation, business development, marketing,
education and operations. These employees also facilitate regular communications
between franchisees and the Company.

Sylvan operates a quality assurance review program to maintain the quality
of Sylvan Learning Centers. Sylvan's field operations managers confirm
franchisee compliance with the Company's standards, including training
requirements, exclusive use of approved educational materials and programs,
correct administration of testing materials, proper execution of supervisory
procedures, sufficient time spent in parent/teacher conferences, staffing and
Learning Center appearance. Sylvan's field managers counsel franchisees that
fail to meet the Company's quality or financial performance standards and assist
these franchisees in developing a plan to improve their Learning Centers'
performance. When necessary, the Company assists franchisees in selling their
franchises.

The Company believes there is significant potential for additional
franchised Learning Centers both domestically and internationally. A number of
territories with only one Learning Center could support one or more additional
Learning Centers based upon the number of school-age children in the market
area. The Company is actively encouraging existing franchisees in these
territories to open additional Learning Centers. In addition, management has
identified at least 198 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. Fifty new territories were sold
in 1999.

The Company has sold franchise rights for the operation of Learning Centers
in Hong Kong, China, the United Kingdom, France 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.

The Company's typical franchise agreement (the "License Agreement") grants
a license to operate a Sylvan Learning Center and to use Sylvan's trademarks
within a specified territory. The franchisee is required to purchase from Sylvan
certain diagnostic and instructional materials, student record forms, parental
information booklets and explanatory and promotional brochures developed by the
Company. Sylvan specifies requirements for other items necessary for operation
of a Learning Center, such as computers, instructional materials and furniture.
The Company currently offers a License Agreement with an initial term of ten
years, subject to unlimited additional ten-year extensions at the franchisee's
option on the same terms and conditions. The initial license fee ranges from
$38,000 to $46,000, depending on factors such as the number of school-age
children in the territory. Royalties are either 8% or 9% of gross revenues of
the Learning Center, and the royalty rate depends upon the demographics of the
territory and is specified in the License Agreement. Advertising spending
requirements range from $1,000 to $3,500 per month, or up to 8% of gross
revenues, whichever is greater. The License Agreement has been revised
periodically, and several franchisees are operating under older agreements with
variations from the above terms. Approximately 8% of franchisees operate under
older agreements with royalties as low as 6% and without any requirement to
contribute to the national advertising fund. The remaining 92% of the
franchisees are required to contribute a minimum of 1.5% of gross revenues to
the national advertising fund. The fund is administered by the SLC National

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Advertising Fund, Inc. ("SNAF"). The Franchise Owners Association ("FOA")
operates the SNAF. The FOA is an association whose members consist of Sylvan
franchise owners. Franchisees must submit monthly financial data to the
Company.

Company-owned Learning Centers. As of December 31, 1999, Sylvan owned and
operated 84 Learning Centers: 6 in the greater Baltimore, MD area, 10 in the
greater Philadelphia, PA area, 9 in the greater Washington, D.C. area, 13 in
South Florida, 5 in Alabama, 6 in the greater Minneapolis, MN area, 7 in Dallas,
TX, 10 in Houston, TX, 5 in the greater Salt Lake, UT area and 13 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 management
procedures. Company-owned Learning Centers give the Company a local presence in
key markets, which has been helpful in cross-marketing the Company's other
educational services in these communities. The Company may consider selected
acquisitions of additional Learning Centers now operated by franchisees.

Schulerhilfe. On October 28, 1998, the Company acquired Schulerhilfe,
a major provider of tutoring services in Germany. Schulerhilfe has approximately
196 company-owned centers and approximately 728 franchise locations in Germany,
Italy and Austria. Schulerhilfe is engaged in providing tutoring service to
primary and secondary school 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. The typical
session lasts approximately 90 minutes. Students attend for an average of 12
months and pay approximately $115 per month. Per center enrollment averages 500
students per year. Schulerhilfe advertises its services using print, radio and
television advertisements on local and national levels.

Sylvan Contract Educational Services

Title I and state-based programs. The federal government and various state
and local governmental agencies allocate funds to local school districts to
provide supplemental remedial education to academically and economically
disadvantaged students. The main program is the Title I program, administered by
the U.S. Department of Education. Federal law contains minimum student
performance standards for each school district receiving Title I funds. The
Company believes that because of its proven record of achieving measurable
improvement in the reading and mathematics skills of its students nationwide, it
is positioned to provide supplemental educational services to school districts
receiving Title I and similar state funds. As of December 31, 1999, the Company
had contracts to provide supplemental remedial educational services to 112
public schools, including 19 in Compton, California, 10 in Detroit, Michigan, 10
in Atlanta, Georgia, 10 in Cleveland, Ohio, and 9 in Columbus, Ohio.

Using Company personnel, or district personnel trained and supervised by
Sylvan, Sylvan offers virtually the same educational services to students in
schools as is offered at Sylvan Learning Centers. The school designates a
classroom to be the Learning Center for the duration of the contract and
modifies the classroom to resemble a typical Sylvan Learning Center. Sylvan
personnel administer standardized diagnostic tests and, based on the results,
prescribe an individualized learning program for each child. Students typically
receive two hours of instruction per week, which includes the use of personal
computers as in a Sylvan Learning Center. The Company can provide these services
to students after school, on Saturdays, during the summer or as a "pullout"
program during the regular school day, which is the method currently prescribed
by most current contracts. There is a high degree of individual attention, with
student to teacher ratios of no more than three to one. The program is designed
to include a high degree of parental involvement, and teachers make a special
effort to have the parents involved. The Company is in the process of
converting its services offered under contract to the public schools to be a
management services contract requiring the schools to invest in the equipment,
classroom buildout and employment of the teachers. The Company will provide
management oversight, license to use its programs, training of staff and quality
control review. The Company believes that over the next 18 months all of its
public school contracts will be offered on this basis.

Under most of its contracts, the Company has guaranteed that each student
who receives instruction in the Sylvan program and meets prescribed attendance
requirements will achieve some minimum measure of improvement required by the
school districts, as measured by standardized tests. Improvement is measured
using various standardized measures, including normal curve equivalents
("NCE's") a generally accepted statistical measure of student performance. The
typical minimum improvement required is two NCE's per year. If a student does
not achieve the required improvement, the Company will provide 12 hours of
remedial instruction to that student during the following summer or school year
without charge. The Company has not incurred significant expense related to this
guarantee. Under the contracts, the school districts pay the Company a set fee
for all services, materials and equipment. The contracts have terms of one to
three years, with the latest expiring in June 2002. All of the contracts contain
provisions for cancellation by school district officials based on funding
constraints.

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The Company is actively seeking contracts to provide its core educational
program to other school systems, offering to tailor its program to the system's
specific needs, and is in discussions with several other major school districts.
In addition to serving public school students, Sylvan can provide its service to
parochial or private school students through contracts with public school
districts. Public school districts are responsible for administering the Title I
funding for the non-public schools. Because government-funded services to any
parochial school students generally cannot legally be provided in the parochial
school, Sylvan offers the flexibility of conducting the program at a nearby
Learning Center, or providing temporary facilities.

The Canter Group. In January 1998, the Company acquired Canter and
Associates, Inc. and Canter Educational Productions, Inc. (collectively, "The
Canter Group" or "Canter"), a leading provider of training, staff development
and graduate courseware for educators. Canter's educational materials have been
used by more than a million teachers since 1976. Canter has also developed the
materials for a distance-learning Master's degree program for teachers offered
through accredited colleges and universities. Additionally, Canter has college
and university partners that offer Canter-produced distance learning video
courses, for which teachers receive graduate level credit. Canter also develops
and distributes staff development materials and programs utilized by elementary
and secondary schools nationwide. Canter's courses and materials cover a
comprehensive array of topics, including technology, instructional strategies,
teacher motivation, parent involvement, behavior management, student learning
styles, conflict resolution and school safety.

Sylvan English Language Instruction

In December 1996, the Company purchased WSI, a European-based franchisor
and operator of learning centers where English is taught through a combination
of computer-based and live instruction. Typically, the instructional programs
are approximately nine months to one year in duration. WSI uses a proprietary
teaching system composed of multimedia interactive video on CD-ROM, live,
personalized instruction and small group classes. WSI has more than 36 Company-
owned and 231 franchised centers in operation throughout Europe and Latin
America.

WSI has 157 centers in Spain (130 franchised and 27 Company-owned) with the
remainder in France, Germany, Italy, Portugal, Switzerland, Mexico, Chile,
Israel, Colombia, Argentina, Brazil, Ecuador and Venezuela. WSI's international
expansion has been accomplished by selling Master Licensing rights, with each
Master Licensor obtaining franchisees to open centers in its development areas.
In the future, Sylvan plans to continue to expand WSI's presence globally,
through the opening of new Company-owned centers with a focus on the Middle
East, Africa, Europe and the Pacific Rim regions.

On May 6, 1998, the Company acquired all of the outstanding common stock of
Aspect. Aspect is a leading provider of English language training programs for
college students and professionals from non-English speaking countries. Founded
in 1989, Aspect delivers intensive English language programs at 28 schools in 7
countries, (18) in the United States, (2) in Canada, (6) in the United Kingdom,
(1) in Ireland and (1) in Australia. Aspect operates language schools in
Company-owned and leased facilities and on university campuses. Aspect's
curriculum is based on the communicative method augmented with technology
enhanced language learning to optimize student learning. All Aspect schools have
multimedia computer labs and include Internet use for collaborative real world
projects. Student/teacher ratios average 12, ensuring individualized attention.
Aspect students, typically pre-college and college-aged students come from more
than 90 countries around the world. The students attend Aspect programs, which
include intensive English language instruction and immersion in an English
language culture, for an average of 10 weeks at an average cost of $3,200 net of
sales commission. Schools operate year round with weekly student intake.
However, 36% of Aspect enrollments are in the July, August and September period.
Teachers are typically TESL certified with a University degree in TSL, English,
Linguistics, Curriculum & Instruction or other related fields.

Aspect sells its courses as a package including language instruction,
accommodation, and an extensive social program to immerse students in their new
language. Each year over 22,000 students participate in Aspect's program. Aspect
operates 13 sales offices in 12 countries on 3 continents. In addition, students
are recruited from over 85 countries via an extensive network of agents,
providing a uniquely diverse student experience.

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Sylvan International Universities

The Company's newest segment, Sylvan International Universities, commenced
operations in the second quarter of 1999 with the acquisition of a controlling
interest in the Spanish company, Prouniversidad, S. A. Prouniversidad, S. A. was
granted a license to operate UEM, a for-profit private university offering a
wide array of university degrees officially recognized in Spain, including
doctorate degrees. UEM also provides, postgraduate courses and dormitory
services to students. UEM owns, for student training purposes, a Dentistry
Clinic and it is also in the process of opening a Podiatry Clinic.

UEM is located in the outskirts of Madrid, Spain and began operating in
academic year 1995/1996. Prior to this time the university was licensed to CEES
and has operated since the early 1990's. The UEM campus is built on a 3 million
foot plot of land owned by Prouniversidad, S. A. At present, the campus
development consists of three academic buildings, two student dormitory
buildings, sports facilities, and parking areas. There is enough space available
at the campus for future expansion.

The University also contains dormitory buildings located on campus. These
buildings can accommodate 529 students. At December 31, 1999, occupancy at the
dormitory buildings was approximately 98%.

UEM provides 15 different bachelor degrees, and 6 associate degrees.
Additionally, UEM provides 8 different degrees issued by the state-owned
Universidad Complutense de Madrid. The number of students enrolled for academic
year 1999/2000, which began on October 1, 1999, is 6,645 degree students, 64
doctorate students and 110 postgraduate students.

The degrees offered by the University cover the following areas:
. Law
. Economics and Business Administration
. Nursing
. Dentistry
. Translation and interpretation (Foreign languages)
. Journalism and Communication
. Engineering
. Architecture
. Sports and Physical Education
. Environmental Sciences and Optics
. Physiotherapy

Bachelor degrees usually take between four and five years to complete.
Associate degrees typically span three years, and doctorate degrees span two
years. The postgraduate courses span approximately three months. The tuition
fee paid per academic year is approximately $6,000 per student, although the fee
may vary depending on the degree and on the number of academic credits taken.
Quality at UEM is achieved by paying special attention to the following
features, which are considered critical: low student to teacher ratio, close
tutoring of students, and state-of-the-art laboratories and clinics.

Marketing

The Company and its franchisees market Sylvan's Learning Center services to
parents of school-aged children at all grade levels and academic abilities. Far
beyond tutoring, Sylvan Learning Centers' supplemental education utilizes a
diagnostic and prescriptive approach to address the specific needs of each and
every student. A portion of Sylvan's advertising includes commercials on
morning news, on the national networks as well as various cable delivered
programs. Sylvan's advertising emphasizes the benefits of its personalized
educational services through testimonials of actual parents and Sylvan teachers.
It positions Sylvan as the leader in supplemental education and emphasizes
Sylvan's high quality curriculum, personalized attention and positive results:
better grades and improved self-esteem. Franchisees form local cooperatives to
collectively purchase local television and radio advertising and usually
supplement their efforts with local newspaper and direct mail. The

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Company also has additional marketing support for specific programs, including
Reading, Math, Algebra, Geometry, 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.

WSI markets its English language instruction services through the use of
national television and radio advertising programs in Spain as well as through
locally placed advertising by its franchisees and company-owned centers in
various countries. Aspect uses several channels for marketing its products:
overseas sales agents, proprietary sales offices and increasingly, the Internet.
Aspect provides brochures, leaflets and CD-ROM to its large network of overseas
partners for their use in recruiting. Aspect currently works with over 1,000
agents in 89 countries. In addition, Aspect operates its own sales offices in 12
countries, which are also an important source of students. Over the past
several years, students have begun to book language programs directly with
Aspect schools through distribution channels such as the Internet.

Sylvan International Universities markets UEM in Spain through promotion of
the University among private schools. To this end, UEM marketing professionals
visit schools across the country presenting UEM to prospective students and
parents. There are also guided tours of the University for school students. UEM
also carries out a nationwide advertising campaign on television, radio, and
the Internet during the annual enrollment period.

Competition

The Company is aware of only three direct national corporate competitors in
its Sylvan Learning Centers segment: Huntington Learning Centers, Inc., Kumon
Educational Institute and Kaplan Educational Centers. The Company believes these
competitors operate fewer centers than Sylvan and that these firms concentrate
their services within a smaller geographic area. In most areas served by Sylvan
Learning Centers, competition also exists from individual tutors. State and
local education agencies also fund tutoring by individuals, which compete with
the Company's Sylvan Learning Centers segment. Schulerhilfe competition consists
of one other national provider of tutoring services in Germany as well as
individual local tutors.

The Company's Contract Educational Services segment's most significant
competitor remains the public school system itself. Given the unique position of
public education in the United States, the Company believes that educational
reforms implemented directly by school officials will not face the same degree
of public resistance that the Company may face. The Company also competes with
school reform efforts sponsored by private organizations and universities and
with consultants hired by school districts to provide assistance in the
identification of problems and implementation of solutions. The Company is aware
of several entities that currently provide Title I and state-based programs for
students attending parochial and private schools on a contract basis.

The English Language Instruction market is highly fragmented with numerous
public and private sector operators. These include Berlitz/ELS, E.F. (a Swedish
company) and Opening (a Spanish company). Berlitz is the largest of these
companies in this market segment, with annual revenues of approximately $330
million. Aspect's most significant competitors are EF, Kaplan, and Study Group
International.

The university market in Spain is dominated by the public universities,
which have a 95% share of the overall market. Private universities have a market
share of 5%. In the Madrid area, where UEM operates, the main competitors are:
C.E.U, Alfonso X el Sabio, and Universidad Pontificia de Comillas. C.E.U. is
believed to be the largest, with several campuses in the Madrid area and
approximately 10,000 students.

Government Regulation
Franchise. Various state authorities as well as the Federal Trade
Commission (the FTC") regulate the sales of franchises in the United States. The
FTC requires that franchisors make extensive disclosure to prospective
franchisees but does not require registration. A number of states require
registration and prior approval of the

9

franchise-offering document. In addition, several states have "franchise
relationship laws" or "business opportunity laws" that limit the ability of a
franchisor to terminate franchise agreements or to withhold consent to the
renewal or transfer of these agreements. While the Company's franchising
operations have not been materially adversely affected by such existing
regulation, the Company cannot predict the effect of any future legislation or
regulation.

Title I. Title I school districts are responsible for implementing Title I
in carrying out their educational programs. Title I regulations, as well as
provisions of Title I itself, direct Title I school districts to satisfy
obligations including involving parents in their children's education,
evaluating and reporting on student progress, providing equitable services and
other benefits to eligible non-public school students in the district and other
programmatic and fiscal requirements. In contracting with school districts to
provide Title I services, the Company has become and will continue to be,
subject to various Title I requirements and may become responsible to the school
district for carrying out specific functions required by law. For example,
Sylvan has responsibility for soliciting parental involvement, introducing
program content adequate to achieve certain educational gains and maintaining
the confidentiality of student records. The Company's failure to adhere to Title
I requirements or to carry out regulatory responsibilities undertaken by
contract may result in contract termination, financial liability, or other
sanctions.

Accreditation. Aspect language schools are accredited in the U.S. by ACCET
[Accrediting Council for Continuing Education and Training]. In the State of
California Aspect language schools are registered with BPPVE [Bureau of Private,
Post-secondary and Vocational Education], in New York State Aspect is licensed
as a private ESL [English as a Second Language] school through NYSED [New York
State Education Department]. Aspect's U.S. schools are authorized by the INS
[Immigration and Naturalization Service] to issue I-20 forms used by students to
obtain F1 visas to study in the U.S. The Canadian schools are registered with
the Provincial governments, the Toronto school is registered with the Ontario
Ministry of Education and Training, and the Vancouver school is registered with
the British Colombia PPSEC [Private and Post Secondary Education Commission].
United Kingdom, Ireland and Australian schools are accredited through quasi-
governmental agencies.

Private Universities. The Spanish authorities play a supervisory role over
private universities. There are minimum requirements with regard to quality.
Private universities must comply with certain legal requirements. These
requirements specify a prescribed ratio of full time teachers to part time
teachers, a prescribed ratio of PhDs to Bachelors among teachers and a minimum
number of degrees that must be offered. The Company believes UEM complies with
these requirements in all material respects.

Trademarks
The Company has a federal trademark registration for the words "Sylvan
Learning Center" and distinctive logo (a reading child), and 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.

Employees
As of December 31, 1999, the Company had approximately 7,437 employees,
4,252 of whom were classified as full-time and 3,185 of whom were classified as
part-time. Of these employees, 1,101 full-time and 401 part-time employees are
employed by the Company's discontinued businesses. Most of the Company's part-
time employees are teachers in school-based programs, Company-owned Learning
Centers and Schulerhilfe centers. None of the Company's employees are
represented by a union and the Company considers its relationship with 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 environmental laws is not expected to
have a material effect on the business.

10

Item 2. Properties

The Company leases most 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 Learning Center segment leases space for 84 sites in the United
States, and 177 Schulerhife sites in Germany; the English Language Instruction
segment leases 84 sites around the world; the Contract Educational Services
segment leases 3 regional offices; and the International Universities segment
leases 2 sites used for the Dentistry and Podiatry clinics.

The Company also owns five buildings in the United Kingdom, one building in
Ireland and five buildings located on the UEM campus consisting of three
academics buildings and two dormitories.

Item 3. Legal Proceedings

The Company is the defendant in a legal proceeding pending in the United
States District Court for the Northern District of Iowa, Civil Action No. C96-
334MJM, filed on November 18, 1996 by ACT, Inc., an Iowa nonprofit corporation
formerly known as American College Testing Program, Inc. ("ACT"). ACT's claim
arises out of the Company's acquisition of rights to administer testing services
for the National Association of Securities Dealers, Inc. ("NASD"). ACT has
asserted that the Company tortuously interfered with ACT's relations,
contractual and quasi-contractual, with the NASD, that the Company caused ACT to
suffer the loss of its advantageous economic prospects with the NASD and other
ACT clients and that the Company has monopolized and attempted to monopolize the
computer-based testing services market. ACT has claimed unspecified amounts of
compensatory, treble and punitive damages, as well as injunctive relief. If ACT
were awarded significant compensatory or punitive damages, it could materially
adversely affect the Company's results of operations and financial condition. In
February 1998, the Court ruled that ACT may proceed only on three of its five
antitrust theories and otherwise narrowed the scope of ACT's antitrust claims.
In March 1998, the Court denied the Company's motion to dismiss ACT's state law
claims. Formal discovery was completed in 1999. Following discovery, in
response to the Company's motion to dismiss, the Court further narrowed the
scope of the litigation by dismissing all of ACT's tort claims. A trial date of
June 26, 2000, has been set with trial expected to last three weeks. The
Company believes that all of ACT's claims are without merit but is unable to
predict the outcome of the ACT litigation at this time.

The Company is the defendant in an arbitration proceeding pending in Los
Angeles, California initiated on or about March 22, 1999 by James Jinsoo Choi
and Christine Choi. The Chois' claim arose out of the previous relationship Mr.
Choi had as a licensee of Sylvan. Mr. Choi was licensed to operate Sylvan
Learning Centers in Korea pursuant to a license agreement. In June 1998, Sylvan
terminated the license agreement for non-curable defaults. In their complaint,
the Chois allege fraud, negligent misrepresentation, breach of fiduciary duty,
and breach of contract. The Chois have claimed unspecified compensatory and
punitive damages. The arbitration hearing has not yet been scheduled, but the
Company anticipates it will occur during 2000. The Company believes that all of
the Chois' claims are without merit but is unable to predict the outcome of the
Choi arbitration at this time.

At this time the Company is not a party, either as plaintiff or defendant, in
any other material litigation.

11

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, 1999.

PART II.
-------

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 1999 and
1998 for the Company's common stock are set out in the following table. These
prices are as reported by NASDAQ, and reflect inter-dealer price quotations,
without retail mark-up, mark down or commission and may not necessarily
represent actual transactions.

1999 High Low
---- ------ ------

1st Quarter $34.63 $24.94
2nd Quarter $29.25 $19.25
3rd Quarter $28.19 $15.25
4th Quarter $19.13 $10.69

1998 High Low
---- ------ ------
1st Quarter $32.33 $21.67
2nd Quarter $35.00 $28.00
3rd Quarter $36.88 $19.88
4th Quarter $32.25 $17.13

No dividends were declared on the Company's common stock during the years
ended December 31, 1999 and 1998, and the Company does not anticipate paying
dividends in the future.

The number of registered shareholders of record as of March 7, 2000 was
462.

During the year ended December 31, 1999, the Company issued 574,813 shares
of its common stock that were not registered under the Securities Act of 1933.

Item 6. Selected Consolidated Financial Data

The selected consolidated financial data for the years ended December 31,
1999, 1998, 1997, 1996, and 1995 have been derived from Sylvan's financial
statements, which have been audited by Ernst & Young LLP. The financial data
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto.

The Company consummated significant purchase business combinations in each
of the five years in the period ended December 31, 1999. 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 PACE and Prometric as net assets of discontinued
operations. The following data should be read in conjunction with Notes 3 and 4
to the Consolidated Financial Statements.

12

1999 (1) (2) 1998 (3) (4) 1997 1996 (5) 1995
------------ ------------ ----------- ---------- ---------
(In thousands, except per share amounts)

Statements of Operations Data:
Revenues $338,496 $247,374 $170,560 $140,014 $113,546

Costs and expenses:
Direct costs 285,967 199,939 148,926 121,291 100,715
General and administrative expense 26,855 15,530 19,693 8,049 6,205
Transaction costs related to pooling-of-interests - 5,000 - - -
Restructuring and asset impairment charges 5,127 3,730 - - 3,316
------------ ------------ ----------- ---------- ---------
Total costs and expenses 317,949 224,199 168,619 129,340 110,236
------------ ------------ ----------- ---------- ---------
Operating income 20,547 23,175 1,941 10,674 3,310
Non-operating income (loss) (15,737) 1,013 31,218 2,044 1,083
Interest expense (4,865) (976) (472) (1,024) (1,380)
------------ ------------ ----------- ---------- ---------
Income (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principle (55) 23,212 32,687 11,694 3,013
Tax benefit (expense) 1,056 (6,706) (10,188) (4,124) 176
------------ ------------ ----------- ---------- ---------
Income from continuing operations before cumulative
effect of change in accounting principle 1,001 16,506 22,499 7,570 3,189
Income from discontinued operations, net of tax 12,302 19,203 5,405 8,184 853
Loss on disposal of discontinued operations, net of tax (26,968) - - - -
------------ ------------ ----------- ---------- ---------
Income (loss) before cumulative effect of change in
accounting principle, net of tax (13,665) 35,709 27,904 15,754 4,042
Cumulative effect of change in accounting principle,
net of tax (1,323) - - - -
------------ ------------ ----------- ---------- ---------
Net income (loss) $(14,988) $ 35,709 $ 27,904 $ 15,754 $ 4,042
============ ============ =========== ========== =========
Earnings per common share, diluted:
Income from continuing operations before cumulative
effect of change in accounting principle $ 0.02 $ 0.32 $ 0.50 $ 0.19 $ 0.12
Earnings (loss) per common share, diluted $ (0.28) $ 0.70 $ 0.62 $ 0.40 $ 0.15

Diluted shares 53,157 51,286 44,890 38,963 27,701

Balance Sheet Data:
Cash and cash equivalents $ 20,410 $ 33,170 13,113 11,178 2,283
Available-for-sale securities 10,890 6,166 82,951 16,474 30,735
Net working capital 276,590 15,101 112,874 28,836 39,044
Intangible assets and deferred contract costs 195,813 117,889 24,135 24,653 52
Net assets of discontinued operations 280,287 278,150 134,345 96,968 86,186
Total assets 788,126 626,138 389,975 247,649 152,888
Long-term debt, including current portion 191,164 67,077 74,744 37,101 12,272
Stockholders' equity 474,093 488,833 314,982 153,190 137,622

(1) On April 1, 1999, the Company acquired a controlling interest in the
Universidad Europea de Madrid ("UEM"), a private for-profit university in
exchange for $26,000 in cash. The acquisition was accounted for as a
purchase, and Sylvan's 1999 results of operations include the results of
operations of UEM for the period April 1, 1999 through December 31, 1999.

(2) During the quarter ended December 31, 1999, the Company recognized
restructuring costs of $5,127. Additionally, the Company recognized
significant non-recurring operating charges during the fourth quarter of
1999, which totaled $10,300. 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 disposal of investments in the fourth quarter
of 1999 also resulted in $13,400 of non-recurring charges during the
period. The cumulative effect of these significant, unusual charges was to
reduce income from continuing operations before income taxes and cumulative
effect of change in accounting

13

principle by $28,800 during the fourth quarter of 1999. See Notes 18 and 20
to the audited consolidated financial statements.

(3) Includes certain non-recurring expenses related to the acquisition of
Aspect. These expenses include $5,000 of transaction-related costs, such as
legal, accounting and advisory fees, $1,200 of compensation to former
shareholders of Aspect, who are no longer with the Company and were not
replaced, and $3,700 of costs, classified in the financial statements as
restructuring costs, that relate to the integration of Aspect with Sylvan.
The net effect of the above items was a decrease in pre-tax income from
continuing operations of $9,900 and net income of $8,900, or $0.17 per
diluted share.

(4) On January 1, 1998, the Company acquired Canter for an initial purchase
price of $25,000. Additional consideration of $35,674 has been recorded to
reflect Canter's achievement of certain EBITDA targets. The acquisition was
accounted for as a purchase, and Sylvan's results of operations from
January 1, 1998 include the operations of Canter. Additional variable
amounts of consideration are also payable to the seller if specified levels
of earnings are achieved in 2000.

Effective October 28, 1998, the Company acquired Schulerhilfe, in exchange
for an initial purchase price of $19,100 in cash. Additional consideration
of $10,424 was recorded subsequent to the initial purchase to reflect
achievement of revenue and collection targets in 1999. The results of
operations of Schulerhilfe subsequent to October 28, 1998 are included in
Sylvan's results of operations.

(5) Effective December 1, 1996, Sylvan acquired WSI, in exchange for an initial
purchase price of $21,071. This transaction was accounted for using the
purchase method of accounting, and Sylvan's results of operations from
December 1, 1996 include the operations of Wall Street.

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Overview

The Company generates revenues from four business segments: Sylvan Learning
Centers, which earns primarily franchise royalties, franchise sales fees and
Company-owned Learning Center revenues; Sylvan Contract Educational Services,
which earns revenues from providing supplemental remedial education services to
public and non-public schools as well as providing teacher training services;
Sylvan English Language Instruction, which earns fees from the operations of WSI
and Aspect; and Sylvan International Universities, which earns tuition and fees
paid by the students of UEM, which was acquired in April 1999.

The following table sets forth the percentage relationships of operating
revenues and direct costs for each division, as well as certain income statement
line items expressed as a percentage of total revenues for the periods indicated
for the year ended December 31:

1999 1998 1997
-------- --------- --------

Revenues:
Sylvan Learning Centers 27% 26% 27%
Sylvan Contract Educational Services 30% 35% 30%
Sylvan English Language Instruction 34% 39% 43%
Sylvan International Universities 9% 0% 0%
-------- --------- ------- -
Total revenues 100% 100% 100%
Direct costs:
Sylvan Learning Centers 20% 18% 23%
Sylvan Contract Educational Services 24% 29% 26%
Sylvan English Language Instruction 31% 33% 38%
Sylvan International Universities 9% 0% 0%
-------- --------- -------
Total direct costs 84% 80% 87%

14

1999 1998 1997
------------ ----------- -----------

General and administrative expenses 8% 6% 12%
Transaction costs related to pooling of interests 0% 2% 0%
Restructuring costs 2% 2% 0%
------------ ----------- -----------
Operating income 6% 9% 1%
Non-operating income (expense) (6%) 0% 18%
------------ ----------- -----------
Income (loss) from continuing operations before taxes and cumulative
effect of change in accounting principle 0% 9% 19%
Tax benefit (expense) 0% (3%) (6%)
------------ ----------- -----------
Income from continuing operations 0% 6% 13%
Discontinued operations:
Income from discontinued operations, net of tax 4% 8% 3%
Loss on disposal of discontinued operations, net of tax (8%) 0% 0%
------------ ----------- -----------
Income (loss) before cumulative effect of change in accounting principle (4%) 14% 16%
Cumulative effect of change in accounting principle, net of tax 0% 0% 0%
------------ ----------- -----------
Net income (loss) (4%) 14% 16%
============ =========== ===========

Results of Operations
The Company has continued to grow rapidly during 1999 in response to the
increasing opportunities in the educational services industry. The core
businesses of Sylvan Learning Centers, Sylvan Contract Educational Services and
Sylvan English Language Instruction have been supplemented with the addition of
Sylvan International Universities. The Company has also moved to address the
increasing importance of technology in learning by focusing efforts on
applications of Internet technology to the education and instruction
marketplaces. In order to fund expansion into Internet applications in
educational and training services and to ensure that management remains focused
on core business strengths in the educational and training services industry,
the Company opted to sell the PACE corporate training business and the Prometric
testing business in 1999 and the first quarter of 2000 respectively. The
operating results of the discontinued businesses have been reported in the
discontinued operations section of the consolidated statement of operations. The
following comparison of operating results focuses primarily on the continuing
operations of the Company.

Comparison of results for the year ended December 31, 1999 to results for the
year ended December 31, 1998.

Revenues. Total revenues from continuing operations increased by $91.1 million,
or 37%, to $338.5 million for the year ended December 31, 1999 from $247.4
million for the same period in 1998. This increase resulted from higher revenues
in all business segments - Sylvan Learning Centers, Sylvan Contract Educational
Services, Sylvan English Language Instruction and the initial operations of
Sylvan International Universities.

Sylvan Learning Centers revenues for 1999 increased by $25.9 million, or
40%, to $90.7 million. Franchise royalties increased by $2.5 million, or 16%, as
a result of the net increase of 43 franchised Centers opened in 1999 and a 12%
increase in same center revenue. Franchise sales fees increased by $1.6 million,
primarily due to the sale of a master franchise agreement for France for $5.0
million in September 1999, the effect of which was partially offset by the sale
of a master franchise agreement for the United Kingdom for $3.25 million in
1998. Revenues from Company-owned Learning Centers increased $7.8 million, or
23%, to $42.2 million during 1999. Same center revenues increased 7%, or $2.2
million, with the remaining revenue increase of $5.6 million generated from 29
new Company-owned centers opened or acquired from franchise owners in 1998 and
1999. The full year impact of the October 1998 acquisition of Schulerhilfe, a
Germany-based tutoring company, resulted in an additional $12.0 million in
revenue for the year ended December 31, 1999. Product sales and other franchise
service revenues generated the remaining revenue increase of $2.0 million for
1999, as compared to 1998. Revenues for Learning Centers represent 27% of the
total continuing revenues of the Company for the year ended December 31, 1999.

15

Sylvan Contract Educational Services revenues increased for 1999 by $15.0
million, or 17%, to $101.3 million. The revenue increase for the year ended
December 31, 1999 was the result of a $3.9 million increase in revenue from
Sylvan at School contracts, a $0.3 million increase in Sylvan at Work contracts,
and a $10.8 million increase in revenue from the Canter teacher instruction
group. The $3.9 million increase in revenue from public and nonpublic schools
for 1999 is the result of $4.5 million in revenue attributable to new contracts
obtained after December 31, 1998, offset by a $0.6 million decrease in revenue
from existing contracts. The revenue increase at Canter was due to increasing
demand for domestic teacher training as well as the sale of a license to apply
the Canter teachers distance learning masters degree program in Mexico for a
licensing fee of $3.5 million. Revenue for Contract Educational Services
represents 30% of total continuing revenues of the Company for the year ended
December 31, 1999.

Sylvan English Language Instruction revenues increased for 1999 by $18.0
million, or 19%, to $114.3. The revenue increase was primarily a result of
adding the operations of several WSI franchise locations acquired after the
first quarter of 1998, which was offset by the disposal of the travel operations
division of Aspect. Revenues at WSI increased $25.1 million in 1999 due to a
combination of acquisitions of Centers in high-growth European countries coupled
with growth in the core areas of the business. Corporate center revenues
increased by $24.0 million in 1999 to $30.8 million, primarily due to the
inclusion of operating results of centers acquired in Italy, Germany and Spain.
Franchising revenues fees increased to $12.6 million in 1999 from $12.3 million
in 1998. The growth of the franchising revenues was reduced by a decrease in
franchise royalties of $0.2 million for 1999 and the impact of the acquisition
of successful franchised centers by WSI in 1999. Revenues from new area
development agreements generated $3.9 million in franchise sales fees in 1999,
which was a decrease from the 1998 franchise sales fees of $5.1 million. Fees
from area development agreements have declined as a result of management's
decision to retain undeveloped territories for Company-operated center
expansion. Product sales revenues increased by $0.4 million to $6.3 million in
1999 due to increased demand for the English language instruction product.
Revenues at Aspect decreased by $7.1 million in 1999, to $61.4 million. The
revenue decrease was a result of management's decision to dispose of Aspect's
travel business, which accounted for $12.5 million in revenue in 1998 and $5.2
in 1999. After factoring in the impact of the travel business disposal, revenues
increased in 1999 by $0.2 million. Revenues in Aspect's core language school
business increased by $3.3 million to $46.3 million in 1999. Revenues for the
English Language Instruction segment represent 34% of total revenues of the
Company for the year ended December 31, 1999.

Sylvan International Universities, the Company's newest division, began
operations in the second quarter of 1999 with the acquisition of a controlling
interest (54%) in the Universidad Europea de Madrid (UEM). Sylvan assumed
operating control of UEM on April 1, 1999, at which time the results of UEM's
operations began to be consolidated with those of the Company. Total revenues
for UEM subsequent to April 1, 1999 were $ 32.3 million, which represent 9% of
total revenues of the Company for the year ended December 31, 1999. Revenues of
UEM are seasonal due to a limited class schedule during July, August and
September.

Direct Costs. Total direct costs of continuing operations increased 42%, to
$317.9 million in 1999 from $224.2 million in 1998, as a result of business
expansion. Direct costs as a percentage of total revenues increased from 90% in
1998 to 94% in 1999. The increase in direct costs as a percentage of total
revenues from continuing operations was a result of restructuring costs in
existing businesses, start-up costs of new business ventures and investments in
technology enhancements.

Sylvan Learning Centers expenses increased $23.3 million to $68.7 million,
or 76% of Learning Centers revenue for 1999, compared to $45.4 million, or 70%
of Learning Centers revenue for 1998. Approximately $7.3 million of the increase
for 1999 related to expenses incurred by Company-owned learning centers due to
the acquisition of franchised learning centers and costs associated with higher
revenues at existing Company-owned centers. Expenses as a percentage of revenues
in Company-owned centers increased for the period as a result of the acquisition
of more franchise centers, which tend to operate at lower margins. Cost
increases of $2.5 million in 1999 related to franchise services support costs as
a result of growth in franchised centers over the prior year. The impact of the
October 1998 acquisition of Schulerhilfe resulted in $10.1 million of increased
costs for 1999. Approximately

16

$3.4 million of the segment's direct cost increase represented non-recurring
costs related to the technology driven impairment of certain educational
programs, and the refocusing of management efforts on core business objectives.

Sylvan Contract Educational Services expenses increased by $9.4 million to
$81.4 million, or 80% of Contract Educational Services revenue for 1999,
compared to $72.0 million, or 83% of Contract Educational Services revenues for
1998. The decrease in expenses as a percentage of revenue for 1999 was primarily
due to the increased volumes at Canter, which has higher operating margins.
Canter operating margins were further enhanced by the sale of a license
agreement to provide Canter's masters degree program in Mexico.

Sylvan English Language Instruction expenses increased by $25.0 million to
$106.4 million, or 93% of English Language Instruction revenues for 1999,
compared to $81.4 million, or 85% of the segments revenues in 1998. The
increase in expenses as a percentage of revenues was primarily due to increased
administrative costs at Aspect in anticipation of future volume increases and a
reduction in high margin WSI area development sales due to Management's
intention to build future value by retaining WSI center locations and acquiring
franchise centers.

Operating expenses at WSI increased $25.5 million to $41.1 million, or 78%
of WSI revenues for 1999, compared to $15.6 million, or 56% in 1998. This
expense increase is primarily due to business growth and the cost of operating
the corporate centers that were acquired in 1999. Approximately $24.1 million of
the increase for 1999 related to expenses incurred in corporate centers due to
the acquisition of franchised centers and costs associated with higher revenues
at existing corporate centers. Expenses as a percentage of revenues in corporate
centers increased for the period as a result of the acquisition of more
franchise centers, which tend to operate at lower margins.

Aspect's operating expenses decreased by $0.4 million to $65.4 million, or
106% of Aspect's revenues in 1999. The expense decrease is primarily due to the
disposal of the travel business, which resulted in a $6.9 million decrease in
1999 expenses. Remaining operating expenses increased $6.5 million, primarily
due to increased operating expenses in the language schools, increased operating
costs in the sales offices and increased overhead as a result of an extensive
investment in senior and middle management in anticipation of substantially
increased volume growth in the future.

Sylvan International Universities expenses were $29.4 million for the nine-
month period ended December 31, 1999. These direct expenses consist primarily
of personnel, marketing and advertising, and facility-related costs of UEM.
These expenses are a larger percentage of the International Universities
revenues for the period from acquisition through December 31, 1999 than the
anticipated annual percentage because of the seasonality of the business.
Classes are not in session for June, July, August and September, however,
certain fixed expenses are incurred year round.

Other Expenses. General and administrative expenses increased by $11.3 million
during 1999, to $26.9 million. The expenses as a percentage of revenues
increased to 8% in 1999. This increase in expenses as a percentage of revenues
is largely due to $3.0 million of non-recurring expenses incurred in 1999
related to business start-up costs, asset impairments, and simplification of the
Sylvan business model. Also included were the general and administrative costs
necessary to provide support for the PACE and Prometric businesses although
their operating results are included in discontinued operations.

Results from continuing operations included $5.1 million in restructuring
costs resulting from strategic changes in the Company's core educational
services business. The restructuring charges were primarily the result of
employee termination costs, school closings and facility exit costs resulting
from management's plan to exit certain activities outside the core business of
providing educational instruction.

In conjunction with the Company's formal restructuring plan, management
also examined existing corporate investments to determine the realizable
investment value. Non-operating losses totaling $13.4 million were incurred in
1999 as a result of decreases in investment values resulting from changing
market conditions for the educational services industry, including an aggregate
loss of $11.4 million related to the sale of the investment in JLC Learning
Corporation as disclosed in Note 6 to the audited consolidated financial
statements.

17

Other non-operating expenses increased $7.2 million, as compared to the
same period in 1998. This net increase was primarily attributable to a $3.1
million decrease in other investment income, a $3.9 million increase in interest
expense related to increased borrowings outstanding during the period, (which
includes $1.8 million of UEM interest expense) and a $0.3 million minority
interest in income of consolidated subsidiary recorded in 1999, which was
associated with UEM.

The Company's effective tax position on continuing operations has been
significantly impacted by utilized tax credits, foreign tax benefits and state
income taxes offset by permanent differences that arose due to the significant
amount of restructuring and non-recurring charges in 1999. Because of these
factors, comparison of the 1999 and 1998 effective tax rates is not meaningful.

Income from Continuing Operations. Income from continuing operations before
cumulative effect of change in accounting principle decreased by $15.5 million,
to $1.0 million for the year ended December 31, 1999. After removing the
effects of restructuring charges of $5.1 million, non-recurring operating
expenses of $10.3 million and losses on investments of $13.4 million, pre-
tax income from continuing operations for the year ended December 31, 1999
increased over 1998 by $5.5 million, or 24.1%, to $28.7 million. This increase
was the result of increased revenues and operating income from the Learning
Centers, Contract Educational Services and International University segments.

Discontinued Operations. At September 30, 1999 the Company approved a formal
plan to dispose of the PACE Group. Losses from PACE operations, net of tax, for
the period ended September 30, 1999 were $1.0 million, and the loss on the
disposal of PACE was approximately $27.0 million, including a tax expense of
approximately $1.1 million. In the first quarter of 2000, the Company sold
Prometric for approximately $775 million in cash. Prometric's net operating
results of $13.3 million and $19.0 million for the years ended December 31, 1999
and 1998, respectively, are reported in the discontinued operations section of
the statement of operations to reflect this sale. The gain on the sale of
Prometric was recognized in the first quarter of 2000 when the sale was
completed.

Cumulative Effect of Accounting Change. On January 1, 1999, the Company adopted
the provisions of AICPA Statement of Position No. 98-5, Reporting the Costs of
Start-up Activities ("SOP 98-5"), which requires start-up costs capitalized
prior to January 1, 1999 to be written-off and any future start-up costs to be
expensed as incurred. The cumulative effect of adopting SOP 98-5 in 1999
decreased net income for the year ended December 31, 1999 by $1.3 million (net
of $0.7 million in income taxes). The amount of the cumulative effect related to
the discontinued operations was $0.6 million (net of $0.3 million in income
taxes).

Comparison of results for the year ended December 31, 1998 to results for the
year ended December 31, 1997.

Revenues. Total revenues increased by $76.8 million, or 45%, to $247.4 million
for the year ended December 31, 1998 from $170.6 million for the same period in
1997. This increase resulted from higher revenues in all business segments -
Sylvan Learning Centers, Sylvan Contract Educational Services, and Sylvan
English Language Instruction.

Sylvan Learning Centers revenue increased by $18.1 million, or 39%, to
$64.8 million for the year ended December 31, 1998, compared to the same period
in 1997. Overall, franchise royalties increased by $2.5 million or 19% for the
year ended December 31, 1998, despite the acquisition of 13 franchised Centers
during 1998. Excluding the effect of the Center acquisitions, franchise
royalties increased 24% in 1998. The increase in royalties was due to a net
increase of 60 new Centers opened during 1998, combined with same center revenue
increases of 18% for the year ended December 31, 1998. Franchise sales fees
increased by $1.2 million, or 27%, to $5.8 million for the year ended December
31, 1998, compared to the same period in 1997. Revenues from Company-owned
Learning Centers increased by $9.3 million , or 37%, to $34.4 million during
1998. The acquisition of 13 centers in 1998 resulted in $8.2 million of
additional revenue in 1998. On a full year basis, same center revenues increased
by $3.5 million, or 16%, in 1998 compared to revenues in 1997. On October 31,
1998, the Company acquired Schulerhilfe, a tutoring company based in Germany.
This acquisition resulted in an additional $2.4 million in revenue in 1998. The
remaining revenue increase in 1998 of $ 2.7 million is principally due to
increased product sales.

18

Sylvan Contract Educational Services revenues increased $35.3 million, or
69%, to $86.3 in 1998 compared to 1997. The cause of $24.8 million of this
revenue increase was the 1998 acquisition of Canter, a leading developer of
training and graduate course materials for educators. Public and non-public
school contracts contributed $11.1 million of the increase which was offset by a
$.6 million decrease at Sylvan at Work. The $11.1 million increase in revenue
from public and non-public schools for the year ended December 31, 1998 is the
result of $17.4 million in revenue from new contracts, offset by a decrease of
$3.7 million in revenue from contracts in existing districts lost or reduced due
to local district budget constraints. This segment's revenue also declined by
$2.6 million as a result of the disposition in late 1997 of an unrelated
business assumed upon the acquisition of Educational Inroads.

Sylvan English Language Instruction revenues increased $23.4 million, or
32%, to $96.3 million in 1998 compared to 1997. The increase in revenues is due
to significant revenue growth of both WSI and Aspect as demand increased for
English language instruction. WSI revenues increased by $7.2 million or 35% in
1998, compared with 1997, as significant growth occurred across all areas of the
business, including opening new centers, launching a new product, and purchasing
a number of centers in Spain. Corporate center revenues increased by $5.7
million in 1998 to $6.9 million primarily due to the acquisition of centers in
Spain during 1998. Product sales increased by $.9 million in 1998 to $5.9
million in response to increased product demand. Royalty revenues increased $1.9
million in 1998 to $4.9 million as a result of the opening of more franchised
centers, however the franchise sales fees decreased $1.3 million during 1998 due
to a focus on opening centers. Aspect's revenues increased by $16.1 million, or
31% to $68.6 million in 1998 compared to 1997. This revenue increase was
primarily driven by an increase in its language schools business of $9.2 million
in 1998. $4.3 million of the 1998 revenue increase is attributed to the
acquisition of IEI, an operator of 10 language schools in the United States.
Travel business revenue grew by $3.6 million to $12.5 million in 1998. The
remaining revenue increase in 1998 of $3.3 million is due to increased revenue
in Aspect's sales offices and its contract to provide English language teachers
to the United Arab Emirates.

Direct Costs. Total direct costs increased 33% to $224.2 million in 1998 from
$168.6 million in 1997. Direct costs as a percentage of total revenues
decreased to 91% in 1998 from 99% in 1997. Both 1998 and 1997 contain certain
non-recurring costs, as further discussed below. Excluding these non-recurring
costs, total direct costs decreased as a percentage of total revenues from 91%
in 1997 to 87% in 1998. This decrease in costs as a percentage of revenues is
primarily due to expanding revenues without a corresponding increase in the
related direct operating expenses.

Sylvan Learning Centers expenses increased $6.2 million to $45.4 million,
or 70% of Learning Centers revenue for 1998, compared to $39.2 million, or 84%
of Learning Centers revenue for the same period in 1997. Included in Sylvan
Learning Centers expenses for the 1997 period is a non-recurring $5.0 million
contribution of the Company's Common Stock to a corporation whose sole purpose
is to develop and fund advertising programs for Sylvan Learning Centers.
Excluding this contribution, Sylvan Learning Centers expenses as a percentage of
revenue would have been 73% in 1997. Approximately $9.8 million of the increase
in recurring expenses was due to direct costs associated with higher revenues at
existing centers and the acquisition of 13 franchised learning centers in 1998.
The company's fourth quarter 1998 acquisition of Schulerhilfe accounted for $2.0
million of increased expenses.

Sylvan Contract Educational Services expenses increased by $26.9 million to
$72.0 million, or 83% of Contract Educational Services revenue for 1998,
compared to $45.1 million or 88% of Sylvan Contract Educational Services revenue
for 1997. The principle reason for this increase in expense was the 1998
acquisition of Canter. The decrease in expenses as a percentage of revenues was
primarily due to revenue growth in excess of additional expenses necessary to
service the contracts.

Sylvan English Language Instruction expenses increased $16.8 million to
$81.4 million, or 85% of English Language revenue for 1998, compared to $64.6
million, or 89% of English Language revenue for the same period in 1997. The
1998 year included $3.4 million of non-recurring charges related to the Aspect
acquisition and compensation of the former owners. Excluding these non-recurring
expenditures, expenses as a percentage of English Language Instruction revenues
decreased to 81% of the total English Language Instruction revenues.

19

Operating expenses at Wall Street Institute increased $5.1 million to $15.6
million or 56% of WSI revenues compared to $10.5 million or 51% in 1997. This
expense increase is primarily due to business growth and the additional costs of
infrastructure to manage the business. Personnel costs and other operating
expenses increased $6.5 million in 1998 as WSI developed the management support
structure to guide the global expansion of the business.

Aspect expenses increased by $17.9 million or 33% to $72.0 million in 1998.
Excluding the non-recurring expenses and restructuring charges incurred in 1998
and 1997 at Aspect expenses increased by $11.7 million, the expenses as a
percentage of revenues decreased from 100% in 1997 to 91% in 1998. Expenses
increased $10.5 million in 1998 in response to the costs of servicing revenue
growth at the language schools and in the travel business. The remaining
expense increase of $1.2 million was a result of increased costs of the sales
offices and the commencement of operations in the United Arab Emirates in 1998.

Other Expenses. General and administrative expenses decreased by $4.2 million
during 1998, compared to 1997. Excluding the non-recurring expenses of $6.5
million incurred in 1997, the percentage of general and administrative expenses
to revenues decreased from 8% in 1997 to 6% in 1998. The primary reason for
this decrease in general and administrative expenses as a percentage of revenues
was the expansion of Company revenues without a corresponding increase in the
general and administrative infrastructure.

In May 1998, the Company acquired Aspect. Associated with this acquisition,
the Company incurred $5.0 million of non-recurring transaction-related costs, as
well as $3.7 million of restructuring charges. The net effect of the $3.7
million restructuring charge, the $5.0 million of transaction-related costs, as
well as the $1.2 million in compensation paid to Aspect's former owners, which
are included in the direct costs for 1998, was a decrease in pre-tax income from
continuing operations of $9.9 million and income from continuing operations of
$8.9 million during the year ended December 31, 1998.

Non-operating income, consisting of investment and other income and equity
in net loss of affiliates decreased from $30.7 million in 1997 to $0.1 million
in 1998. The decrease in principally due to a $28.5 million net termination fee
received from an acquisition breakup in 1997 and an increase in the allocable
losses from Caliber of $1.5 million in 1998.

The Company's effective tax rate decreased from 31.1% during 1997 to 28.9%
during 1998. This reduction is a result of a proportionally greater increase in
income earned in lower-taxed international jurisdictions during 1998.

Income from Continuing Operations. Income from continuing operations decreased
by $6.0 million, or 27%, to $16.5 million for the year ended December 31, 1998.
After removing the effect of the non-recurring expenses in both years and the
effect of the $28.5 million breakup fee received in 1997 the pre-tax income from
continuing operations for the year ended December 31, 1998 increased $15.9
million, or 92% over the same period in 1997. This increase is a result of
increased revenue and margins from all operating divisions.

Income from Discontinued Operations. Operating income from the discontinued
operations of PACE and Prometric increased by $13.8 million to $19.2 million in
1998 as a result of the growth of the computerized testing market.

Future Assessment of Recoverability and Impairment of Goodwill

In connection with various acquisitions, the Company has recorded goodwill.
At December 31, 1999, unamortized goodwill was $191.1 million, which
represents 24% of total assets and 40% of stockholders' equity. Goodwill arises
when an acquirer pays more for a business than the fair value of the tangible
and separately measurable intangible net assets. For financial reporting
purposes, goodwill and all other intangible assets are amortized over the
estimated period benefited. The Company has determined the life for amortizing
goodwill based upon several factors, the most significant of which are the
relative size, historical financial viability and growth trends of the acquired
companies and the relative lengths of time such companies have been in
existence.

20

The Company amortizes goodwill on a straight-line basis over periods of 10 to 25
years based upon the specific acquisition.

Management periodically reviews the Company's carrying value and
recoverability of unamortized goodwill. If the facts and circumstances suggest
that goodwill may be impaired, the carrying value of such goodwill will be
adjusted which will result in an immediate charge against income during the
period of the adjustment and/or the length of the remaining amortization period
may be shortened, which will result in an increase in the amount of goodwill
amortization during the period of adjustment and each period thereafter until
fully amortized. Once adjusted, there can be no assurance that there will not be
further adjustments for impairment and recoverability in future periods. Of the
various factors considered by management of the Company in determining whether
goodwill is impaired, the most significant are (i) losses from operations, (ii)
loss of customers, and (iii) industry developments, including the Company's
inability to maintain its market share, development of competitive products or
services, and imposition of additional regulatory requirements.

Liquidity and Capital Resources

During 1999, the Company generated $70.9 million of cash flow from
operations, an increase of $12.8 million compared to 1998. The reported net loss
of $15.0 million for 1999 included significant non-cash elements such as
depreciation and amortization charges of $46.8 million and losses from the sale
of discontinued operations and investments of $40.3 million. Working capital
increases of $7.2 million during the year resulted primarily from overall
business growth. Management believes that uncollectable accounts receivable will
not have a significant effect on future liquidity. Future continuing operations
of the Company will not include the operating results of Prometric, which will
reduce the magnitude of the Company's cash flow from operations.

Cash used in investing activities, excluding securities investment
transactions, was $161.0 million in 1999 and $151.6 million in 1998. The 1999
investment activity was primarily for the acquisition of property and equipment
($61.2 million), the acquisition of WSI and Company-owned Sylvan Learning
Centers ($49.0 million), the acquisition of UEM ($26.0 million), the payment of
contingent consideration for prior period acquisitions ($16.7 million), other
investments and the expenditures for deferred contract costs ($20.9 million).
These investments were made to commence operations of the International
Universities segment, to acquire successful Learning Center and WSI centers and
to invest in furniture, computer equipment and software development for the
Company's general business expansion. In 1999, the Company sold its investment
in JLC Learning Corporation for $15.2 million of cash.

At December 31, 1999 the Company has accrued obligations payable in cash of
$22.5 million related to contingent consideration for the Drake, Schulerhilfe
and Canter acquisitions. The amount due will be paid in 2000.

The Company funded investing activity through funds provided by financing
activities as well as operating cash flows. The Company received net proceeds
of $110.5 million from borrowings during 1999. Proceeds form these borrowings
were applied to repurchase shares of Common Stock ($36.2 million) and fund
investment activities during 1999. Borrowings under the revolving credit
facility are due December 31, 2003. On March 3, 2000, the Company repaid the
entire outstanding balance due on the facility with a portion of the $600
million of net proceeds from the Prometric sale. Additionally, in March 2000,
the Company entered into an amendment to the facility reducing the amount
available for borrowing to $100 million.

The Company anticipates that cash flow from operations, available cash and
existing credit facilities, will be sufficient to meet its operating
requirements, including the expected expansion of its existing business over the
near term. The proceeds of $600 million net of tax and transaction costs from
the disposal of Prometric are expected to be further applied to International
University acquisitions ($100 million), to fund an Internet Educational Services
incubator operation ($220 million) and to repurchase outstanding shares of
Common Stock. The Company continues to examine opportunities in the educational
services industry for potential synergistic acquisitions.

21

On February 24, 2000, Management announced a $100 million investment in the
Company led by Apollo Management L.P., a private investment firm. Joining
Apollo in the investment will be an affiliate of Investor AB, DB (Deutsche Bank)
Capital and SKT, LLC. The investment will be in the form of ten-year
subordinated debentures. The debentures will have a 5% cash coupon, paid
semiannually, and will be convertible into common stock at $15.735 per share.
The transaction is expected to close in the first quarter of 2000.

On March 21, 2000, the Company announced the commencement of a modified
"Dutch Auction" tender offer to purchase up to 9.5 million shares, or
approximately 19%, of its outstanding Common Stock at a single per-share price
within a price range of $15.25 to $17.50 per share. If the tender offer is fully
subscribed, the Company will spend between approximately $145 million and $166
million to purchase the tender shares. The Company, intends to finance the
repurchase with a portion of the proceeds from the Prometric sale.

Restructuring

During the fourth quarter of 1999, the Company completed an analysis of its
operating structure to improve operating efficiency and to enhance shareholder
value. This analysis of the Company's operating structure revealed that the
significant growth the Company had achieved had come at a cost of increased
business complexity, added costs, slowed decision making, and diffused
responsibility and accountability within the Company. As a result of this
analysis, management approved a formal restructuring plan, and the Company
recorded a restructuring charge to operations of approximately $5.1 million.
The restructuring plan was comprised of employee termination and facility exit
costs resulting primarily from the Company's plan to exit certain activities
outside the core business of providing educational services. Facility exit
costs include approximately $3.5 million of costs to close schools and school-
based facilities. $3.0 million of the restructuring costs were paid through
December 31, 1999. The Company expects to complete implementation of the plan
by the end of the second quarter of fiscal 2000.

The restructuring plan adopted by management is consistent with the
Company's strategy of simplifying the Company by focusing on core educational
services businesses and discontinuing involvement in the corporate training and
computerized testing businesses. The restructuring will also streamline the
Company operations to allow management to focus on core business competencies
and expansion into educational opportunities on the Internet. Direct cost
savings from the restructuring plan will be primarily in the form of reduced
employee expense across all divisions and in general and administrative expenses
which will begin in the first quarter of 2000. Other changes in the business
model through entrance into Internet educational services opportunities and the
dynamics of the education marketplace prevent quantification of the impact of
future cost savings, if any, from this restructuring plan.

Discontinued Operations

On September 30, 1999, the Company adopted a formal plan to dispose of
PACE. The sale transaction closed December 31, 1999, whereby the Company
contributed PACE in exchange for an equity investment in Frontline Pace, a
corporate training enterprise.

On March 3, 2000, the Company sold its computer based testing segment,
Prometric, for approximately $775 million in cash.

Management's decision to discontinue business in the corporate training and
computer based testing segments is consistent with the stated goal of refocusing
management's efforts and the Company's resources on the core business of
educational services. The proceeds from the disposal of these businesses will
also provide the necessary seed capital to develop an Internet incubator for
educational service companies that are bringing emerging Internet solutions to
the education and instruction marketplace.

Year 2000 Compliance

The Year 2000 Issue was a result of computer programs written using two
digits (rather than four) to define the applicable year. Absent corrective
actions, programs with date-sensitive logic could recognize "00" as 1900

22

rather than 2000. This could have resulted in a system failure or
miscalculations causing disruptions of operations, including, production
difficulties, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

The Company implemented a corporate wide Year 2000 task force to resolve
the potential concerns presented by the Year 2000 issue. The Company
successfully completed all Year 2000 readiness preparation prior to December 31,
1999 and no significant complications have been experienced as a result of Year
2000 issues. During the year ended December 31, 1999 the Company incurred $0.6
million in expenses in continuing operations as well as $3.9 million in expenses
related to discontinued operations in order to prepare for the Year 2000 issue.
All costs were expensed in 1999 and the Company does not foresee incurring any
additional costs subsequent to December 31, 1999.

Euro Conversion

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

Contingent Matters

In connection with the Company's acquisition of Canter and based on
Canter's earnings in 1999, additional estimated consideration of $9.0 million is
expected to be paid to the seller in cash. As of December 31, 1999, the Company
has recorded this additional consideration as a liability and goodwill, which
will be amortized over the remaining amortization period of 23 years. Additional
variable amounts of contingent consideration are also payable to the seller if
specified levels of earnings are achieved in 2000, payable in equal amounts of
cash and stock. The Company will record the contingent consideration when and
if the contingencies are resolved and the additional consideration is payable.

In connection with the Company's acquisition of Schulerhilfe, the Company
is obligated to pay the sellers an additional estimated $10.4 million of
consideration in 2000. The amount is based on the amount of 1999 franchise fees,
collected by Schulerhilfe on or before January 31, 2000 and the amount due will
be paid in cash. The Company has recorded this additional consideration as a
liability and additional goodwill at December 31, 1999 and the goodwill will be
amortized over the remaining period of 23 years.

Effects of Inflation

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

All statements contained herein that are not historical facts, including but not
limited to, statements regarding the anticipated impact of uncollectible
accounts receivable on future liquidity, the Company's contingent payment
obligations relating to acquisitions, future capital requirements, potential
acquisitions, the failure to remediate or the cost of remediating Year 2000
Issues and the Company's future development plans are based on current
expectations. These statements are forward looking in nature and involve a
number of risks and uncertainties. Actual results may differ materially. Among
the factors that could cause actual results to differ materially are the
following: amount of revenues generated by the Company's tutorial and teacher
training operations; the availability of sufficient capital to finance the
Company's business plan on terms satisfactory to the Company; general business
and economic conditions; and other risk factors described in the Company's
reports filed from time to time with the Commission. The Company wishes to
caution readers not to place

23

undue reliance on any such forward looking statements, which statements are made
pursuant to the Private Securities Litigation Reform Act of 1995 and, as such,
speak only as of the date made.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss to future earnings, to fair values or to
future cash flows that may result from changes in the price of a financial
instruments. The Company is exposed to financial market risks, including changes
in foreign currency exchange rates, interest rates and investments in available-
for-sale securities. The Company does not utilize derivative financial
instruments, but exposure to market risks is managed through its regular
operating and financing activities.

Foreign Currency Risk

The Company derives approximately 42% of its revenues from continuing
operations from customers outside of the United States. This business is
transacted through a network of international subsidiaries, generally in the
local currency that is considered the functional currency of that foreign
subsidiary. Expenses are also incurred in foreign currencies to match revenues
earned and minimize the Company's exchange rate exposure to operating margins.
A hypothetical weakening of the U.S. dollar relative to all other currencies
should not materially adversely affect expected 2000 earnings or cash flows. The
Company generally views its investment in the majority of its foreign
subsidiaries as long-term. The functional currencies of these foreign
subsidiaries are principally denominated in Euro-based currencies. The effects
of a change in foreign currency exchange rates on the Company's net investment
in foreign subsidiaries are reflected in accumulated other comprehensive income.
A 10% depreciation in year-end 1999 functional currencies relative to the U.S.
dollar would have resulted in a $9.4 million decrease in consolidated
stockholders' equity and comprehensive income.

Interest Rate Risk

The fair value of the Company's cash and cash equivalents would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due to the short-term nature of the Company's portfolio. The
Company's long-term revolving credit facility bears interest at variable rates,
and the fair value of this instrument is not significantly affected by changes
in market interest rates. At December 31, 1999 debt levels, 100 basis points
increase in interest rates would reduce annual pretax income from continuing
operations by approximately $1.7 million.

Investment Risk

The Company's investment portfolio is primarily exposed to risks arising
from changes in equity prices. The Company is exposed to equity price risks on
equity securities included in its portfolio of investments entered into for the
promotion of business and strategic objectives. These investments are generally
small capitalization stocks in the Internet segment of the educational services
industry. The Company typically does not attempt to reduce or eliminate its
market exposure on these securities. A 10% adverse change in equity prices would
result in an approximate $1.1 million decrease in the fair value of the
Company's available-for-sale securities and comprehensive income.

The Company's investment portfolio includes a number of holdings in non-
publicly traded companies in the educational services industry. The Company
values these investments at either cost less impairment (if any) or under the
equity method of accounting. Equity method investors are specifically excluded
from the scope of this disclosure. Non-public investments where the Company
owns less than a 20% stake are subject to fluctuations in market value, but
their current illiquidity reduces the exposure to pure market risk.

All the potential impacts noted above are based on sensitivity analysis
performed on the Company's financial position at December 31, 1999. Actual
results may differ materially.

24

Item 8. Financial Statements

The financial statements of the Company are included on pages 32 through 64
of the report as indicated on page 31.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

There were no changes in accountants, disagreements, or other events
requiring reporting under this Item.

25

PART III.
--------

Item 10. Directors and Executive Officers of Sylvan Learning Systems, Inc.

Information required is set forth under the caption "Election of Directors"
in the Proxy Statement relating to the 2000 Annual Meeting of Shareholders,
which will be filed on or before April 30, 2000.

Information required pertaining to compliance with Section 16 (a) of the
Securities and Exchange Act of 1934 is set forth under the caption "Election of
Directors" in the Proxy Statement relating to the 2000 Annual Meeting of
Shareholders, which is incorporated by reference.

Item 11. Executive Compensation

Information required is set forth under the caption "Executive
Compensation" in the Proxy Statement relating to the 2000 Annual Meeting of
Shareholders, which is incorporated by reference.

Item 12. Security Ownership and Certain Beneficial Owners and Management

Information required is set forth under the caption "Security Ownership" in
the Proxy Statement relating to the 2000 Annual Meeting of Shareholders, which
is incorporated by reference.

Item 13. Certain Relationships and Related Transactions

Information required is set forth under the caption "Certain Transactions"
in the Proxy Statement relating to the 2000 Annual Meeting of Shareholders,
which is incorporated by reference.

PART IV.
--------

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) The following documents are filed as a part of this report:

1. Financial Statements

The response to this portion of Item 14 is submitted as a separate section
of this Report.

2. Financial Statement Schedules

All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are inapplicable or
immaterial and therefore have been omitted.

(b) Reports on Form 8-K:

Form 8-K dated December 13, 1999.

Item 5. Other Events - Shareholder Rights Plan Amendment Notification

Item 6. Exhibits

26

3. Exhibits

(a) Exhibits:

Exhibit
Number Description
- ------ -----------

3.01 Articles of Amendment and Restatement of the Charter.(b)
3.02 Amended and Restated Bylaws dated September 27, 1996.(l)
3.03 Amendment to By-Laws as of December 13, 1999.(p)
4.01 Specimen Common Stock Certificate.(b)
4.02 Form of Warrant to Purchase Common Stock of Sylvan KEE Systems, Inc.
dated January 26, 1993.(b)
4.03 Form of Warrant to Purchase Common Stock of Sylvan KEE Systems, Inc.
dated July 14, 1993.(b)
4.04 Amended and Restated Rights Agreement by and between Sylvan Learning
Systems, Inc. and First Union National Bank, Rights Agent, dated as
of December 18, 1999.(p)
5.01 Opinion of Piper & Marbury L.L.P.(a)
10.01 Lease Agreement between Harbor East Parcel G-Office, LLC and Sylvan
Learning Systems, Inc. dated August 24, 1995. (c)
10.02 Master Agreement Between Educational Testing Service and Sylvan
Learning Systems, Inc. for Computer-Based Testing Services at
Sylvan Technology Centers dated September 1, 1993. (Portions of
this document have been omitted pursuant to a request for
confidential treatment.)(b)
10.03 Term Lease Master Agreement between Sylvan Learning Systems and IBM
Credit Corporation dated March 31, 1992.(b)
10.04 1993 Employee Stock Option Plan.(b)
10.05 KEE, Incorporated Non-Qualified Stock Option Plan.(b)
10.06 Sylvan Employee Confidentiality and Non-Disclosure Agreement and
Covenant Not to Compete.(b)
10.07 Form of Franchise Agreement.(b)
10.08 Form of Technology Center Agreement.(b)
10.09 Agreement and Plan of Reorganization dated February 17, 1995 by and
between Registrant and Remedial Education and Diagnostic Services,
Inc. (d)
10.10 Agreement and Plan of Reorganization dated as of March 1, 1995, by
and between Registrant and the PACE Group.(e)
10.11 Agreement and Plan of Reorganization dated as of July 28, 1995, by
and between Registrant and Drake Prometric, L.P.(f)
10.12 Lease Agreement dated August 24, 1995, First Amendment dated May 13,
1996 and Second Amendment dated November 11, 1996 by and between
Registrant and Harbor East, LLC.(k)
10.13 Senior Management Option Plan dated March 29, 1996.(k)

27

10.14 Securities Purchase Agreement by and between Registrant and JLC
Holdings, Inc., Software Systems Corporation and JLC Learning
Corporation dated November 1, 1996.(g)
10.15 Agreement and Plan of Reorganization dated January 28, 1997 by and
between Registrant and Wall Street Institute.(h)
10.16 Agreement and Plan of Reorganization dated May 30, 1997 among
Registrant and I-R, Inc. and Independent Child Study Teams, Inc.(i)
10.17 Sylvan Learning Systems, Inc. Employee Stock Purchase Plan.(j)
10.18 Sylvan Learning Systems, Inc. 1998 Stock Incentive Plan.(l)
10.19 Asset Purchase Agreement by and among Sylvan Learning Systems, Inc.,
Block Testing Services L.P. and Block State Testing Services L.P,
dated as of December 1, 1997.(m)
10.20 Agreement and Plan of Reorganization by and among Sylvan Learning
Systems, Inc., Block Testing Services L.P., National Assessment
Institute, Inc. and NAI Merger Corp, dated as of December 1,
1997.(m)
10.21 Stock Exchange Agreement dated as of April 7, 1998 between Aspect
International Language Schools, B.V., the Stockholders and Sylvan
Learning Systems, Inc.(n)
10.22 Agreement and Plan of Reorganization dated January 28, 1997 by and
between Registrant and ZGS Zentrale Gelsenkirchener SCHULERHILFE J.
Gratze + M. Mohr GbR mbH and SCHULERHILFE Gesellschaft fur
Nachhilfeunterricht mbH.(o)
10.23 Credit Agreement among Sylvan Learning Systems, Inc., Various Banks,
NationsBank, N.A., as Syndication Agent and Bankers Trust Company,
as Lead Arranger and Administrative Agent.(o)
10.24 Third Amendment to Credit Agreement among Sylvan Learning Systems,
Inc., Various Banks, NationsBank, N.A. (now known as Bank of
America, N.A.), as Syndication Agent, and Bankers Trust Company,
as lead Arranger and Administrative Agent (since replaced by Bank
of America, N.A., as successor Administrative Agent).
10.25 Stock Purchase Agreement effective as of January 1, 1998, by and
among Sylvan Learning Systems, Inc., a Maryland corporation,
Marlene Canter, the sole stockholder of Canter & Associates, Inc.
and Canter Educational Productions, Inc.(o)
10.26 Stock Purchase Agreement dated January 26, 2000, by and among Sylvan
Learning Systems, Inc., Prometric Acquisition Corporation and The
Thompson Corporation.(q)
10.27 Acquisition Agreement dated January 26, 2000, by and among Sylvan
I B.V. and Dodd Street Holding B.V.(q)
21.00 Subsidiaries of the Registrant.
23.01 Consent of Ernst & Young LLP.
23.02 Consent of Deloitte & Touche
23.03 Consent of Smith, Lange & Phillips L.L.P.
27.01 Financial Data Schedule for the year ended December 31, 1997.
27.02 Financial Data Schedule for the year ended December 31, 1998.
27.03 Financial Data Schedule for the year ended December 31, 1999.
99.01 Opinion of Deloitte & Touche(o)
99.02 Opinion of Smith, Lange & Phillips L.L.P.(o)

(a) Incorporated by reference February 26, 1996. from the Exhibits to the
Company's Registration Statement on Form S-1 dated February 26, 1996.
(b) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 (Registration No. 33-69558).
(c) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 as amended by a Registration Statement on Form S-
1 (No. 33-97870).
(d) Incorporated by reference to the Company's Current Report on Form 8-K
dated February 27, 1995.
(e) Incorporated by reference to the Company's Current Report on Form 8-K
dated May 5, 1995.
(f) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 21, 1995.
(g) Incorporated by reference to the Company's Current Report on Form 8-K
dated November 1, 1996.
(h) Incorporated by reference to the Company's Current Report on Form 8-K
dated January 28, 1997.
(i) Incorporated by reference to the Company's Current Report on Forms 8-K
and Form 8-K/A dated April 17, 1997 and May 30, 1997.
(j) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-8 dated February 18, 1997.
(k) Incorporated by reference from the Exhibits to the Company's Form 10-K
filed March 31, 1997.
(l) Incorporated by reference from the Exhibits to the Company's 1998 Proxy
Statement filed April 21, 1998.

28

(m) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 dated February 23, 1998.
(n) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 dated August 10, 1998.
(o) Incorporated by reference from the Exhibits to the Company's Form 10-K
filed March 31, 1999.
(p) Incorporated by reference from the Exhibits to the Company's Current
Report on Form 8-K dated December 13, 1999.
(q) Incorporated by reference from the Exhibits to the Company's Current
Report on Form 8-K dated February 2, 2000.

29